Advisors’ shuffle away from cash reaches its fifth year

Advyzon has unveiled its third annual asset allocation study shedding light on new trends in financial advisors' investment strategies.

The report titled "What's Going On With Assets in 2024?" delves into the asset allocation choices of over 1,500 advisory firms utilizing Advyzon's portfolio reporting services as of the end of 2023.

A notable trend identified in the 2024 study is the continued reduction in cash allocations by advisors throughout 2023. From north of 10 percent at the end of 2019 when Advyzon first started recording investment data for firms on its platform, cash allocations have gone on a steady decline yearly to reach just 4.6 percent by the end of 2023.

"The end-of-year expectation in 2023 was that the Fed would lower rates six times in 2024,” Brian Huckstep, CIO of AIM, Advyzon's TAMP, said in a statement. “That may have prompted some investors to preemptively exit cash and very short-term bonds to seek better returns in longer-dated bonds or other investments."

This shift might have cost some advisors, however, as they could have missed out on higher-than-average yields from short-term debt and cash equivalents.

Another significant finding in the report is the widening preference for ETFs over mutual funds, with advisors allocating nearly 30 percent to ETFs by the end of 2023, compared to roughly 22 percent to mutual funds.

Explaining the trend, Buckstep pointed to the rise of buffer ETFs designed to mitigate downside risk, effectively putting them in a portfolio turf war against structured notes.

He also noted the growing popularity of lower-priced ETFs, a trend bucked by SPDR's SPY. Despite SPY's higher cost of 0.09 percent, triple the sticker price of Vanguard’s VTI or IVV, the dollars held in SPDR’s ETF remain sticky likely due to long-time investors not wanting to realize the decades’ worth of capital gains they’ve accumulated in the 31-year-old fund.

Advyzon saw a sharp turn to diversification in 2022 with more allocations to alternatives and “other” investments, a trend that continued in 2023. But by the end of last year, it found advisors had 2.3 percent allocated to alternatives – a step down from 2.7 percent at year-end 2022, but still substantially up from less than 1 percent in the years before that.

“[I]t does seem like advisors focused on diversification in 2023, a trend likely to continue as mixed economic conditions persist in 2024,” Advyzon’s new report said.

Among the crosswinds investors are navigating is this year’s presidential election, which will see former president Donald Trump and incumbent President Joe Biden battling for voters’ hearts and minds at the polls.

While investors might be tempted to draw a direct line between sharp movements in the markets and bombs lobbed in the war of words, Kaitlin Hendrix, asset allocation research director at Dimensional Fund Advisors, emphasized the resilience of the stock market across different political landscapes.

"Stocks have rewarded disciplined investors for decades, through both Democratic and Republican presidencies, as shareholders are investing in companies that focus on serving their customers and growing their businesses regardless of who is in the White House," Hendrix said.