Date: 11/29/2018
Source: Incapital
Author: Incapital

It Will Take a Significant Correction in Equities to Wake Investors Up to the Benefits of Fixed Income According to New Financial Advisor Survey

Investors Primarily Seeking Income through Dividend-Paying Equities


Advisors like bonds for predictable income and diversification
and say ETFs have changed the definition of fixed income investing


Boca Raton, FL, November 29,  2018   Over 70% of financial advisors surveyed believe it's going to take a significant correction in the equity markets to wake all investors up to the portfolio benefits of fixed income investing, according to a new survey released today by Incapital LLC, a leading underwriter and distributor of fixed income securities.


The objective of the survey of 200 financial advisors, was to uncover insights about their perceptions and behaviors regarding fixed income investing, as it relates to their clients. In doing so, it found that the two primary assets investors are using to generate income are dividend-paying stocks and equity income mutual funds.

Increasing Allocation to Fixed Income

The average asset allocation among the clients served by the advisors surveyed was:

  1. Equities: 46%
  2. Fixed income: 27%
  3. Cash: 14%
  4. Alternatives: 9%
  5. Other: 4%

While advisors said it would take a significant equity market event for investors in general to recognize the benefits of fixed income, they're not waiting for it to happen when it comes to their clients: Half of the surveyed advisors said they expect their clients would be increasing allocations to fixed income or cash over the next 12 months, with far fewer (29%) saying they expect an increase in equities. This comes as 76% of advisors say principal protection has become a top priority for their clients.

"With prolonged low interest rates and the sustained equity bull market, investors seeking income might have become comfortable taking on equity risk to accomplish income needs," said Paul Mottola, Managing Director and Head of Capital Markets at Incapital. "That may explain why advisors say it will take a significant correction in the equity markets for investors to appreciate the benefits of fixed income. But with increased volatility in the 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. 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."

What Advisors Want from Fixed Income

According to advisors, the top three benefits they seek from fixed income investing for their clients are:

  1. Providing a predictable rate of income: 53%
  2. Portfolio diversification: 51%
  3. Return of principal at maturity: 38%

Advisors were particularly bullish on bond ladders, with 80% saying bond ladders are extremely effective at helping investors manage interest rate risk.

Coincidentally, the risk of rising rates was the advisors’ top-ranked concern with fixed income investing, followed by finding good fixed income solutions in a low rate environment, and generating income without increasing portfolio risk.

Given the fundamental benefits sought by advisors, almost two-thirds (64%) responded that bond ETFs (exchange-traded funds) have changed the definition of fixed income investing away from predictable income and return of principal, to fixed income exposure.

It’s important to understand that many of the features and risks for bond ETFs differ from those of individual bonds. ETF’s generally represent a diversified portfolio of securities which trade as one security on a public stock exchange. These features do help mitigate market and credit risk and provides holders with ease of tracking and strong market liquidity. However, they don’t typically have a fixed distribution rate, and given the portfolio strategy, they may also have a fixed interest rate duration, meaning that the interest rate sensitivity will generally remain constant over time, which is an important consideration with the risk of rising rates. Individual bonds issued by corporations are subject to overall market risk, interest rate risk, liquidity risk (ability to sell bonds in the secondary market), and the overall credit worthiness of the issuer. If the issuer defaults, the coupon payments (predictable income) and principal will be at risk.

"Despite having single security market and credit risk, the features that bonds provide are particularly appealing right now," Mr. Mottola said. "Bonds offer predictable income and return of principal at maturity (absent issuer defaults), if bought at par, and the potential for portfolio diversification which may improve clients’ risk-adjusted returns. Most bond ETFs provide many important benefits, such as portfolio diversification and market liquidity. 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."

Investment Vehicles Used To Generate Income

Advisors described the type of investments typically used to generate income in their clients’ portfolios. Dividend-paying stocks led the way at 51%, and individual bonds were only being used 38% of the time.

  1. Dividend-Paying Stocks (51%)
  2. Equity Income Mutual Funds (43%)
  3. Annuities (43%)
  4. Bonds (38%)
  5. Bond Mutual Funds (39%)
  6. Bond ETFs (29%)

When asked what would get them to use more individual bonds in their clients’ portfolios, advisors pointed to a rate increase (38%). However, they also noted that if they had a simplified process to access bonds (32%), access to better online tools for evaluating bonds (28%), and more/better education on bond investing (24%), they would likely increase their use of individual bonds.

"With equity market volatility increasing more recently, it has become critical for advisors to review clients’ portfolios, recognize the inherent risks associated with certain equity income securities and consider the diversification benefits of traditional fixed income securities," said Mr. Mottola.

Bond Bull Market May Be Over

The bond market has enjoyed its own prolonged bull market for approximately three decades, but according to many of the financial advisors surveyed, it’s coming to an end, if it hasn’t already.

More specifically, nearly two-thirds of the advisors surveyed (63%) believe that the bull market in bonds is over, or will be within 12 months.

About the Survey

The Incapital Financial Advisor survey was conducted by Q8 Research LLC using a quantitative online survey methodology. A total of 200 financial advisors across channels completed the survey during the period September 20 to October 1, 2018. It was conducted among a diverse set of respondents from various firms, including wire houses, regional dealers, independent dealers, as well as Banks and RIAs. The survey’s objective was to uncover insights about financial advisors’ perceptions and behaviors regarding fixed income investing, client asset allocations broadly, as well as looking specifically within the fixed income sector. All respondents have 3+ years tenure as a financial advisor and are involved in portfolio construction decision-making with their clients.


About Incapital

Incapital was founded in 1999 and today is a leading underwriter and distributor of securities to more than 800 broker-dealers, institutions, asset managers, RIAs and banks. The firm represents more than 300 issuing entities and has underwritten more than $470 billion in securities. The firm is headquartered in Chicago, IL and has a principal office in Boca Raton, FL. Further information is available at

Any financial product sold prior to maturity may be worth more or less than the original amount invested. Depending upon the specific product offering, investment risks include, but are not limited to, interest rate risk, credit risk, call risk and liquidity risk. Additionally, unless otherwise specified in the respective offering documentation, the product(s) discussed herein are not FDIC insured, may lose value, and are not bank guaranteed. Past performance is not indicative of future results. Securities offered through Incapital LLC. Member FINRA/SIPC.