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How a $1.8M IRA Beneficiary Can Potentially Boost Income by 15% Using Covered Calls

Executive Summary

Navigating the complexities of inherited IRAs can be daunting, especially for clients seeking stable income in retirement. This case study demonstrates how a 68-year-old widow, Eliza, increased her potential annual income by 15% on a $1.8 million inherited IRA using covered call options and the power of the Black-Scholes model, mitigating tax concerns and preserving principal simultaneously. Golden Door Asset provides the AI-powered tools that RIAs need to help clients like Eliza achieve financial security.

The Challenge

The Registered Investment Advisor (RIA) landscape is becoming increasingly competitive. Fee compression is a persistent pressure, and clients are demanding more value for their investment management costs. According to a recent study by Cerulli Associates, the average RIA fee declined by 5 basis points over the past five years, forcing firms to find innovative ways to generate alpha and deliver superior client service. Furthermore, the aging population is transferring vast sums of wealth to the next generation. These beneficiaries often face the complex challenge of managing inherited IRAs while minimizing tax implications and maximizing income potential. Successfully navigating this situation is crucial for client retention and attracting new assets under management.

Advisors often struggle to balance a client's desire for income with the need to preserve capital and manage risk, especially for those with limited financial experience. Directly withdrawing funds from a Traditional IRA triggers taxable events, potentially eroding the principal faster than anticipated. Traditional bond portfolios, while conservative, may not provide sufficient income in today's low-interest-rate environment. More aggressive strategies, like high-yield dividend stocks or real estate investments, expose clients to increased market volatility and require a deeper understanding of complex financial instruments. Many advisors lack the time or expertise to consistently monitor and implement sophisticated options strategies for each client's unique needs.

The cost of inaction can be significant. Clients who deplete their inherited IRA too quickly risk running out of funds during retirement, leading to financial insecurity and stress. Dissatisfied clients may seek alternative advisors who can offer more tailored and effective solutions, resulting in lost revenue and damage to the firm's reputation. Ignoring the tax implications of IRA withdrawals can result in unnecessary tax liabilities, further diminishing the client's wealth. Ultimately, failing to address these challenges can hinder a firm's ability to attract and retain clients in a competitive market.

Our Approach

Golden Door Asset empowers RIAs with AI-driven tools to navigate these complex scenarios efficiently and effectively. Our approach centers on providing advisors with the insights and capabilities to implement sophisticated investment strategies, such as covered call options, in a streamlined and compliant manner. For Eliza's situation, we leveraged our platform to provide the following:

1. Portfolio Analysis: The platform analyzed Eliza's existing IRA holdings and risk tolerance, identifying opportunities to generate income through covered call options without significantly altering the portfolio's overall risk profile. We focused on large-cap, blue-chip technology stocks already present in her portfolio, ensuring familiarity and minimizing potential anxieties.
2. Option Strategy Identification: Using real-time market data and sophisticated algorithms, the platform identified attractively priced call options on the selected technology stock. The Black-Scholes model was used to assess the fair value of the options, considering factors such as the underlying stock price, strike price, time to expiration, volatility, and risk-free interest rate. This helps ensure that the option premiums received are sufficient to compensate for the potential upside risk of the underlying stock.
3. Implementation and Monitoring: The platform provided detailed instructions and tools to facilitate the execution of the covered call strategy. This included generating trade orders, tracking option expiration dates, and monitoring the performance of the underlying stock. Regular alerts are generated to notify the advisor of any potential adjustments needed to the strategy based on market conditions or changes in Eliza's financial circumstances.

This approach is unique because it combines the power of AI and machine learning with the advisor's expertise and understanding of the client's individual needs. Unlike traditional methods, which rely on manual analysis and subjective judgment, our platform provides data-driven insights and automated workflows, freeing up the advisor's time to focus on building client relationships and providing personalized financial advice.

Technical Implementation

Golden Door Asset's platform is built on a robust and scalable architecture designed to handle large volumes of financial data securely and efficiently. The key technologies and frameworks include:

• Python: The primary programming language used for data analysis, algorithm development, and API integration. Python's extensive libraries for scientific computing (NumPy, SciPy, Pandas) and machine learning (Scikit-learn, TensorFlow) provide a powerful foundation for our AI-driven tools.
• Black-Scholes Model Implementation: A carefully vetted and optimized Python implementation of the Black-Scholes option pricing model. This is used for fair value assessment.
• Real-time Market Data Feeds: Integration with leading financial data providers such as Refinitiv and Bloomberg to access real-time stock prices, option quotes, and other market information.
• RESTful APIs: Secure APIs that allow seamless integration with existing RIA platforms and portfolio management systems. This enables advisors to access our tools and data directly from their preferred workflow environment.
• Cloud-Based Infrastructure: The platform is hosted on a secure and scalable cloud infrastructure (Amazon Web Services) to ensure high availability and performance. This also allows us to easily scale the platform to accommodate growing demand.

The platform leverages several data sources to provide comprehensive and accurate information:

• Market Data: Real-time stock prices, option quotes, and other market data from leading financial data providers.
• Portfolio Data: Integration with portfolio management systems to access client account holdings and transaction history.
• Economic Data: Macroeconomic indicators and forecasts from reputable sources such as the Federal Reserve and the Bureau of Economic Analysis.

Security and compliance are paramount. We adhere to strict security protocols to protect sensitive financial data. This includes:

• Data Encryption: All data is encrypted both in transit and at rest using industry-standard encryption algorithms.
• Access Controls: Strict access controls are implemented to limit access to sensitive data to authorized personnel only.
• Compliance: The platform is designed to comply with relevant regulations, including the SEC's Investment Adviser Act of 1940 and FINRA rules. We also provide advisors with tools and resources to help them meet their own compliance obligations.

Results & Impact

By implementing the covered call strategy recommended by Golden Door Asset's platform, Eliza was able to significantly enhance her income potential while mitigating risk.

The primary ROI metric is the increase in annual income:

• Annual Income Increase: Estimated at $54,000, representing a 3% yield on the $1.8 million portfolio and a 15% increase compared to simply holding the underlying stock. This additional income provides Eliza with greater financial security and flexibility in retirement.

Secondary benefits include:

• Downside Protection: The premium income earned from selling covered calls acts as a partial hedge against market declines, potentially protecting Eliza's capital by up to $10,000 in a moderate downturn.
• Client Satisfaction: Eliza expressed increased satisfaction with her advisor's proactive approach to managing her IRA and generating income.
• Risk Mitigation: The strategy was implemented within Eliza's existing risk tolerance, avoiding investments in unfamiliar or overly volatile assets.

Here's a comparison of Eliza's potential income with and without the covered call strategy:

The advisor was able to confidently implement this strategy using Golden Door Asset's tools, spending less time on manual analysis and more time on client communication.

Key Takeaways

• Covered call strategies can be a valuable tool for generating income from inherited IRAs. They allow clients to earn premium income while maintaining ownership of underlying assets, providing a balance between income and capital preservation.
• AI-powered platforms can streamline the implementation and management of complex investment strategies. By automating analysis, generating trade orders, and monitoring performance, these platforms free up advisors' time and reduce the risk of errors.
• The Black-Scholes model is a useful tool for evaluating option prices and identifying attractive opportunities. However, it's important to remember that the model is based on assumptions and may not always accurately predict future market movements.
• Risk management is crucial when implementing any investment strategy. Advisors should carefully assess each client's risk tolerance and financial circumstances before recommending a particular strategy.
• Providing personalized financial advice is essential for building strong client relationships. By understanding each client's unique needs and goals, advisors can tailor their recommendations and provide a higher level of service.

Why This Matters for Your Firm

In today's competitive RIA landscape, advisors need to leverage technology to deliver exceptional value and differentiate themselves from the competition. Clients are increasingly seeking personalized financial advice and sophisticated investment strategies that can help them achieve their financial goals. Golden Door Asset's AI-powered tools empower you to meet these demands and provide your clients with a superior experience.

By incorporating our platform into your existing workflow, you can streamline your investment process, generate more alpha for your clients, and build stronger, more profitable relationships. Imagine being able to confidently recommend and implement complex strategies like covered calls, knowing that you have the support of cutting-edge technology and data-driven insights. This not only enhances your service offering but also positions your firm as a leader in the adoption of AI within the financial services industry.

Ready to transform how you manage client portfolios and generate income? Explore Golden Door Asset's AI-powered solutions today and discover how we can help you elevate your practice. Contact us for a demo and see the difference firsthand.