In my continuing problem with how I perceive financial planners servicing their clients. there arises the natural question: Outside of general guidance, can financial planners really be effective in helping clients create wealth and avoid financial disasters?
From my perspective as an outsider, I see planners helping investors choose mutual funds, ETFs, index funds etc. That all works very well during bull markets. What I don't see is any effort to prepare for bear markets. I'm not suggesting that planners try to time the markets by holding cash for any substantial period of time. That's probably the worst possible strategy because the chances of outperforming the markets by guessing direction as well as timing when to invest, are very small.
Traditionally, the idea of diversification and allocating assets to various investment classes was looked upon as the savior of all portfolios. Historically, that method has proven to be beneficial, but in 2008, nothing helped. Investors everywhere were hurt – unless they knew how to hedge their investments.
It's late to be raising this point now, but all through the market debacle I've been worrying about how individual investors were getting crushed – simply because they lacked guidance from competent advisors. The bottom line question: Is it feasible for financial planners to adopt risk-reducing option strategies for clients? Can the planner teach clients how to collar a position? Or should he/she be expected to make the trades for their clients? Neither approach seems reasonable in today's world.
To me there are two feasible solutions:
a) Planners can become experts in hedging techniques. That allows them to not only guide clients when building a portfolio, but it also allows them to educate those clients about one (maybe two) basic option strategies that can be used to reduce risk. Those strategies are collars and covered call writing. More sophisticated clients can eventually learn additional option strategies.
b) Planners can encourage clients to learn option strategies for themselves. Once the client and planner have chosen an appropriate portfolio of ETFs, individual stocks, or the equivalent of index funds (SPY, QQQQ), clients can learn to write covered calls and buy collars. This blog and the Rookie's Guide to Options are just what those clients need.
I've been in touch with at least one planner who has used collars. But the vast majority never learned how options work are are both unqualified and uninterested in placing the needs of their clients first. I am in favor of a law that makes anyone who gives personal investment advice be required to act as a fiduciary, and place the interests of the client above their own. The chances of seeing that happen are zero.