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We’ve heard it said so many times now: Traditional asset allocation models simply fell short in the crisis. Though the market has been in recovery mode for some time, many investors are still afraid to dive back in and are holding their cash on the sidelines. To get them back in the game, advisors should reset future expectations, get more aggressive with their clients’ portfolios and focus more on risk management, said panelists at Pershing’s INSITE 2011 conference held this week.

According to Erik Aarts, executive vice president with PIMCO, there’s about $10.9 trillion sitting in money market funds, savings and checking accounts and cash, as investors continue to harbor fears about the markets. “There’s paralysis out there,” he said.

But there are steps advisors can take to get clients reinvested. For one, Aarts said advisors need to re-think asset allocation with a more qualitative and forward-looking approach. For example, we found out in the crisis that asset class diversification, the endowment model of diversification, didn’t work. While the endowments of large institutions were diversified in their asset classes, these asset classes had similar risk characteristics to stocks and bonds. Given that, investors should diversify their risk factors in the portfolio, not the asset classes, he said.

Getting clients out of cash involves a lot of hard work and communication, Aarts said. He suggested having a conversation with them about what they’re doing with their cash. For example, identifying cash that clients don’t need right away can be used to get them further out on the risk spectrum.

Clients also need to get away from the home country bias, he said. Emerging markets represented 50 percent of global growth last year, yet the average U.S. allocation to emerging markets is 2 to 3 percent.

Nathan Rowader, director at Forward Management, also said clients need to increase their exposure to the developing world to achieve a higher return.

The mechanisms for achieving risk management are not working as they should in this environment, Rowader added. For example, international stock has a higher correlation to the S&P 500 these days. One way to be more non-correlated and achieve a substantial degree of risk management is with alternative investments, he said. Investors need a little risk in their portfolios. This often involves adding a twist in how stocks and bonds are structured.

During his keynote address, Richard Hoey, chief economist at BNY Mellon and the Dreyfus Corporation, said the U.S. stock market is more likely to give you positive returns over the next 12 months because American multi-nationals are benefiting from growth in global GDP. In particular, he said large-cap stocks are likely easier to sell to clients because people know those companies well, and these stocks don’t appear too risky now. If the market sees more of a correction, switch to small caps, he recommended.