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How Financial Advisors Use and Think About Exchange-Listed Options

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How Financial Advisors Use and Think About Exchange-Listed Options HOW FINANCIAL ADVISORS USE AND THINK ABOUT EXCHANGE-LISTED OPTIONS TABLE OF CONTENTS About Cerulli Associates Cerulli Associates is a global research Industry Recommendations ........................................................1 and consulting firm specializing in asset management and distribution Part 1: Options Users ...................................................................2 trends worldwide. Cerulli produces a suite of annual, quarterly, and monthly publications in addition Who Are They? ..........................................................................................2 to an online data platform, and How Do They Use Them? .........................................................................2 also provides custom research and Motivations and Beliefs ...........................................................................5 advisory services. The company has been in existence since 1992, Part 2: Options Non-Users ...........................................................6 is independently owned, and has fully staffed offices in Boston, What Keeps Advisors from Using Options? ..........................................7 London, and Singapore. Cerulli has established a strong global What Are They Willing to Consider? .......................................................7 reputation for quality, reliability, What Impact Does the Firm Have? .........................................................9 and consistency. Part 3: Mega Team Advisors ......................................................11 Questions? Please contact: What Advisors Can Learn from Mega Team Options Users ............. 11 Emily Sweet, CFA Senior Analyst Conclusions .................................................................................15 Cerulli Associates [email protected] INTRODUCTION About The Options Industry Council In this study, Cerulli seeks to understand the behavior of advisors who use The Options Industry Council (OIC) is exchange-listed options strategies with clients and those who do not. The an educational organization funded purpose of this study is to identify target audiences and educational strategies by OCC, the world’s largest equity for The Options Industry Council (OIC) that may lead to increased adoption derivatives clearing organization, and of exchange-listed options strategies among financial advisors. Important the U.S. options exchanges. The components of this behavioral study are advisors’ practice characteristics, key mission of OIC is to increase influences of their behavior, and perceptions about exchange-listed options. awareness, understanding and In addition, Cerulli studies the habits of advisors from the largest practices by responsible use of exchange-listed AUM to provide an aspirational example for all advisors. In sum, Cerulli seeks options among a global audience to identify the types of advisors who are most likely receptive to exchange- of investors, including individuals, listed options and the mechanisms through which to spread messaging financial advisors and institutional most effectively. This study has been sponsored by The Options Industry managers, by providing independent Council. and unbiased education combined with practical expertise. Learn more about OIC at: www.optionseducation.org INDUSTRY RECOMMENDATIONS Cerulli recommends that the options industry take the following actions: 1. Target advisors who are most open to using options. The most important advisors are those who are considering using options in the future. These advisors show elevated levels of confidence about options and are willing to incorporate more diverse use by both options strategy and goal. Independent RIAs demonstrate many of these characteristics, and independent RIAs who currently use options implement them more broadly and for a greater percentage of client accounts than advisors in other channels. By narrowing the focus to the most receptive advisors, OIC should have better results increasing adoption of exchange-listed options. 2. Consider building relationships with centers of influence such as RIA custodians, service providers, or consolidators to more effectively distribute the message about exchange-listed options. This will help OIC reach RIAs in a more scalable manner. 3. Develop messaging and educational content that addresses concerns about time management. Promote the risk management capabilities of exchange-listed options and the preexisting preference of them over OTC options. By identifying and responding to advisors’ biggest hesitations, OIC will likely increase the number of advisors willing to consider using options. Building upon current competitive advantages should help this cause. 4. Do not ignore client impact on advisors’ options use. It is difficult to quantify the impact clients have on advisors’ options use, but many advisors acknowledge its presence. This is particularly important given an increase in conversations about the role of a fiduciary and client suitability. Educating advisors and increasing their confidence in talking to clients about options is an important step to managing and understanding clients’ influence. 5. Consider mega team options users as a center of influence for all advisors. Share best practices regarding how these advisors use and think about options. Advisors from smaller practices often look to the largest and most successful advisors as an aspirational model for building their own practices. By sharing best practices, OIC can help other advisors think and act in a way that may help them create a more successful business. 6. Be intentional and selective with firm-level options promotion. Partner with B/Ds and custodians that have fewer options-related resources to promote the benefits of exchange-listed options to advisors. Extend the reach of this messaging to non-users who are far less aware of existing options messaging than advisors using options. 7. Assess the opportunity to increase marketshare of exchange-listed options with current options users. Half of advisors currently using exchange-listed options also use OTC strategies. Promoting the merits of exchange-listed options to these advisors may increase OIC’s penetration of overall exchange-listed options use. CERULLI ASSOCIATES | How Financial Advisors Use and Think About Exchange-Listed Options 1 PART 1: OPTIONS USERS On average, advisors use Options Users: Who Are They? options in 21% of their In a survey of more than 600 advisors, approximately one-third (32%) currently clients’ accounts, and use options in client portfolios. Use is even higher among the largest practices they expect to increase by AUM, with close to 40% of these advisors currently using options. In addition, almost one-third of advisors in each of the independent registered use by 30% in three years. investment advisor (RIA) and national and regional broker/dealer (B/D) channels use options. Options usage rates are lower among independent broker/dealer (IBD) and hybrid RIA advisors, with 26% and 25% of participants, respectively, currently using options. On average, advisors use options in 21% of their clients’ accounts, and they expect to increase use by 30% in three years. At present, independent RIAs use options across 28% of client accounts, the broadest use across channels. In addition, independent RIAs and hybrid RIAs expect the greatest increases in options usage rates across client accounts in the next three years, from 28% and 22% to 39% and 33%, respectively. By contrast, wirehouse advisors incorporate options in only 15% of client accounts. While wirehouse advisors report the greatest occurrence of options use (46% currently use options), these advisors incorporate them in only a small percentage of client accounts. Advisors whose practices are primarily fee-based (greater than 90% fee-based revenue) report using options with 29% of clients, the highest usage rate of the 90% four fee categories defined by Cerulli. These advisors also plan to increase use to 37% of client accounts in 2019. By contrast, advisors who produce less than 90% of revenue from fee-based business use options with an average 15% of Of advisors from the largest clients, and they expect to increase use by approximately one-third to 20% of teams in terms of AUM who clients in three years. Even so, this usage figure remains much smaller than use options, most (90%) use that reported by primarily fee-based advisors; accordingly, in 2019, primarily exchange-listed options. fee-based advisors expect to use options with 79% more client accounts than advisors who earn 10%-50% of their revenue from fees. The number of option trades advisors place annually in a typical client account is well distributed across usage buckets, measured by number of trades. Employee channel advisors (wirehouse and national and regional B/Ds) report the highest volume of trades, with 35% of these advisors executing more than 20 trades annually in a typical client account. By contrast, only 21% of independent advisors report doing more than 20 trades annually for clients. Higher frequency of trading is likely supported by greater centralized support services, especially at wirehouse firms, where advisors report a higher overall level of centralized firm resources than other channels. When assessing the opportunity set for increasing adoption of use, it is important to consider not only the frequency of use, but also the depth of use, as these behaviors may not occur simultaneously. Options Users: How Do They Use Them? Use of exchange-listed options
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