Financial Advisors and Derivatives Training

It may come as a surprise to learn this, but relatively few financial advisors are licensed to advise in options or futures (let alone other derivative products). As I’ve alluded to before, there are roughly 100,000 financial advisors in Canada and less than 30% of those 100,000 are licensed by IIROC (Investment Industry Regulatory Organization of Canada) – which is who you need to be licensed by in order to trade and advise on individual securities. The other 70,000 (approx.) can only advise and trade on mutual funds, GICs and government savings bonds for the most part.

But of those 30,000 who are IIROC licensed, not all of them have either an options license or a futures license. I don’t know the exact numbers, but I would estimate from having talked to numerous IIROC advisors over the last few years that perhaps 1 in 4 might be so registered. Taken together, this means that maybe only 7,500 financial advisors in Canada have achieved the necessary credentials required to advise and trade on some form of derivative products.

But there’s more – many of the options-licensed advisors I have spoken to do not actively use options in any form – so let’s cut the number of advisors down in our wildly scientific pontification to about 2,500 (or by 2/3rds).

As Mark Wolfinger has pointed out, options were designed as tools to reduce risk, but their design cuts both ways and most press has been given to risky option strategies. Many advisors who are not qualified to speak to options and option strategies routinely dismiss them as too risky when questions are raised by investors (it’s an easy dismissal as examples of people blowing themselves up are not rare), but there are numerous strategies that I believe can be employed to reduce risk (and returns – there’s still no free lunch) in ways that allow investors to stay invested and/or sleep more soundly. Ultimately, and this is all in my own humble opinion, option strategies when employed properly can smoothen out the psychological highs and lows of investing which are the real culprits of low relative returns of investors in general.

I’ll try not to bite the hand that feeds me too much (I’m still in the industry), but many of the criticisms of the industry stem from the fact that advisors are paid as salespeople and not advisors, and training is focused on sales techniques not portfolio management.