Most retail financial advisors are diversifying their clients' portfolios with alternative investments and want to use them increasingly over the next year, says a new study by Cogent Research.

The data, gathered from a survey of 1,643 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 probably will increase in the future, says John Meunier, a Cogent principal and author of the report, 2011 Advisor Brandscape.

"It was somewhat surprising to us to see such broad and consistent use of alternatives, not only across channels, but also based on assets under management," says Meunier.

"Clearly advisors of all stripes and tenure have embraced the notion that managing client portfolios in today's environment requires the tools to provide greater asset-class diversification and better risk management strategies," he adds.

Alternatives are now used by 78% of retail advisors as a portion of their clients' portfolio. The primary reason for their use, the advisors say, is to provide diversity (83%), to manage risk (80%), and to achieve absolute returns (54%), the research shows.

Far fewer advisors report using alternatives in an effort to deliver returns above a benchmark (20%) or for tax management purposes (19%).

On the other hand, 22% of the advisors surveyed say they do not use alternatives at all, with nearly half (47%) of those admitting it is because of a lack of knowledge on their part about alternatives. More than half (52%) of those who do use alternatives say they do not use them more because of their clients' lack of knowledge about them.

The trend toward alternatives stretches across the board to all kinds of financial advisors. Advisors as a whole allocate an average of 11% of their portfolios to alternatives.

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

Of the advisors with less than $25 million in assets under management, 72% use alternatives, and for those with more than $100 million in AUM, the percentage increases to 80%.

This is the first year Cogent has gathered this data, so it will from the benchmark for future comparisons.

For 2012, 41% of advisors say the want to increase their use of alternative ETFs and 28% say they want to increase the use of mutual funds that involve alternative investments. Structured products and notes followed, with 18% wanting to increase their use, according to the research.

-Karen DeMasters