Exchange-traded funds (ETFs) seem to be the darling of the investment world, as 90% of advisors said they use them or recommend them to clients and nearly half intend to use them more in the upcoming year, according to a new Financial Planning Association survey.

Following the tumult of 2022, financial advisors have had a lot to manage the tasks of easing the concerns of clients and finding opportunities to boost portfolio returns, according to the FPA's annual “Trends in Investing” report.

Anticipating that advisors would be focused on the search for higher returns, the FPA and Journal of Financial Planning loaded this year’s survey with questions about alternative investments.

“We learned that while there is interest in these products, there are still significant concerns, namely their lack of liquidity and overall cost,” the researchers wrote. “What’s more, some planners indicated a general lack of trust in the ability of these products to meet clients’ needs.”

The five most popular investment classes for advisors in 2023 are ETFs (90.1% adoption among advisors), cash and cash equivalents (76.4%), non-wrap mutual funds, (63.9%), individual stocks (50.8%) and individual bonds (47.1%). ESG funds came in sixth place with 34.6% adoption.

Looking forward, advisors expect to increase the use or recommendation in the next year for these top-five categories: ETFs (49.7%), individual bonds (23.6%), individual stocks (18.3%), separately managed accounts (15.2%) and variable annuities (12%).

And they expect to decrease the use in the next year of these vehicles: non-wrap mutual funds (25.7%), cash and cash equivalents (13.6%), mutual fund wrap programs (8.9%), cryptocurrencies (4.7%) and ESG funds (4.7%).

60/40 Inspires Confidence Still
“Although investment professionals are generally bearish in their economic outlooks, over 71% expressed some level of confidence in the traditional 60/40 portfolio’s ability to provide similar returns as it has historically,” the survey reported.

That left roughly 28% not confident or neutral, so it wasn’t surprising that these respondents said they were looking outside of this allocation to reap better returns. These advisors said they were actively investing in alternatives that were suitable for their clients.

Diversification (55%) and risk mitigation (41%) were the top two reasons advisors said they use alternatives in client portfolios, but even with that healthy endorsement, 48% said they thought the biggest obstacle to greater adoption was lack of liquidity. Other challenges, like fees/expenses and the effort in identifying suitable opportunities for clients, were also noted 41% and 38% of the time, respectively.

The survey identified private equity as the most popular alternative asset, with 29% of respondents saying they sought these opportunities. That was followed by 24% saying they used a multi-strategy approach, 16% liking long-short opportunities and 15% eyeing managed futures.

Client Concerns
The advisors polled said they had received calls from their clients about topics that roughly fell into three groups: highest concern, where 82% to 85% of calls touched on these subjects; mid-level concern, where about 35% of calls addressed these topics; and then lowest concern, where about 25% or fewer of calls were about these subjects.

Top of mind were the effects of general volatility on a portfolio, as well as the effects of inflation on a portfolio or retirement plan. Mid-level concerns were the effects of Secure 2.0 on their retirement plan, fees and other costs of investing. And at the lowest level were the effects of tax reform, cryptocurrency investing, ESG investing, the effects of the pandemic on portfolios, direct indexing and cannabis investing.

The survey was conducted between February 14 and April 7, and resulted in 191 responses from financial planners who provided investment services for clients.

The advisors who participated in the survey self-identified at fee only (60%), fee and commission (36%) and commission only (4%). The majority were independent RIAs (53%), either a registered rep or independent advisor affiliate with a broker-dealer (17%), a dually registered advisor (11%), an unregistered planner or advisor (8%), a broker employed by a broker-dealer, 4% or a registered rep working for a bank or credit union (2%).

Nearly half have been in the profession more than 21 years (47%). And 79% said they hold a CFP designation, while 16% said they were Finra-registered. Some 28% said they held other designations.