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December 03, 2018 at 11:24 AM
Some seven in 10 financial advisors in a new poll say it will take a significant equity market correction for investors in general to recognize the benefits of fixed income, Incapital LLC, a fixed income securities underwriter and distributor, reported this week.
However, advisors are not waiting for this to happen. Half of the survey participants said they expected their clients to increase allocations to fixed income or cash over the next 12 months, while only 29% said they expected an increase in equities.
This comes as 76% of advisors say principal protection has become a top priority for their clients.
These were the average asset allocations among the clients served by the advisors surveyed:
- Equities: 46%
- Fixed income: 27%
- Cash: 14%
- Alternatives: 9%
- Other: 4%
“With prolonged low interest rates and the sustained equity bull market, investors seeking income might have become comfortable taking on equity risk to accomplish income needs,” Paul Mottola, head of capital markets at Incapital, said in a statement. “That may explain why advisors say it will take a significant correction in the equity markets for investors to appreciate the benefits of fixed income.”
(Related: Morningstar’s Toolkit to Ease Market Downturn)
Mottola said that with increased market volatility, investors will now be much more receptive to assessing some of the potential benefits that are typically associated with fixed income, such as portfolio diversification and lower volatility.
“This is especially true among investors who have taken equity risk for income, and those who now may be focused on principal protection and a fixed and predictable stream of income,” he said.
Q8 Research polled 200 financial advisors across channels from Sept. 20 to Oct.1, using a quantitative online survey methodology.
What Advisors Want
Fifty-three percent of surveyed said providing clients with a predictable rate of income was the main benefit they seek from fixed income investing. Fifty-one percent said it was portfolio diversification, and 38% said it was principal at maturity.
Advisors were particularly bullish on bond ladders, with 80% claiming that these were highly effective in helping investors manage interest rate risk.
Risk of rising rates was the advisors’ top concern with fixed income investing, followed by finding good fixed income solutions in a low rate environment and generating income without increasing portfolio risk.
