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Financial Professional Outlook

Posted: December 8, 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 (fielded Oct. 6 – 21, 2015), Russell collected the opinions of 297 financial advisors working for 213 national, regional and independent advisory firms across the country.

As always, we gained interesting insight into how advisors and their clients feel about the markets and the top topics of their conversations. We also took a deep dive into the topic of income investing. In the past, we’ve explored how advisors are approaching income for retired clients, but in this survey we wanted to broaden that question to talk about all investors with a preference or need for income.

So how are advisors feeling about the markets as well as the risks and challenges of generating yield? Check out some of the highlights from the latest survey or download the full report.

Key challenges

What are your key challenges in serving your clients near or in retirement? (Multiple repsonse)

Yield-focused investment strategies

For many investors who need their investments to provide income, yield-focused strategies (relying on dividends and interest alone to provide income) is an appealing way to invest. In general, what is your view on yield-focused investment strategies for clients?

The risks and challenges of generating yield

Many advisors (46%) said that they find it challenging to develop diversified investment strategies for clients near or in retirement that balance income and growth.

Despite their struggle, 82% of advisors said that yield–focused investment strategies (or strategies that rely on dividends and interest alone to provide income) are a strong option for some or all of their clients.

Advisors' primary reasons include the belief that these strategies are simple for investors to understand and that they may be able to protect the initial investment in the portfolio while being a more sustainable approach. But we would argue that simplicity and comfort aren't the most important factors in financial planning.

In fact, only a small portion of these advisors actually said that they recommend yield–focused strategies because they are superior to other strategies. This finding points to a primary hazard of being overly focused on yield: it's not always an optimal investment approach and these strategies can put sustainable income at risk.

Download the latest Financial Professional Outlook to learn more about how advisors can understand investors' yield preferences and also assess some of the risks that can come along with yield-oriented investing.

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

Advisor market optimism drops while investors remain persistently uncertain

Advisor market optimism drops while investors remain persistently uncertain

Only 64% of advisors said they are optimistic about the performance of the capital markets over the next three years. This is an all-time survey low, reaching a level similar to the November 2012 survey, when the U.S. “fiscal cliff” and European debt concerns were rocking the markets.

Just 25% of advisors reported that their clients are optimistic about the markets, while 53% said clients are "uncertain." This has been a persistent theme throughout the life of the Financial Professional Outlook, as at least 50% of advisors have reported client uncertainty in nearly every survey.

While advisors and investors are likely reacting to expectations around interest rates rising in the U.S. and the recent market volatility largely generated by concerns about China and emerging market economies, we think this shift toward pessimism may be a bit drastic.

It's important to remember that when facing uncertainty, it can be helpful to provide context for what is historically "normal" for market, asset class and economic performance. Moments of doubt can also be opportune times to remind investors of one of the tenets of investing: it is often during the times you feel the most uncertain, such as market dips, that potential investment opportunities arise that can support a disciplined investment strategy.

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.

Advisors have an opportunity to refocus client conversations

The factors weighing on advisors' and investors' market views have clearly been a driving force in their recent discussions. When asked about the top topics of conversation initiated by clients in the past three months, 56% of advisors pointed to market volatility, no doubt driven by the recent spikes we've seen.

In August, month–end market volatility (as measured by the CBOE VIX) rose to 19.43%, the highest since 2012. In September, month–end market volatility creeped even higher with the VIX hitting 24.53%. Volatility concerns likely fed into other popular topics of investor–initiated conversation, including portfolio performance (48% of advisors) and global events (35% of advisors).

Advisors are largely raising the same issues in the conversations they are initiating with clients. The most-cited topic was portfolio performance (42% of advisors) followed by portfolio rebalancing (38% of advisors) and global events (37% of advisors). Since all eyes were on the Federal Open Market Committee meeting in September, it also wasn’t surprising to see an uptick in the number of advisors broaching the subject of rising interest rates (34% of advisors compared to 21% in the October 2014 FPO survey).

Given the nature of these topics, advisors may be spending a lot of time in defensive mode – and that doesn’t leave much room for effective financial planning. The good news is that advisors can take control by creating the right environment for purposeful conversations.

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