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Pofessional Investment Advice

CXO Advisory Group does an excellent job in reporting on, and discussing a variety of research topics within the investing arena.

Here is an excellent example of how individual investors (individual clients of a large European broker) responded to an offer of free, unbiased investment advice (personalized written
and verbal)

For more details see the original post.


The offer was made by email, with
telephone calls to anyone who did not respond.

The response study found that:

  • Only 5% of the 8,195 clients accept the offer

  • Those accepting tend to be male,
    older, wealthier, financially more sophisticated, and have a longer relationship with the

  • Among accepted offers, if implemented, the free advice would have improved client investment performance.  This free advice was a bargain

  • However,  very few clients who accept the offer actually follow the
    advice. Those who do, tend to follow have higher account values than
    those who do not.

Conclusion: Evidence suggests that individual investors,
especially those apparently most in need, tend to ignore expert advice.

There's not much to say from a single study.  Yet, it rings true.  The vast majority don't want advice or don't know whether to trust the advice. 

When so few people accepted the offer, it's difficult to know how valid the conclusions are.  Yet, I would love to know why these were the results:  I can see alternatives:

a) The novice wants to make trades.  In other words, to get out and play.  He/she wants action.

b) The uninformed novice is willing to pay for advice.  No statistics, but the fact that many costly newsletters, with poor track records, continue to stay in business musts get their customers from somewhere.  The ill-informed novice is the most likely customer. 

There are higher quality newsletters, and they survive by having a good track record and having subscribers renew.

Is it simply that 'free' advice cannot be trusted?

b) The wealthier, older, less-emotional person knows that the bottom line is the money earned.  There is no ego gratification required, and thus, earning money is more important than making the trades oneself.

Trusting the broker, this investor also trusts the free advice.


After finalizing this post last night (Wed), I found a new post by Felix Salmon, in which he describes a Charles Schwab survey. The survey results are lengthy.  For a quick summary, see Salmon's blog.

"People want investment advice when it comes to their 401(k) plans,
especially if they can get it for free.

And when they take investment
advice, they change their savings habits significantly [by saving more money].

But it turns out
that even when companies do provide free investment advice for their
employees, the employees don’t take it."

The findings of the two studies are similar.  Free advice is worth hearing, but few use it. 



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Protecting a Portfolio with Collars. How Many Puts are Required?

Previous post

1) I believe you agreed (with caveats) that a portfolio with a beta of .50 and desired maximum loss of 15% can purchase SPX puts 30% OTM (I ignored transaction costs). My confusion: how many contracts to buy.

Assuming I have a $1mm account with a beta of .50 and want to limit losses to 15%. Current S&P is $1,080; the one year 750 put is $36.90.

If I buy 5 at that price wouldn't my portfolio be insured? Say the S&P falls by 35%, the value of my stock & bond portfolio would be $825,000 (given the beta). I would have paid $18,450 for the puts (5*100*36.90) and when I exercise them at 700 I collect $25,000 ((750-700)*100*5).  That gives me a $6,550 gain on the options my portfolio a total value of $831,500 and a loss of a little over 16%.

I ran the numbers at higher loss levels and get the same results – the portfolio loss is limited to roughly 15% with five contracts.  This is troubling to me because your explanation makes sense, but my numbers are giving me the desired insurance.


2) With regard to "the long dated put does not provide the hedge you think", is this because of the following reasons: (1) If you pay up for IV when it is high and IV goes lower the put loses value? This is also why buying longer dated puts and selling shorter dated calls can be risky. (2) The delta is lower given the longer expiration date? (3) If the market moves up, your puts decrease in value and probably no longer provide the desired hedge? 


3) Assuming the above assumptions are correct, if the goal is pure insurance are those points negligible? I believe you outlined this in the post "Q & A. Stretched Collar (LEAPS Puts and Short-Term Calls)". That being said, if IV is high (say like now) then maybe shorter dated puts will prove more beneficial in the long-run.

Again, I want to thank you for your help and hope you can clarify those few questions/statements. 

Our firm is just trying to find a good way to manage risk and insure portfolios. Options seem like the best way (and I loathe structured notes). Thanks so much and keep up the good work. When we start introducing options to our clients your book will certainly be the go to we recommend.



1a) Yes.  SPX is a reasonable proxy for your diversified portfolio, if that portfolio consists primarily of large-cap stocks.  If not, other indexes may be more appropriate.

1b) Yes you can buy 30% OTM puts to suit your scenario of losing no more than 15% (of a 0.50 beta portfolio) in a bear market.  But, this is true only as long as  beta remains near 0.50.

1c) How did you decide to purchase 5 puts? When the strike price is 750, each put gives you the right to sell $75,000 worth of stock.  That equates to $375,000 – and you own a $1mm portfolio.

When buying puts to protect the portfolio, you must use the strike price to determine how much stock you will be able to sell, should it become necessary.  [That statement applies to American style options.  But the math hold true for European options, even though you do not actually sell any shares]  The current index price is not the answer.  Thus buying 5 puts does not give you the right to sell 5 * 1080 *100 worth of shares.

I don't know what you did when you ran the numbers at higher loss levels, but look at this:

If the market is cut in half when expiration arrives, then SPX is 540.  The puts are ITM by 210 points and are worth 21k each, or $105,000.  The portfolio declines by 25% and is worth $500,000. Addendum.  The portfolio is worth $750,000.  Mea culpa. Total value of your assets: $605,000. $855,000  Net loss: 40%. 15%

Assumption: net cost to buy puts and sell calls is essentially zero

Conclusion:  you are not buying enough puts.  Five puts appears to be the correct quantity.


Take it to the (impossible) extreme: SPX goes to zero.  The puts are worth $75,000 each.  How many puts must you own to have $850,000 cash? Five is not sufficient.

1d) You calculated the loss by ignoring the sale of call options, and that's not something to ignore.  Let's assume you collect as much from the calls as you pay for the puts.  That's going to be approximately true, unless you want to take a more bullish stance.


2) Regarding buying long-dated puts and selling short dated calls.  This is important.  I'm pleased that your results are troubling.  They should be. You seem to believe that once the market drops 35%, you no longer lose money on a further decline.

That's true only when you are adequately hedged.  And you believe 5 puts is the correct quantity to buy.  Read on.

a) When the market drops and the calls no longer offer much in the way of downside protection, your position is essentially: Long puts plus long stock.

That is equivalent to being long the long-dated call (same strike price as the put).  Please tell me you understand this – if not, you must pause in your questions and learn about equivalent positions (Chapter 15 in The Rookie's Guide to Options) before going further. 

Thus, you own that synthetic LEAPS call and when the market tanks, what do you expect will happen to the value of your call option?  It's positive delta and you have essentially zero hedge.  Sure, it will pick up a bit of value as IV increases, but the value of the call, and the value of the portfolio decreases.

That's the reason why collars are a slightly bullish play.  You earn a limited profit on the upside, but lose on the downside.  The purpose of a collar is to limit, not eliminate, those losses. When you own a call (or a synthetic call as you do in this scenario), loss is limited.  But make no mistake, you have a loss.

By selling the long dated call instead of the short-term call, you collect MUCH more premium.  You still lose on the downside, but the loss is less.  If the market punches through the put strike price (of your collar), then you have ultimate protection.  But you still lose (in your scenario, that's 15%).

b) If the market surges and moves through the call strike price, then the call delta moves quickly to 100 and the put delta moves slowly towards zero.  This is the reason why selling short-term options is so dangerous – high negative gamma.  The long-term options you buy have a much smaller gamma and the option delta does not approach 100 quickly.  The delta moves slowly. 

That means your put loses significant value on the upside while your covered call portion (yes: the long stock plus short call is a covered call) of the position gains, it gains much less quickly than the put loses.  Two reasons:  the put value gets crushed by an IV decrease and it contains far more time value  than remains in the call.

The profit potential of a covered call that has already moved significantly into the money is merely the time premium (not its full price) in the call.  And that is going to be far less than that of the long-term put.

Mixed month collars are risky and you do not want to trade them for clients who are using collars for safety.  Mixed month collars are NOT safe positions.


3) Yes.  In my opinion long-term options (when planning to hold for a long time) should only be purchased when you believe IV is relatively low. 

Yes, shorter-term puts are better when IV is high.  The definition of 'high' is highly subjective.  And short-term puts are FAR more effective when the market tanks?  Why?  They have a much higher positive gamma.  The delta moves to 100 quickly.  There is far less time premium to lose when they move deep into the money.

But the bottom line is that you do not want to own mixed month (stretched) collars.  Just too risky for you and your clients.  For aggressive clients, that's another story.  But clients who use collars for safety should not be subjected to this risk.

ZA: If your firm feels some consultation would be beneficial, my rates are truly a bargain, and you get to ask all the questions you feel like asking.  With immediate replies.


"I thoroughly enjoyed your book “The Rookies
Guide to Options”.  The book has paid for itself many times
over.  Thank you."  VR


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More on Financial Planners and Collars


Great blog. As an advisor in a similar position to AH, I find this
blog extremely helpful when it comes to developing various options
platforms. This post was especially helpful as collars are the main
risk management strategy we hope to utilize.

Your answers have pretty
much confirmed my original ideas; however, I have the following

1. We have diversified portfolios that blend passive ETFs and different
active managers. As such, I was thinking that portfolio Betas
(relative to the S&P 500) should be used to determine strike prices
and the amount of options purchased/sold on the S&P index. For
instance, if a client has a Beta of .50 and wishes to lose no more than
15% a strike 30% below the current S&P level could be used before
the client would reach that 15% waterline.

Likewise, only half of the
portfolio would have to be used when determining how many S&P index
options to purchase. Ignoring the problems with Beta (I can't think of a
better way to hedge the portfolio), is that above assumption generally

2. Given the high cost of S&P index puts relative to calls and the
goal of collar (at least in our case) of downside protection, what is
the danger in buying puts 12 months out and rolling calls? The shorter
calls should allow to take greater advantage of positive Theta and
looking roughly at the math may turn out to cover the cost of the puts
(I realize there is no way to calculate this), while the longer dated
put would provide the desired hedge.

3. Does is make sense to actively manage the collar or just let the
strategy run its course? While there certainly are situations when one
might be more beneficial, is there a broad explanation? I was thinking
of selling the put if it is in the money and using the proceeds to by an
at the money put or rolling up calls on the upside.

4. Similar to the question above, does it make more sense to close the
position prior to expiration or let the options become exercised, if
Given the length of the questions, I understand if you can't get to
this. Regardless, thanks again for the very insightful blog and I look
forward to learning more from you in the future.



Thanks ZA,

Glad to hear this blog has been helpful.

1) If I understand correctly, you don't want to collar the specific positions you own, but prefer to buy puts and sell calls on SPX.  I'll assume that is correct.

Nothing wrong with doing that.  However, as far as your broker is concerned, this involves the sale of naked calls on the SPX.  Yes, you are covered for risk, but many brokers will not allow the sale of naked calls.  Period.  Those that do require large margin.

Do not allow this to be a limiting factor for you.  You can find a broker who will accommodate this strategy.  Of course, some clients may not want to change brokers, and you may not be able to adopt this methodology for them.

2) We tend not to use beta in the options world, and use the volatility of each ETF on its own. By owning funds of active managers (I hate the fees charged; I hope the returns justify those fees), you don't have such a volatility number and would have to calculate it – or use beta as being 'good enough.'

3) If you have a .50 beta portfolio, you are assuming a 15% move when SPX moves 30%.  If beta holds true to form, that is a reasonable expectation.  Just be aware that sometimes specific types of investments can become more (or less) volatile than one would expect and beta can change.

If you accept this limitation, using beta ought to be okay.  I'd like to avoid beta calculations, but it's also time consuming and costly (broker commissions) for your clients when you collar each investment individually. 

4) When choosing a strike price [30% OTM (out of the money) in your example], don't ignore the cost of the put when estimating the maximum loss.  Unless you plan to offset the cost of the puts by selling calls at approximately the same dollar amount.

That is a good way to choose which calls to sell – but it's a call that expires in the same month.

5) You ask about the risk of owning long term puts and selling monthly calls.

The long dated put does not provide the hedge you think it does. 

I recently posed a lengthy (2 part) description of that risk.  It is MUCH LARGER than expected.  And oddly, the downside risk is just as large as the upside risk.  This is NOT a good idea for your clients.

It may be a good idea for anyone who wants to 'play volatility' – but a customer should not be paying for trading advice from a planner.  He/she should be paying for planning advice.  Clients who are interested in setting a maximum risk level should NOT be doing as you suggest.

Yes, you can earn lots of extra dollars.  But this idea can lose bunches of money and is just not the right strategy for people who they to limit losses.  Please read that post.

Even if you decide to take this risk, you do NOT want to buy long term options when IV is high. You pay a lot for those puts and may get very poor prices for the shorter-term options. 

6) I do not believe it is correct to hedge half the portfolio. 

Assume a client has 100k, and you buy options that are 30% OTM.  If those are eventually exercised, the assumption is that a .50 beta portfolio would lose only 15k and not 30k.  That is he maximum.  You cannot buy fewer puts.

NOTE: SPX options settle in cash, so if exercised, you get some cash to offset losses beyond that (estimated) 15% loss.

7) In general you do not want to actively manage the collar.

But, that does not mean you should not take advantage of certain situations.  If for example, the market tanks and Iv moves higher, that may be a good time to do as you suggest.  Roll the put to a less expensive one, taking in cash and improving the upside.  Do keep in mind that this makes the downside worse – so the 15% maximum may be exceeded.  I'm not saying not to do it.  I am telling you to consider the new potential loss.  When markets are falling is when clients will not want to give up protection. 

It's a difficult decision.  You can earn a lot of extra dollars if you get lucky and make such an adjustment near the bottom.  That's why it's important to recognize just how much you are making the downside when making this trade.

The idea is to take out some cash – it's safer not to grab the maximum amount of cash from an adjustment.

You may also want to roll the call, but be careful not to roll too far.  That could hurt the upside.  Be certain the call still has a higher strike that the new put you own.

8)  If using SPX options, it doesn't matter if you exercise them.  These are settled in cash.  And as a reminder, these options are European style and cannot be exercised prior to expiration.

However, if you do trade ETF options for some clients, then it gets messy to exercise options and take a position in the underlying.  I would exit and roll as expiration day gets near to eliminate this inconvenience.

If you are assigned on calls, same situation.  No real problem, but it's better to avoid taking a position when you don't have to.  Just roll prior to expiration.  Pay attention to ex dividend date when trading SPY.

One more thing:  I know that many
investors find options complicated, but that is due to a lack of
understanding.  If you have clients who want to understand what you are
doing for them, please recommend The Rookie's Guide to Options.


Free e-book: Introduction to Options: The Basic Concepts

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Financial Planners and Collars

Hi Mark,

Clearly collars reduce downside risk. As a financial planner I'm
very interested in using them to help protect client portfolios. There
are some issues which I'd like your views on before treading this path

1) How close to the price of the underlying should the collar be
established? My own research indicates that the more volatile the
underlying and the further into the future the option position is
established, then the 'wider' the collar should be to maximize long term
returns. On the other hand, 'narrower' collars reign volatility in
further but appear to really hurt long term cumulative returns. How
wide should your collar be? Should it be skewed eg. 10% downside
protection and 20% upside ceiling?

2) This post is all about collar adjustments. As a planner, clients
with even medium account sizes can't afford to pay someone to
continually adjust collar positions, even less so if multiple
underlyings are held. Is a 'passive' collar strategy wise eg. 3, 6 or
even 12 months out?




The fact that you, as a financial planner, want to use conservative option strategies to help your clients is good news.  I have complained – on this blog and on other blogs wherever I could find them – about how financial planners have done immeasurable harm to their clients by remaining ignorant about options.

Let's begin with some general statements:

Each client has different needs, and as you would not recommend the same holdings to each client, so too, will you make slight modifications to the specific collar recommended.

Collars are going to underperform when the markets are strongly bullish.  That's the cost of owning insurance.  Be certain your client is willing to accept that fact and does not blame you for such under performance.

Collared portfolios perform extraordinarily well when markets tumble.  The greater the fall, the happier your clients will be for having taken your advice.  They will not make any money, but losses will be at acceptable levels.

Assuming you have reasonable clients, you should be able to explain that pluses and minuses when holding collars.

If the put and call expire in different months, you will earn extra money when the markets cooperate.  However, I believe they are too risky and voids the whole idea of owning a collar FOR PROTECTION in the first place.  Per the example offered by a commenter.  Mixed expiration collars are okay if you understand the extra risk involved.  That's not for a financial planner and his/her clients.

1) The first question is:  Which is more important to each client?  Is it the desire to earn as much as possible with low risk?  Or is it the preservation of capital, with the hope of earning a small return?

2) If preservation of capital is the name of the game, then it should be easy to choose the put strike price.  In a worst case scenario – and for this client that's a down market – how much is your client willing to lose over the time period covered by the collar?  If it's 10%, then buy a 10% OTM put.  If it's less, choose an appropriate put to buy.  With indexes there are always plenty of choices.  With individual stocks, it's more difficult to choose the appropriate put because there are far fewer offered.  There's a big difference between strikes of 30, 35, and 40.  It it were an index or ETF, there would be strikes every one point, giving you just the put you need.

3) If earning capital gains is the
objective, then I'd begin by choosing the call to sell because that caps
the upside.  Then perhaps it would be easiest to buy a put that costs
essentially the same as the premium collected from the call sale.  This is
the 'no-cost collar.'

Profits are the goal, but losses must be capped at some point.  You buy a put that is less expensive offers less protection against loss.  How much the client is willing to pay to own the collar will determine just which put to buy.

Keep in mind that paying a debit means the client will lose money when the market is steady to slightly higher.  That may not sit well.  Those zero cost collars don't always provide the best strike prices, but if the client does not understand the details of what you are doing for him/her, then you ought to adopt middle-of-the-road methods that offer the best protection you can afford to buy – given the circumstances.  The person who wants to sell calls that are 20% OTM is not going to be able to afford to spend much for put protection.  In fact, I'd suggest that if the client is that bullish, perhaps a collar is not the best choice.

If trading indexes or exchange traded funds (ETFs), you can assume they won't drop 30% overnight, but as we have seen, 50% in one year is not impossible, and owning puts is beneficial.

For this client, there is no easy way to pick the put strike price becasue protection is not the top priority.  Perhaps you can decide how much to pay for puts ad make the decision that way.  This would result in far less protection now, when markets are volatile (and everyone wants to own protection) and more protection when markets are calmer and option implied volatility is lower. 

4) If you follow the advice on choosing the put to own, and if you allow your pocketbook to determine how much to collect when selling the call, the first question becomes unimportant.  It just solves itself.

5) There is no reason to make a client trade more often than necessary.  I'd look to trade 12-month collars for clients who are not interested in active trading.  More than that, I'd encourage them to own SPY (or another broad-based index), unless you or they have displayed a talent for picking stocks that out-perfrom the market.  One ETF means only one collar trade at a time, rather than one per underlying stock.

6) Don't forget, it's not necessary to collar an entire portfolio.  Even 25% is better than none – when you want some safety.



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Options and the Real World

It's a privilege to write this blog for a devoted niche audience, and I truly appreciate every kind word that comes my way.

The frustrating part for me is being unable to have my message heard by a much wider audience of investors.  I consider my job to be the dissemination of information.  Once that is done, then each reader can accept or reject any or all of my suggestions/opinions. Or better yet, readers can voice an opinion by making a comment at the end of any blog post:


Each of you already knows that options can be used to reduce risk, and understand just how useful options can be in serving a dual purpose:

  • Protecting your assets
  • Increasing your chances of having a profitable trade

I've reached the point where I recognize there is no use beating my head against a brick wall.  There is simply no way (that I can see) to reach the millions of investors who can benefit from tearing themselves away from stockbrokers who churn accounts and whose commissions are far too high.

Also beyond my reach are people who depend on financial planners and advisors.  Those are the professionals who, in many (but not all) cases collect fees for investment ideas that are many decades old.  Although the investment ideas are not 'terrible,'  they are far less useful than investors deserve.

I plan to preach far less frequently about my frustrations with all those financial professionals.  I get it.  They earn their living by selling what they know to their clients.  There is zero incentive for them to do any better, learn anything new, or even admit to the possibility that there are risk-reducing investment alternatives that can truly make life better for their clients.  They want their fees first, last and always.  I cannot change that.

The new year (but, please: it's not a new decade) is about to begin and I hope to post articles that both interest and educate an audience of experienced option traders, option rookies, and option traders of the future.

I hope each of you had a wonderful Christmas, Kwanzaa, or Chanukkah.


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Financial Planners. How do they survive?

Steady readers know that I have a problem with professional financial advisors.  I am so disappointed at how they appear to do well by their clients during bull markets (when their services are not needed) and do poorly during bear markets (when their help is desperately needed). 

I know these people cannot produce miracles, but in my opinion, the advice they peddle is essentially worthless.  I believe investors would do better to save the fees and spend time learning to become a do-it-yourself investor who adopts conservative option strategies.  And if that idea is unsuitable, owning a mix of index funds and bonds would probably produce results that are as good, or better – with no fees.

I found some interesting blogs on this topic yesterday:

Harriett Johnson Brackey, financial columnist for the Sun Sentinel, asks

"Why is it so hard to find a financial adviser (and I didn't even say a good one)?"

There has to be a reason, but I’m not sure what it is.

Why don’t advisers try to connect with the public? How do they expect the public to find them?"

Good questions.  Perhaps the answer is that they are too embarrassed by their inability to help clients.  How about it planners:  Are you allowed to advertise?  Why don't you?  


Then I found this piece on how well financial planners have done when earning money for themselves.  Of course, these are the fees they collect from clients, and not the result of their investing prowess:

Eric Shurenberg had this comment in April, 2009.  It's a video worth watching.


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Option Trading: How Important is Asset Allocation? Part IV

Synopsis: Discussing a Wall Street Journal article from Apr 29, 2009.  It's written by Anne Tergesen and Jane J. Kim. 

Advisers Ditch 'Buy and Hold' For New Tactics

Facing Angry Clients, Pros Turn to 'Alternative' Products; Risk of Missing a Turnaround

"The broad decline across financial markets in the past year has
persuaded a small but growing number of financial advisers to abandon
the traditional buy-and-hold strategy — which emphasizes long-term
investing in a mix of assets — for a new approach geared to sidestep
future market plunges and ease volatility."

Another mention that professional advisors are moving away from traditional investing styles.  Now 'buy and hold' joins 'asset allocation.'  It's not true that everyone is discarding these time-honored methods for risk reduction, but what was once considered to be gospel is losing adherents.

"an adviser… used to counsel
clients to buy a diverse menu of stocks, bonds and commodities, and
hold on for the long run… Today, … [he] keeps about 90% of his clients' money in such
low-risk investments as short-term bonds, cash and gold. With some of
the small amount that's left over, he uses leveraged exchange-traded
funds to place magnified bets both on and against the Standard &
Poor's 500-stock index."

90% in Bonds, cash and gold.  I love the fact that this financial advisor was thinking outside the box and was truly trying to help his clients.

As I said, a noble attempt.  Unfortunately the advisor made a big mistake when buying leveraged ETFs.  Those vehicles are designed strictly for day traders and holding them for longer periods lessens the investor's chances of earning a profit. Adam Warner writes the Daily Options Report and has made a significant contribution with his reports on why owning leveraged ETFs is a losing proposition.

"Buffeted by steep declines in stocks, many bonds, commodities and real
estate, many advisers are questioning their faith in long-standing
investment principles, such as controlling risk by building diverse
portfolios. Some are adding increasingly exotic investments, including
products that offer downside protection, to client portfolios. Others
are trading more actively — and say they plan to continue to do so
until they see evidence of a new bull market."

'Trading more actively.'  There's no other way to interpret those words.  Some advisors are now attempting to time the market.  It's almost beyond belief. One of the most sacred tenets of professional financial advisors is that it's extremely difficult to out perform the market by timing trades.  Yet, here they are: abandoning buy and hold.  Giving up on asset allocation.  Timing market buys and sells.  It seems these advisors will be trying anything to salvage their clients accounts.  Well almost anything…options are barely mentioned in this article.

"By abandoning time-proven prudent techniques, they run a serious
risk of destroying their own credibility and their clients'
portfolios," says…an independent financial advisory firm that
still practices buy-and-hold investing.

The changes come at a time when financial advisers are coming under
pressure from clients who are tired of paying fees only to watch their
savings evaporate. Advisers have "a lot of cranky clients."

And they should be cranky.  Clients don't expect miracles, but when paying fees for professional advice, they don't expect to under-perform the market.

"some are adopting even less-conventional approaches in an attempt to
more effectively offset the risks of investing in stocks… Others are turning to
"structured products," which are complex investments that often employ
options to provide downside protection. Still others are using
investments such as currencies or managed futures that they believe
will rise when stocks fall."

Options?  Did she say options?  Unfortunately there is this statement later in the article: "Such products typically come with high fees and employ investment strategies that can pose complex risks."  Options are finally mentioned as an alternative, but are soon dismissed as involving high fees and 'complex' risk.

Then there's the last sentence of this article: Advisers are using items they believe will move in the opposite direction than stocks do.  Amazing.  Isn't that the entire purpose of asset allocation?  Are these advisors trying this for the first time now?  Something must be lost in the translation.

Another advisor is quoted: "Asset allocations built on stocks and bonds are best suited to secular
bull markets… but the past nine years have proved that
nontraditional thinking makes more sense in secular bear markets."

I could not agree more.  Almost anything works in a bull market, but it's the bear market from which investors need to be protected.  My suspicion is that the professionals who collect commissions and fees from their clients always knew this and were happy to take feels when everyone was happy.  But it's been quite awhile since investors have been happy.  Traders can make a living in any type of market, but trading is for the few and investing is for anyone who can save a little money on a regular basis.  Those people need help.

"Other advisers are looking even further afield for alternative
investments… is also recommending greater
exposure to alternative investments, including managed-futures funds,
bonds that back construction and expansion projects at churches,
hedge-fund-like mutual funds, gas-drilling projects, and private
partnerships that invest in real estate. He also holds positions in two
private partnerships that invest in railroad cars."

To me, this is scary stuff.  Railroad cars?  Illiquid investments?  These advisors go pretty far to avoid using options.  I do not understand why this is true.


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Fiduciary Responsibility. Fact or Myth?

One of our
top financial journalists frequently tells readers that there has never
been a 20-year period in US history during which the stock market ended
lower than it began.  That's her way of encouraging investors to ride
out bear markets, not to panic by dumping investments at what is likely
to be a bad time, and to remain invested over the long haul.

almost universal advice that we hear today is to diversify, allocate assets,
buy and hold, markets always recover, and investing in the stock market
has proven to be a better investment method than any other (over the

don't have any specific arguments with the goals of encouraging the investing public to save and invest on a regular basis.  My quarrel is
with the advice itself.  Each of those ideas listed above fits in with
the idea of following the 'prudent investor rule.'

According to Wikipedia, The Prudent Man Rule dates back to 1830 and directs trustees "to observe how men of
prudence, discretion and intelligence manage their own affairs, not in
regard to speculation, but in regard to the permanent disposition of
their funds, considering the probable income, as well as the probable
safety of the capital to be invested."

the Prudent Man Rule, speculative or risky investments must be avoided
and a fiduciary may not be held liable for a loss in one investment, as
long as the portfolio, as a whole, satisfies the rule.

Does the Prudent Man Rule require updating?

Does this rule achieve it's main purpose, or does it represent a legal shield for financial advisors?

me, it's clear.  This rule protects financial planners and advisors, and serves no other purpose.  Anyone who has a fiduciary responsibility to take action that benefits the customer [as opposed to Wall Street tradition of making sure that it's the fiduciary who is well cared for by charging sufficient fees and commissions], can simply tell the arbitration panel, which is already biased in favor of the advisor, that the customer was diversified and that asset allocation had not been ignored.  It becomes difficult for the customer to find basis for a reimbursement of losses – because the fiduciary acted in accordance with the prudent man rule.  Even if one or two absurd investment choices (for that specific individual's goals) were made, the defense is that the portfolio, as a whole, met the intent of the rule.  And that defense protects the advisor who failed to act in the best interests of his/her client . 

There is nothing that is not right about this rule, especially because the world had changed.  it's not 1830 anymore. Fiduciaries ought to learn how meet their legal and moral obligations.  And the ostrich  philosophy of fearing to learn or recommend anything new must be replaced.


1) If the market is higher twenty years from now, but is only higher by 5%, how is that going to do anyone any good?  If, at the end of that 20-year period, you are anywhere near retirement age, what are you going to do for money if your assets were in the stock market?  OK, maybe you diversified and had money elsewhere.  Still, the money you counted on being there may not be there.  I don't like advice to buy and hold when it's based on the assumption that all will be well – eventually.  We each face the decision of whether to retire only once per lifetime.  It does you no good to know that there was a 95% chance the money would be there when you needed it.

2) Diversification makes sense, but sometimes all assets get pounded at the same time.  2008 was such a year.  There must be a better method for protecting assets.

3) Asset allocation is another form of diversification.  Again, it's sensible.  But is it enough for an advisor to buy some gold, stocks and bonds and consider the fiduciary responsibility has been fulfilled?   I vote 'no.'

What can be done?  What must pros do for their clients?

I'm not out to change the whole world.  But as far as stock market investing is concerned, there's no reason why the prudent investor should not be protected by choices that evolve over time.  Why doesn't the law demand that the pros who handle other people's money learn to protect an investors assets so that the investor never has to suffer trough another incident such as the bursting of the technology bubble in 2000, or the market decline of 2008?

Large losses can be prevented.  And that does not require the investor's assets be held in cash or equivalent securities.  The methods are neither difficult to learn nor costly.  But it does require that advisors make an effort.  Is that too much to ask?  They collect their fees – is it too much to ask them to earn those fees?

The answer to a significant part of the problem is 'options.'  There is simply no excuse for options to be thought of as being risky investment tools.  There is no excuse for fiduciaries not to adopt risk-reducing option strategies when advising individual investors.  And risk reduction is not the only goal.  There is plenty of opportunity for making money.  Profits are not ignored, but for some clients, preservation of assets must take priority and earning additional money can play a still important, but secondary role.

Options have been exchange-traded for more than 36 years and yearly volume has been exploding.  These tools are not just for hedge funds.  They can be used by many millions of investors worldwide.  I agree that options are not for everyone, but there's no excuse for not learning about alternative investment choices, and what they can do for you.  Once you have learned for yourself, or after your financial advisor has carefully and completely outlined how options are used – then you can decide whether to take advantage of the special properties of options.  Today the attitude among the professionals is (apparently) that it's just too much effort.  And many, in their ongoing ignorance, make no effort to learn for themselves – just in case they may discover something useful for clients.  The truth is that they don't dare.  Lose money with something new and better, and you get sued.  The prudent man law must be changed and brought into the 21st century.


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