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The Changing Rules of Asset Allocation: Practice Edge, June 2009

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If what goes up must come down, then the opposite must also be true: what falls down (even the market) must bounce back. Even a battered economy, no matter how far it has fallen, will eventually recover. But with many investment advisors suffering a loss of assets and tightening profit margins, some firms may not be well positioned to take advantage of the recovery when it does inevitably come 3/4 and a recovery may be not so far away. The Advisor Confidence Index, our monthly advisor confidence indicator, shifted into positive territory in May 2009 for the first time in the past year. The May index increase marked the index’s most significant upward movement in the last 20 months. “It is looking more and more likely that we will be out of recession soon, though it will not be officially recognized until probably next year,” said Bill Ramsay of Financial Symmetry of Raleigh, North Carolina.

The downside, however, is that according to the Spectrem Group, a Chicago-based consulting firm that specializes in the wealth and retirement markets, “anywhere from 20% to 30% of wealthy clients will change advisors over the next several years.” To ensure that your business bounces back with the market, it’s imperative to retain 3/4 and gain 3/4 clients rather than risk losing them to competitors. Helping clients weather the storm is essential to retention, so this month we take a look at how approaches to asset allocation are changing in today’s challenging market environment.

The Power of Asset Allocation

The majority of advisors say that their approach to asset allocation has changed in the last six months. More than 35% of advisors surveyed said that their diversification approach remains the same. Twenty-four percent of advisors said they are increasing their allocation to income-oriented investments such as bonds, real estate, and TIPs. About one third (33%) of advisors surveyed quickly reacted to changing market conditions by increasing their allocation to alternatives.

The Role of Alternatives

As markets become more challenging, advisors seeking to insulate client portfolios from market volatility are borrowing a page from institutional investors’ playbooks: they’re increasingly turning to alternative investments. Alternative investments and non-correlated investment products are playing an increasingly important role in advisors’ client portfolios to enhance returns and mitigate risks. Thirty-seven percent of advisors surveyed said they have increased investments in non-correlated products in 2008 and 26% said they have increased allocation to alternative assets. Nineteen percent of advisors surveyed said that alternatives played a significant role in helping protect their clients’ portfolios and mitigating their downside risk in 2008. Thirty-three percent of advisors said they are increasing allocations to alternatives to provide adequate diversification to their clients. Only 12% of advisors surveyed said that they used alternatives but that alternatives did not help the portfolios.

Investment Style

The division of tactical (35%) versus strategic (50%) investment advisors remains largely unchanged compared to 2007. In past years, advisors were evenly split between tactical and strategic, but strategic advisors are taking a larger lead in investment style popularity.

Advisors who want to weather the storm should borrow a motto from the Boy Scouts: be prepared. The economy will eventually improve-to make sure you are spending your time wisely today and positioning your practice for a rebound in the economy, make client relationships a priority. Performance matters, of course. But keeping your clients front and center–and communicating how you have helped their portfolios weather the storm–is a way to serve your clients in the short term and help your business in the long term.

Maya Ivanova is a market research manager with Rydex|SGI AdvisorBenchmarking She can be reached at [email protected].

Rydex|SGI AdvisorBenchmarking is a research and analysis center focused on the registered investment advisor (RIA) marketplace. The service is aimed at helping advisors grow and enhance their firms by comparing how their businesses fare against other advisors. Advisors also learn best practices of the most successful advisors in the business.

AdvisorBenchmarking is an affiliate of Rydex|SGI. The analysis on Rydex is based on the number of completed surveys and reflects only information from those surveys. This information is intended to be general in nature, and these overviews are no substitute for professional, legal or consulting advice. This information should not be construed as advice from Rydex Investments|SGI and it affiliates or any of its affiliates.

The survey was conducted in March-May 2009 (561 RIAs participated in the survey).