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Financial Professional Outlook

Posted: August 3, 2015

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 295 financial advisors working for 194 national, regional and independent advisory firms across the country.

This is our second annual survey focused on tax-aware investing. Last year saw new tax laws take effect that had the potential to increase the tax burden of many investors. This led us to believe tax-managed investing may be a long-term area of interest for advisors. In fact, most advisors (81%) reported that their clients faced an equal or greater tax burden for the tax season just passed.

How are advisors helping clients manage higher taxes? Check out some of the highlights from the latest survey or download the full report.

Total AUM in taxable accounts

Approximately what percentage of your total AUM is in taxable accounts?

Average size of assets

What is the average size of a client's taxable account? What is the average size of a client's tax-deffered account? What is the appropriate size of client taxable assets that are "held away" (not managed by you)?

Why tax-aware investing matters.

In our discussions with advisors, we often find they don’t fully appreciate drag or reduction of return caused by taxes. Consider that the average U.S. equity mutual fund (including both active and passive products) sacrificed 1.2%* annually to taxes over the five years ending March 2015. That kind of tax hit can add up fast, especially in a low-return environment.

On average, respondents to our survey said 48% of their assets under management reside in taxable accounts (Exhibit 1). That works out to about $450,000 per taxable account (Exhibit 2). Add to that the $263,000 that the average advisor said is "held away" with either another advisor or managed by clients themselves, and you can understand why it’s important to manage these assets with an eye toward greater tax efficiency.

For more information, download the latest Financial Professional Outlook.

*Morningstar all U.S. Equity Mutual Fund/ETFs universe

Advisor sentiment cools. Investors remain uncertain.

With advisor optimism dropping 8 points since our last survey in November 2014, it looks like the concern of a potential rise in interest rates may be setting in. At only 70% optimistic, advisors are more cautious today than they have been since November 2012. Not only that, but they are currently twice as pessimistic (16%) as they were in October 2014 (8%).

Advisors said that investor sentiment remains virtually unchanged across the board since our last survey, with 31% optimistic, 51% uncertain and 18 % pessimistic. But here's something worth noting: the optimism gap (the percentage of optimistic advisors minus the percentage of optimistic investors) is narrower than it's ever been.

It's our hunch that advisors have grown cautious over an impending rise in interest rates signaled by the Fed itself. Additionally, the U.S. stock market has seen 6 consecutive years of positive returns contributing to a general feeling of "this can't go on forever." Regarding the possible interest rate increase, we do not believe a gradual rise is a reason for doom and gloom. On the contrary, we see it as a normalization that may well be overdue.

Market sentiment.

In general, how optimistic or pessimistic are you and your clients about capital markets over the next 3 years?

Sentiment Index* Trend: Advisor vs. Investor

* 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.

For more information, download the latest Financial Professional Outlook.

For the current survey, the most common conversation topics were as follows: Advisors said clients were focused on market volatility (43%), portfolio performance (39%) and running out of money in retirement (30%). Advisors seemed to stick to their long-running script of talking about portfolio rebalancing (39%) and portfolio performance (36%). A relatively new and popular topic – concerns about rising interest rates – came in third (31%).

Since our focus today is tax-aware investing, we’d be remiss if we didn’t point out the low ranking that the tax implications of investing received as a common conversation topic. This seems especially noteworthy when we consider the survey took place a few weeks after the April 15th tax filing deadline.

It seems odd that only 22% of advisors said taxes were one of the most common conversation topics this year versus 29% in 2014. Interestingly, advisors said 14% of investors wanted to discuss taxes in 2015. That’s up 4 points from 10% last year.

Given the number of advisors (74%) who claim to be active in the taxable space, we think these conversations should rank higher. By taking a proactive stance on taxes and talking about solutions, advisors can reinforce their own value. Ultimately, the goal is to increase their clients’ after-tax wealth.

What advisors and investors are talking about

When thinking about conversations you've had with your clients over the past three months, which of the following have been the most common topics of conversations initiated by you? Initiated by your clients? (up to three responses)

For more information, download the latest Financial Professional Outlook.

Finacial Professional Outlook Info Graph