Individual investors are wading back into the market nearly three years after the financial crisis, but some U.S. brokerage executives said their customers remain cautious.

The heads of several of the largest U.S. brokerages, speaking at the Financial Industry Regulatory Authority's annual conference on Monday, said expectations remain muted and faith in the markets tenuous. Financial advisers must work to help investors avoid market land mines by communicating risks more clearly, but also by listening more carefully to what customers want, they said.

The industry's views of what clients want is outdated. So much time is spent looking for ways to produce upside, as opposed to what the clients want, which is protection against the downside, said Sallie Krawcheck, who as Bank of America Corp's wealth management division president oversees giant brokerage Merrill Lynch. There is a disconnect.

Stock prices have bounced back since the depths of the crisis in 2008 and 2009, but the confidence of small investors remains shaken. A panel of four executives said brokerages can do a lot to address those concerns -- and must, or they risk losing a new generation of customers put off by a decade of negative returns.

Clients have more appreciation for the risks. They're sitting on a lot of cash, and many are starting to pay off debt, said James Weddle, managing partner of Edward D. Jones & Co, which operates more than 10,000 brokerage offices catering to smaller investors.

Many of the old tools and techniques do not work, such as parking assets into U.S. Treasury securities and money markets when stock markets get too choppy.

It's a new environment, where there are no sidelines, said Mark Cresap, who runs the small broker-dealer Cresap Inc. in Radnor, Pennsylvania. With benchmark interest rates near zero, he said, firms should make sure cautious clients do not stray into investments that promise more yield but also carry more risk, such as illiquid private partnerships.

Krawcheck said firms have to make it easier for investors to understand what they are buying. That means investing in research and educating clients and advisers, while improving disclosures. If that were done right, investments widely considered risky would not have to be dismissed.

Yet lack of clarity has all too often attracted the wrong customers to investments that ultimately have caused great harm, such as collateralized debt obligations.

'Structured products' has become a bad word, after what we saw happened with CDOs. You just say it and people start to twitch, Krawcheck said. But if you go back, you see clients say they got really burned, and that they're willing to give up some upside to protect against the downside.

The lesson of the past few years also should remind investors to spread their eggs across many baskets, Edward Jones' Weddle said. Diversification is not 'nice;' it's absolutely necessary.

(Reporting by Joseph A. Giannone, editing by Gerald E. McCormick)