A Simple, No-Risk Growth Opportunity for RIAs: Educate Ignorant Investors About Bonds

For laypersons, an investment portfolio often means a mish-mash of stocks and bonds. But self-directed investors can’t even get that right.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

Research shows investors understand and value risk-adjusted returns. That spells opportunity for advisors, since many self-directed investors are ignoring an entire asset class.

Only a quarter of self-directed investors own any fixed income securities, perhaps because they are woefully ignorant about the asset class. When asked to define a fixed income investment, 42% of investors said “an investment that provides a fixed amount of income per month or quarter” and 36% chose the option “I don’t know,” according to a survey of 2,007 investors by BNY Mellon Investment Management.

Some investors, who didn’t flat out admit their lack of knowledge, were even further out of touch: 9% described fixed income as “an investment that locks up your capital for a fixed period of time” and 5% labeled the asset class “Investments that include equities, futures, alternatives, and thematic products.”

Healthy debates about portfolio allocation rage on but investors saving for retirement can benefit from learning more about and ultimately investing in fixed income. Therein lies an opportunity for financial advisors, Liz Young, Director of Market Strategy, BNY Mellon Investment Management, told RIA Intel.

Most survey respondents (64%) who worked with an advisor claimed to understand fixed income securities “a lot” or “somewhat” compared with 35% of self-directed investors. Advisors’ clients also had bigger allocations to the asset class as a result.

To start, advisors should help clients and prospects grasp just how big the fixed income universe is and manage expectations. Bonds have appreciated in value over recent years as interest rates have fallen but it “has not necessarily been a normal environment,” according to Young.

That growth is not something investors should come to expect from fixed income. Rather, in Young’s opinion, advisors need to help investors understand that bonds help manage risk and shouldn’t add volatility to a portfolio. Advisors who explain this will attract more clients.

Working with a financial advisor also increased investors’ appetites for risk. Out of those working with an advisor, 42% expressed “some or strong” appetite for risk, compared with 27% for investors without an advisor.

Investing through an advisor for the long term – including in fixed income – gives clients a heightened sense of comfort with risk, according to Young. They understand “you must be present to win” and will take to advisors who explain risk-adjusted returns.