IN Daily Opinion/Column

Warning: Some clients are smarter than they appear

May 19, 2010 @ 11:22 am

By Evan Cooper

The conventional wisdom among advisers and product companies that distribute through advisers is that without the advice of a financial professional, individuals are doomed to poor investment decisions and subpar performance.

I believe that's largely true.

Even among educated affluent adults, financial illiteracy is rife. And what little most investors do know isn't helped much by the irrationality that nature has apparently hardwired into our brains.

But a small, largely self-directed segment of the individual investor population is a lot smarter than many advisers would care to concede. These experienced investors are well-informed and do just fine without professional help.

As an example, consider the group of individual investor options traders surveyed recently by Harris Interactive for the Options Industry Council, the educational arm of the options exchanges.

The 1,330 investors polled in December and January came from five discount brokerage firms, but all participants had several brokerage accounts — and all earned a bit more, had slightly more assets and higher levels of formal education than investors who didn't use options.

So these are the slaphappy traders most advisers don't want, right? Maybe, maybe not.

According to the survey, the options users were indeed fairly frequent traders — making about 30 options trades and 30 stock trades a year — but they weren't punch-drunk. Most have been investing in stocks and mutual funds for more than 20 years and seven in 10 said they used options “to increase income,” while others used options to manage risk or to customize their portfolios.

They also tended to be more diversified than other investors, being more likely to hold American depositary receipts, exchange-traded funds, gold and futures. What's more, 81% said they would consider looking into new investment vehicles.

What they aren't doing, according to the OIC, is asking a financial adviser for help: Only about 16% of options users relied on their financial adviser for investment advice, although of those who did, 82% thought their advisers are very or somewhat knowledgeable.

Is it worth an adviser's while to attract and retain such clients, and if so, how would you do it?

I guess some investors are simply constitutionally unsuited to be advised and may be written off. Others probably would welcome advice that's specific and clearly demonstrates expertise.

In the case of options, becoming an expert solely to head off client defections from the relatively small number of options fans out there probably isn't worth the effort. But understanding how to use options as a risk-management tool and as a generator of additional income certainly couldn't hurt.

And if you attracted a few clients in the bargain, so much the better.


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