Clients Seek Advisors' Help in Hedging Risk: Aberdeen, Options Council Surveys

Equity allocations are up in U.S. and emerging markets; options seen as income generators

Investors’ growing appetite for hedging risk—and higher profits in a low-yield economy—has advisors making more aggressive market plays, studies commissioned this spring show.

An Aberdeen Asset Management Inc. study conducted by Harris Interactive in March shows that advisors plan to increase their equity allocations in both the domestic and international markets.

In addition, an Options Industry Council (OIC) financial advisor benchmark study conducted by Bellomy Research and released May 12 finds that options usage among advisors is on the rise.

Home Country Bias Is Diminishing for Equities

“We believe that the survey reveals two forces at play,” said Gary Marshall, chief executive at Aberdeen, in a statement. “One shows investors’ increased risk appetite for equities in general, which is consistent with the findings of other studies. The other is the widening of investor appetite from a previous strong ‘home country’ bias to a more diversified international portfolio. We see advisors seeking to diversify client assets to access the growth potential of developing economies.”

The Aberdeen online survey polled more than 800 financial advisors across wirehouses, regional brokerage firms, independent wealth management shops and other investment advice providers. Many financial advisors said they plan to increase the allocation of client assets to domestic equities, emerging market equities and global developed market equities in 2011.

When asked to indicate a preferred vehicle when increasing allocations to international or emerging markets, 60% of advisors in the Aberdeen survey chose open-ended mutual funds and 24% chose exchange-traded funds (ETFs) for investing in international or emerging markets.

Wirehouses, Regional BDs Are Biggest Options Users

The OIC options study found that nearly half, or 48%, of financial advisors used options in the last year for their clients. Users were more likely than non-users to be found in wirehouses and regional broker-dealers, suggesting that they receive more product support for options than other advisor channels.

The OIC study also found that advisors who use options tend to have more assets under management than non-users. A total of 94% of advisors with AUM of $500 million or more used options versus 36% of advisors with AUM of less than $50 million.

According to the survey of 607 respondents, 91 wirehouses, or 66%, used options in the last 12 months, and 67 regional broker-dealers, or 76%, used them. Also buying and selling options were 225 independent BDs, or 41%, 42 RIAs, or 47%, 115 insurance advisors, or 30%, and 55 bank advisors, or 54%.

Option-using advisors said they most commonly bought them to generate income and as a hedge. Income generators, such as covered calls, were used by 69% of those surveyed. A total of 59% used option products such as an index to hedge an existing portfolio. Advisors said they also use options to acquire a stock at a later date and diversity a portfolio using calls or puts, and to lock in profits on existing investments using collars.

A total of 48% of advisors said they used options for speculation. Option use among advisors is a response to both current market conditions and a shift in client attitudes, the survey showed.

Other Highlights of the Aberdeen Advisor Survey:

  • 46% of advisors plan to increase the allocation of clients’ assets to U.S. equities (S&P 500 Index); 38% plan to increase the allocation to emerging markets equities; and 34% to global developed equities.
  • 58% plan to decrease their allocations to Treasury bills; 42% plan to decrease their allocations to U.S. fixed income; and 42% plan to decrease the allocation to cash.
  • 44% of advisors will recommend that clients allocate between 6-10% to emerging market equity funds; 25% of advisors polled will recommend clients allocate between 11-20% to emerging market equity funds.
  • 43% of advisors will recommend clients allocate between 0-5% to emerging market fixed income funds; 35% of advisors stated they will recommend client allocate between 6-10% to emerging market fixed income funds.

Read “Spending More Time With Clients Helps Advisors De-Stress” at AdvisorOne.com.

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