Retail financial advisors are redoubling efforts to diversify their clients' portfolios by increasing allocations of alternative investments, says a new study by Cogent Research.

The data, gathered from a survey of 1,750 retail investment advisors, reveals a trend of advisors turning to alternatives to manage risk in a volatile market. Retail financial advisors are moving to alternatives for their clients' portfolios, something that was done in the past mostly by institutional investors, and the trend is projected to increase in the future, Cogent principal John Meunier said.

Meunier and Cogent senior project director Meredith Rice co-authored the 4th annual Advisor Brandscape report released on Wednesday.

Advisor use of alternative funds remains high. Seventy-five percent of advisors surveyed reported using alternative investments of some kind. "Usage is highest in the broker-dealer channel," Rice said. "In the national channel, almost eight in ten advisors report that they are using some form of alternative fund."

An estimated 68% of RIAs report using alternative investments, according to the report.

Advisor alternative fund usage is also a function of the assets under management (AUM) an advisor oversees. "Advisors with books of business of $25 million and above are more likely to report that they're using alternatives of some kind.

The primary reason for their use, the advisors say, is an attempt to add diversification to client portfolios, according to 88% of advisors surveyed. Other reasons include downside protection for clients' portfolio (83%) and absolute return purposes (55%).

In terms of what types of alternative strategies advisors are using, 34% of all advisors listed multi-strategy/multi-alternatives, followed by 25 percent selecting managed futures; and 24 percent listed long-short equity strategy.

Independent advisors use alternatives the most and prefer venture capital, private equity and hedge funds. Bank advisors rely heavily on limited partnerships, and RIAs prefer structured products and notes.

Advisor use of exchange traded funds (ETFs) is also increasing. In 2007 about 45% of advisors surveyed said they used ETFs. This year, advisor ETF usage is at 68%. "The more experience advisors have with ETFs, the more likely they are to be heavy users of the product," Rice said.

Jim McConville