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CBOE Forms Partnership With Options- and Tech-Centric Vest Financial

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CBOE Holdings (CBOE) said Monday it had made a majority equity investment in Vest, an investment advisory firm that already provides options-centric products through a Web-based platform designed for advisors.

John Deters, CBOE’s chief strategy officer and head of corporate initiatives, said in an interview Friday that Vest’s products “really resonate in markets” like we’ve seen since the beginning of 2016, and Vest’s user-friendly tools “help advisors select the appropriate investments for clients.”

CBOE’s own strategies will be available through the platform built by Vest, which becomes a majority-owned subsidiary of CBOE. Karan Sood will continue to lead Vest as CEO, while President Bill Kung will step down from his current role to focus on Vest’s technology solutions business.

According to a statement from CBOE, the Vest platform allows advisors to use managed accounts with the desired level of risk for new or existing stock/ETF positions, then structures a “Protective Strategy,” using a portfolio of exchange-traded options to match the investor’s personalized investment objectives and desired protection as closely as possible. Sood said in an interview Friday that in addition to the managed accounts, it will launch unit investment trusts (UITs), mutual funds and ETFs through a partnership with an index provider. “We are going to partner with an index provider,” he said, to develop an ETF “with exposure to the S&P 500 with a 10% downside protection and a cap.”

Deters said Vest’s tools allow advisors to “sell the benefits of options” to clients “rather than selling options.” In addition, it also provides advisors “with a sense of the all-in costs” of using options to protect client portfolios. Deters said “it’s not widely understood that the cost of protection in liquid options is extremely reasonable,” and in some instances “you can purchase your protection at a net zero cost.”

There are, of course, other methods of protecting client portfolios during volatile market periods, but Deters said “diversifying into cash or fixed income comes with its own cost — low yield and potential downside pressures” should interest rates continue to rise, along with correlation risk.

There are multiple risks right now, such as slowing growth in China and “the ultimate impact of the Fed tightening, neither of which has happened for 10 years,” so Deters argues that “the protections of options allows clients to sleep at  night” because with the options strategies “we’re taking the downside risk almost completely off the table.”

So why make the investment in Vest? While the technology Vest has created was impressive, Deters says Vest has a “phenomenal team as we’ve gotten to know them. We appreciated their insightful approach, and their disciplined principle to make options as simple as possible.” At Vest’s website, users can view the firm’s three strategies for building protection for an existing portfolio or a new one. Sood said advisors can build their own options-protected portfolios, use one of Vest’s prepackaged solutions or “give us your portfolio and we’ll hedge it for you.” Using online sliders on Vest’s site, advisors can easily see what the cost for a protection strategy is — on the upside or downside — while “behind the scenes we’re replicating a sophisticated options strategy,” Sood said. 

When asked in the interview if Vest’s goal is to democratize the use of options by advisors for end clients, Sood responded by saying it’s “trying to make the benefits of options more accessible — options are the ingredients to deliver certain investment outcomes.”

Sood said Vest’s existing advisor users are “more on the independent” side of the advisor universe, notably RIAs custodying at TD Ameritrade and Fidelity.

Sood said Vest’s intent is “to be a full service asset management firm — with products in managed accounts, UITs, mutual funds and the ETF space.” The focus of those products will all be options-based and outcome oriented, “beginning with protection-oriented products then going toward yield-oriented or market-inverse products.” 

CBOE said its investment in Vest was funded with existing cash. While the acquisition is not “expected to be material” regarding CBOE’s financials for 2016, in its statement CBOE said it is “optimistic about the potential for growth in the long term.”

— Check out What Advisors Can Learn From ‘Conan the Contrarian’ on ThinkAdvisor.


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