Financial advisers are now moving private investors’ money out of cash and into corporate bonds and selected equities, in response to a “significant” increase in demand for higher-yield investments in recent weeks.

Barclays Wealth, Collins Stewart, Newton, RBC Wealth Management and Punter Southall all report that more clients are seeking improved income yields – with many taking advice even before Thursday’s Bank of England base rate cut.

Edward Chadwyck-Healey, managing director of Barclays Wealth’s Private Bank, says the rapid fall in the rates paid on deposits has been “encouraging many clients to look for enhanced yields over cash”, while Symon Hawken, head of the London wealth management division at Collins Stewart, reveals that “a high proportion of our clients have been dissatisfied with the returns on cash – as a result, we have seen significant inflows over the past few months.”

This marks a reversal of the fund flows in the second half of 2008. “After a ‘flight to quality’ last year, which manifested itself in the raising of cash [balances] and the purchase of government Treasury stock, we are beginning to see demand from clients who are keen to explore ways of improving the return on their liquid assets,” says Mark Rayward, managing director of Newton Private Investment Management.

For many clients, the return on liquid assets effectively turned negative after the last two base rate cuts, allowing for tax and inflation. So this week’s rate announcement has merely accelerated the move into riskier assets. “High net worth individuals recognise two things: leaving money in cash in the current interest rate regime is a guaranteed way of losing money in real terms, and to generate higher levels of income will necessitate taking on additional risk,” explains Geoff Tresman, chairman of Punter Southall Financial Management.

Forecasts of further interest rate cuts are likely to mean that cash is held only as an emergency reserve. “With interest rates at 1.5 per cent and heading south, cash has lost most of its attraction in terms of return for investors,” says Phil Cutts at RBC.

So, for investors relying on an income from capital, most advisers now recommend corporate bonds and equities. “We still believe that a diversified portfolio more heavily weighted with investment- grade corporate debt and with exposure to UK equities is the straightforward answer to the income conundrum,” says Matthew Phillips, investment director at BDO Stoy Hayward Investment Management. “The UK corporate bond sector is currently yielding about 5 per cent per annum and many UK corporate bond funds are producing up to 6 per cent, while minimising their exposure to the lower-quality end of the bond market.”

Adrian Lowcock of advisers Bestinvest says that with the flight to government stock driving prices up and yields down, corporate bonds are clearly more attractive. “In the current climate, corporate debt is being valued with high levels of default risk. As such, the quality end of the corporate bond market is paying around 5-6 per cent and high yield paying in excess of 10 per cent,” he says.

Killik & Co highlights the Anglo American 5.125 per cent bond maturing in December 2010, the Compass Group 6.375 per cent bond maturing in May 2012, and the Tesco 5.5 per cent bond maturing in December 2019 – all of which have gross redemption yields in excess of 5.5 per cent. Or, for investors preferring a more diversified approach, the firm recommends the Invesco Perpetual Corporate Bond fund and M&G Corporate Bond fund.

High-yielding FTSE 100 equities are also being recommended for their potential to provide a growing income stream to combat inflation in the longer term. PSigma Asset Management is combining corporate bonds with holdings in blue-chip companies where it believes dividend growth is “reality rather than make-believe”. Patrick Gordon at Killik & Co also recommends UK companies with “strong balance sheets and a high degree of earnings visibility”, including BP, Royal Dutch Shell and Vodafone.

However, Gary Dugan, chief investment officer of Merrill Lynch Global Wealth Management, urges caution: “There’s a wave of investors buying high-yielding equities. This is optimistic. Investors should be wary of chasing dividends that may not last. Even if a dividend is only cut from 5 per cent to 3 per cent, the investor may be dismayed to watch the value fall 10 per cent in sympathy.”