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Financial Professional Outlook

Posted: April 29, 2014

Russell's Financial Professional Outlook is a survey of financial advisors that provides a view of advisors' insights on topics of importance to their businesses and the industry. In the latest survey, Russell collected the opinions of 173 financial advisors working for nearly 100 national, regional and independent advisory firms nationwide.

The latest survey focused on the topic of tax-aware investing. Check out some of the highlights from the latest survey or download the full report.

Advisors on the importance of tax-aware investing.

For many investors, taxes can seriously detract from an investment portfolio's return if not managed effectively. In the latest Financial Professional Outlook survey, the majority of advisors (86%) said tax-managed strategies are important - or critical - to their businesses and 77% said they're important to their clients. Respondents roughly fit the normal distribution pattern (bell curve), falling into one of three categories that we call Experts, Believers and Unmotivated.

Experts. The 11% who said tax-aware strategies are critical to their business are fully engaged on the subject and likely have a greater number of high net-worth clients interested in the topic. As you might expect, experts appear to have a firm grasp of tax-aware strategies and how to implement them effectively.

Believers. Most advisors (75%) fall into this middle category and said they make tax-managed investments available to "most clients" or their "high net-worth clients." Believers are looking to learn more about tax-aware investing, seeking information to share with clients and planning tools to help them succeed. They also expressed an interest in developing stronger relationships with their clients' tax professionals.

Unmotivated. These advisors (14%) either don't offer tax-managed solutions or provide them only to "those who request it." It's likely that advisors in this category work with clients who have fewer assets. They may also be serving clients with mostly "qualified" or non-taxable accounts like 401(k)s and IRAs, so there would be little need to focus on managing taxes.

For more on how advisors are approaching tax-aware investing through products, strategies and conversations with clients, download the latest Financial Professional Outlook.

In our Financial Professional Outlook survey, we ask advisors a simple question: In general, how optimistic or pessimistic are you and your clients about capital markets over the next three years?

In the latest survey, we saw a new record high of 87% of advisors feeling optimistic about the markets. That beats the previous high of 86% set back in February 2011.

Only 30% of advisors said clients are optimistic, down from 36% in the December 2013 survey. The optimism gap between advisors and investors widened 14 points to 57%.

For more information, download the latest Financial Professional Outlook.

* The Sentiment Index provides a point-in-time measurement of advisor and investor sentiment about capital markets over the next three years. The Sentiment Index takes into account both those who are optimistic and those who are pessimistic, and is calculated in this way: Sentiment Index = (% of group that is optimistic) – (% of group that is pessimistic).

This chart was created by asking advisors to indicate how optimistic or pessimistic they are about the capital markets looking out over the next three years, on a 5–point scale of "extremely pessimistic to extremely optimistic." Then we asked them to gauge the sentiment of their clients on the same scale.

In the Financial Professional Outlook, we ask advisors to name the most common topics of conversations with clients over the past three months – both those conversations that they initiate and those that clients initiate.

Same topics, different quarter

In the latest survey, the top advisor topic of choice was portfolio rebalancing (51%), followed by portfolio performance (40%), running out of money in retirement (29%) and tax implications of investing (29%).

It's likely there was some overlap between the rebalancing and tax conversations because the equity markets experienced very strong performance in 2013 (up over 27%),1 while bonds were weak (returning -2.02%).2

That lopsided performance meant a typical balanced portfolio of 50% stocks and 50% bonds could need to sell some equities and buy more bonds to get back to its target allocation. As a result, investors could owe taxes on their gains while potentially paying a higher tax rate year over year. That's the hard way to learn about tax-efficient investing.

For investors, advisors said their main focus was on volatility (55%), portfolio performance (35%) and concerns with government policy (34%).

1 Russell 1000 index

2 https://indices.barcap.com/show?url=Benchmark_Indices/Aggregate/Bond_Indices

For more information, download the latest Financial Professional Outlook.