More advisors are using alternative investments to help round out clients' portfolios, but alternatives still make up only a small proportion of investments, in part because advisors have a difficult time explaining the purpose of alternatives to clients, reveals a recent study from the Financial Planning Association Research Center.

   Among advisors now using alternatives, 47% plan to increase their use over the next year. However, only 20% of advisors surveyed now use alternatives, and within this group the average allocation to alternatives was slightly more than 7%. "This suggests that, for many financial planners, alternative investments are still very much a niche product, used only occasionally to meet specific client needs," concludes the study entitled, How Advisor's Choose: A study on adviser selection screen and value assignments for asset managers, custodians, and product usage.

   Among other findings from respondents, 13% say they make direct investments in hedge funds, which on average accounted for 5% of their total assets under management. And a total of just seven people surveyed say they use private-equity funds.

   The study says that developers of alternative products don't provide enough simplified materials to help advisors educate their clients on how alternatives can enable them meet their investment goals.

   Investments now categorized as alternatives have grown to include a range of vehicles from short-extension strategies to funds and ETFs that invest in commodities. The categories garnering the most use are commodities, real estate partnerships, international/global real estate funds and hedge-like mutual funds. Respondents to the survey say they use alternatives for higher-net-worth individuals who can tolerate short-term volatility in exchange for larger long-term returns.

   The survey was based on responses from 450 FPA members taken between November 2007 and January 2008.