The Value of Options

Lim Choon Siong

Working in a financial advisory firm, I frequently overhear my colleagues discussing how they assist clients in reaching their life goals by increasing their wealth through investments. This often leaves me feeling concerned, as I find myself lacking clear life goals if any at all. What implications does this have for me? Does it suggest that I do not require financial planning since I lack defined objectives?

After much contemplation, I have come to the unequivocal realisation that this is not the case. Even in the absence of defined objectives, prudent planning remains essential. Ample financial resources offer flexibility and options, laying the groundwork for future goals as they emerge.

The other day, I was on the Singapore MRT with two colleagues. They discussed the significance of having ample financial resources, even without specific goals, emphasising that the value lies in the freedom and flexibility of having options.

In the world of finance, options hold significant value. Whether it’s in the form of stock options, index options, or other derivatives, these financial instruments offer investors the opportunity to capitalise on market movements, hedge against risks, and create strategic investment portfolios. Central to understanding the pricing of options is the renowned Black-Scholes Merton option pricing model, which revolutionised the way investors perceive and evaluate these valuable tools.

The Black-Scholes Merton model, developed by economists Fischer Black, Myron Scholes, and Robert Merton, a Nobel Laureate in Economics and Resident Scientist at Dimensional Holdings, in the early 1970s, introduced a groundbreaking framework for determining the fair market value of options. By considering factors such as the current price of the underlying asset, the option’s strike price, time to expiration, volatility, and risk-free interest rate, the model provides investors with a mathematical formula to estimate the price of an option.

At the heart of the Black-Scholes-Merton model lies a fundamental principle: options have value because they offer choices. Just as purchasing a call option gives an investor the right to buy an asset at a predetermined price within a specified timeframe, seeking financial advice from a qualified advisor presents individuals with a multitude of options in their life journey.

In one of CEO Christopher Tan’s articles, “Are You Getting Value From Your Wealth Adviser?” he emphasises that one of the crucial aspects of value provided by a financial advisor is the ability to engage in deep conversations with clients. Through these conversations, advisors can assist clients in gaining a better understanding of themselves and what constitutes a fulfilling life for them. This understanding forms the foundation upon which a tailored wealth plan can be built, one that truly adds value to their lives.

From another perspective, I would argue that these deep conversations also serve to elucidate the array of options available to clients. By delving into their aspirations, priorities, and values, advisors can present clients with a clearer picture of the possibilities at their disposal. Armed with this knowledge, clients can make informed decisions about their financial future, choosing paths that align with their objectives and aspirations. Thus, the ability to understand and explore these options represents another invaluable facet of the adviser-client relationship.

Celebrating our recent achievement of surpassing the 1 billion SGD Assets Under Management (AUM) milestone, we’re excited to emphasise how this opens up a multitude of options for Providend and our clients. With a larger AUM, we gain access to a wider array of funds, thanks to our enhanced bargaining power. Our substantial assets afford us greater leverage in negotiating more favourable terms with fund providers. This translates to an improved investment experience for our clients, as we can explore additional options to optimise their portfolios.

For instance, we have recently established a partnership with Saxo, a brokerage platform, and are currently in the process of transitioning our clients to this new platform. Saxo, headquartered in Copenhagen and authorised across various jurisdictions, manages client assets exceeding EUR 95b. Recognised as a Systematically Important Financial Institution (SIFI) by Denmark’s financial oversight authority, Saxo plays a pivotal role in the financial ecosystem and is subject to rigorous regulatory standards and capital requirements reflective of its systemic importance. Moreover, Saxo fully complies with Monetary Authority of Singapore (MAS) regulations and holds a ‘capital markets services license’ from the MAS, demonstrating its commitment to regulatory compliance and client protection. With access to over 50 global exchanges, Saxo offers a wide range of investment opportunities, ensuring diversified options for clients. This illustrates how a higher AUM can expand the range of choices available to Providend’s clients.

In conclusion, the journey of financial planning is not solely about navigating towards predetermined goals, but also about embracing the value of options along the way. Even in the absence of clearly defined objectives, prudent planning remains essential, offering flexibility and laying the groundwork for future aspirations as they emerge. Just as options hold significant value in the world of finance, the ability to understand and explore various life pathways is a cornerstone of the advisor-client relationship. As we celebrate our milestone achievement of surpassing the 1 billion SGD AUM mark, we are excited to leverage our enhanced options to further optimise portfolios and provide an improved investment experience for our clients. This exemplifies how a broader range of options, fueled by a larger AUM, can truly enhance the life journey for both advisors and clients alike.

This is an original article written by Lim Choon Siong, Research Analyst at Providend Ltd, the first fee-only wealth advisory firm in Southeast Asia and a leading wealth advisory firm in Asia.

For more related resources, check out:
1. Active Investing That Adds Value to the Client
2. Why a Robust Estimate of Future Returns Is Important for Investment Planning
3. How Providend Helps Affluent Families Have a Good Investment Experience

To learn more about our purpose-driven approach towards wealth management, please visit this link.

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