During one of the worst years in history for traditional portfolio models, financial advisors pulled out of equities and increased exposure to alternative investments.
At the end of 2022, advisors allocated an average of 53.7% of client assets to equities, down from 60.1% in 2021, according to data collected by advisor technology company Advyzon, which provides CRM, document storage, trading and portfolio management to wealth management firms. Meanwhile, allocations to alternatives jumped from 0.6% to 2.7%.
Not all of that can be blamed on the weak performance of equities, said Brian Huckstep, chief investment officer at Advyzon Investment Management, the turnkey asset management business that Advyzon launched in 2022.
“U.S. stocks were down 18% in 2022 while bonds were down just 13%,” Huckstep wrote on Advyzon’s blog. “That math explains roughly half of the drop in equity exposure from 60% to 54%.”
Allocations to bonds remained relatively consistent, increasing just 50 basis points. Use of alternatives, while still representing a small portion of overall allocations, surged thanks to increased availability of the products to advisors, said Shana Sissel, CEO of alts investing firm Banríon Capital Management.
“2022 demonstrated the value of evolving the traditional 60/40 portfolio to include an allocation to low-correlation alternatives,” Sissel said in a statement.
Not only has access to alternatives improved for independent advisors in recent years, but the number of different products available has exploded, said Daniel Dusina, the director of investments at Blue Chip Partners, a Farmington Hills, Michigan-based registered investment advisor with $1.2 billion in assets under management. Alternatives can provide excellent value if they fit the client, and the increased variety makes it easier to find an suitable product, Dusina said.
While he’s not surprised by the shift indicated in Advyzon’s data, he still doesn’t think alternatives are a fit for all clients.
“Just because they’ve been democratized and there’s this shiny new object doesn’t mean that everyone needs exposure to them,” Dusina said. There are still operational challenges RIAs must contend with, so Blue Chip is holding off on directing client assets to alternatives while keeping a close eye on how the products can be effectively added.
“We’re not getting a lot of retroactive inquiries about [alts]. It’s not like clients are banging down our door asking for them,” Dusina said.
The drop in equity allocations makes sense with what happened in markets last year, Dusina said. Though Blue Chip didn’t make wholesale changes to its portfolio strategy, the firm started making adjustments to clients’ equity exposure in late 2021.
“After a decade of equities significantly outperforming, clients were fairly overweight on stocks. Some of that corrected itself last year, and very late last year, when we looked at the markets, bonds looked very attractive.” he said. “It wasn’t like we were changing recommended allocations. We encouraged advisors to get back to a target asset allocation mix.”
Despite the increasing federal funds rate, cash in client portfolios declined in 2022, according to Advyzon’s data. Huckstep attributed this to advisors seeking higher yield in “cash equivalent” products like CDs or money market funds.
Advyzon's data also indicated that ETFs have dethroned mutual funds as the top investment vehicle for advisors, a trend that many have seen coming for a long time, said Dusina.
“It’s overwhelming how much easier it is to operate with ETFs as opposed to mutual funds,” he said.
However, there are still market segments where investors should be more active, such as in fixed income, international markets and small cap, he added.
“The market is still getting its legs under it in terms of active ETF offerings,” Dusina said. “There are some offerings that are very attractive across equities and fixed income that are available in the mutual fund wrapper but not in the ETF wrapper.”
The Advyzon report is based on data collected anonymously from 1,200 advisors who use Advyzon for performance reporting. The information was anonymized to protect client privacy, the company said.
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