Private Banks Hedge Against Risk with Diversification

February 14, 2022 — Boston

Bank advisors seek exposure to fixed-income, alternative asset classes, and ETFs

While product allocations have not shifted drastically during the COVID-19 pandemic, bank advisors are showing stronger demand for products that provide diversification and risk protection, according to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition.

Many bank advisors have looked to adjust their fixed-income holdings to protect against near-term price volatility, and to achieve broader diversification benefits over the long term. Fixed income has long been a core component of bank clients’ portfolios given the asset class’s lower volatility, consistent income stream, and uncorrelated returns relative to the stock market. Asset managers that can help navigate the complex fixed-income markets and demonstrate a consistent track record of helping clients generate income and reduce overall portfolio volatility will stand to benefit in the current market environment.

Alternative asset classes are also becoming more attractive to bank advisors, with many expecting to increase their allocations to private equity, hedge funds, and non-traded real estate investment trusts (REITs) during the next two years. The uncertain outlook for equity and bond markets in the coming years has benefitted both private equity and hedge funds, which high-net-worth investors have long relied on to generate outperformance and diversify risk exposure from equity markets.

Bank advisors are also increasingly interested in exchange-traded funds (ETFs). Nearly three-quarters (71%) of bank advisors report that performance is the most important factor when selecting ETFs, followed by expense ratio (62%) and daily trading volume (57%). “Given the ETF vehicle’s inherent advantages of scalability, low cost, and tax efficiency, they have become a core building block for clients’ portfolios across banks’ advisory platforms,” says Chayce Horton, research analyst. A growing number of advisors are incorporating active ETFs within their fixed-income allocations, and in doing so are reducing overall portfolio costs for their clients compared with using individual bonds. “As bank advisory teams demonstrate continued demand, there is a clear opportunity for asset managers to further educate advisors about the benefits of active ETFs within their clients’ portfolios,” he adds.

With the path of the pandemic and global market uncertain, there remains an opportunity for active managers to reassert themselves and outperform passive, index-tracking strategies. “While certain market conditions will cause some active managers to underperform at times, the majority of bank advisors have designed long-term portfolios that combine aspects of both active and passive,” says Horton. “As such, asset managers should remain product- and vehicle-agnostic and be prepared to position both actively managed funds and passive strategies to banks’ home offices across a wide range of asset classes and portfolio objectives.”

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