Markets are volatile, clients can be fickle and business growth is challenging. Advisors aren’t always clear what action to take, if any, on these more macro issues affecting the industry. Perhaps that’s why many choose instead to concentrate on something under their control—such as increasing financial knowledge or picking up skills that can be used to better operate or market their business.
The most recent Rydex|SGI AdvisorBenchmarking survey suggests that many advisors are taking this route, and in the process infusing themselves with a more sophisticated range of resources to offer clients, which in turn helps keep them calm and loyal during unstable market conditions. The survey, conducted earlier in 2011, confirms that many advisors understand the value of having a broader tool set and a deeper knowledge base, whether involving investments or practice management.
Take, for example, how advisors are increasing their investment knowledge. Almost 75% of advisors surveyed advocate alternative investments either for “many” or “a select few” clients, revealing an understanding that an allocation to alternative investments (“alts”) can benefit most portfolios, given alts’ tendency to behave differently from traditional stocks, bonds and cash. Increased advisor sophistication is also evident in the reasons advisors recommend alternative investments for many of their clients. Most use alts primarily in satellite positions and have risk-related goals, including seeking portfolio diversification, managing risk and lowering portfolio volatility. Moreover, advisors report that they are increasingly evaluating alternative strategies by using less conventional risk metrics such as maximum drawdown and semi-deviation, reflecting a view that there is often more to assessing risk in an investment than standard deviation and Sharpe ratio.
The story is similar with ETFs. Half of advisors report “expert” or “above average” knowledge of basic ETFs characteristics, and about the same percentage say that they plan to increase their use of ETFs. Advisors also demonstrate a sophisticated understanding of ETFs in reporting that they use them for more than core positions—increasingly, ETFs are implemented for specific purposes, such as gaining alts exposure, establishing directional market positions or obtaining exposure to certain factors, asset classes or regions.