Clients have yet to appreciate the benefits of fixed-income investing.

That is what Incapital LLC found after surveying financial investors nationwide.

Incapital, a Boca Raton, Fla., underwriter and distributor of fixed-income securities, surveyed 200 financial advisors to learn more about their clients’ perceptions and behaviors about fixed-income investing.

Over 70 percent of advisors surveyed said that it would take a significant correction in the equity markets to change their clients’ perception of bonds. For now, the seesaw battle of fixed-income investments against the more bullish equity market has tilted in favor of the latter.

Incapital found that the two primary assets investors are using to generate income are dividend-paying stocks and equity income mutual funds. Clients allocated 46 percent of their investment assets to equities, 27 percent to fixed income, 14 percent to cash investments, 9 percent to alternative investments and 4 percent to other investments.

Despite a client preference for equities over fixed income, half of advisors surveyed said they expected their clients to increase allocations to the latter over the next 12 months.

Only 29 percent of advisors said they expected an increase in client equity investments over those in fixed income.

Incapital found that 76 percent of advisors reported that clients cited protection of investment principal as a top priority, even though many cited a preference for investing in equities over less-risky fixed-income investments.

The advisors surveyed said they wanted three specific benefits for their clients from fixed income: Over half of them—53 percent—wanted bonds to provide a predictable rate of income for their clients; 51 percent wanted bonds for portfolio diversification; and just 38 percent wanted the investments for their return of principal at maturity.

Bond ladders stagger the maturity of the securities, allowing people to reinvest proceeds at regular intervals, and many advisors cited this as an extremely effective investment strategy for managing clients’ interest rate risk. That was one of the factors making fixed-income investments more appealing to them.

On the other hand, many advisors also said that the risk of rising interest rates was their top-ranked concern about bonds, followed by their worry about finding good bond solutions in a low rate environment, and their worry about generating income without increasing portfolio risk.

Paul Mottola, the managing director and head of capital markets at Incapital, said that issuer defaults aside, individual bonds offer a predictable income and return of principal at maturity if bought at par. He said that the potential for portfolio diversification might improve clients’ risk-adjusted returns, despite having single security market and credit risk. He said this offered advantages over ETFs.

“Most bond ETFs provide many important benefits,” Mottola said, “however, their income is generally not fixed, and in many cases their interest rate sensitivity remains constant over time, unlike a bond, which declines over time as the maturity date grows closer. This is an important consideration, especially given the risk of rising interest rates.”

Over half of the advisors in the Incapital survey, 51 percent, said that dividend-paying stocks were the preferred investment of choice. Coming in second at 43 percent, advisors said that equity income mutual funds or annuities generated the bulk of clients’ portfolio investments; 39 percent cited bond mutual funds; 38 percent said bonds; and 29 percent said bond ETFs.

Incapital asked advisors what would get them to use more individual bonds in clients’ portfolios. Slightly more than a third, 38 percent, said an interest rate increase would, while 32 percent said they would use individual bonds if there were a simplified process to access them. Twenty-eight percent wanted access to better online tools for evaluating bonds, and 24 percent said individual bonds would be preferable if there were more/better education on bond investing.

After three decades of a bullish bond market, 63 percent of advisors surveyed said they believed a bear market would replace it within the next 12 months.

That may be good news for Incapital, which conducted the survey in order to better understand investors’ behavior and reasoning in eschewing less volatile fixed-income investments over those in a supercharged equity bull market.

“We believe investors will now be far more receptive to assessing some of the potential benefits that are typically associated with fixed income, such as portfolio diversification and lower volatility,” Mottola said. “This is especially true among investors who have taken equity risk for income, and those who now may be focused on principal protection and a fixed and predictable stream of income.”

Q8 Research conducted the online survey from September 20 to October 1, 2018. The respondents included advisors with at least three years of experience in portfolio management for firms, wirehouses, regional dealers, independent dealers, banks and RIAs.