Financial Professional Outlook

Transcription

1 Financial Professional Outlook Tracking the opinions, conversations and market sentiment of U.S. financial advisors since All s quiet at the mid-year mark. As we move into the second half of the year, one of the most interesting observations we see is how mellow the markets have been. Yes, equity markets keep rising and in turn setting new highs, with the Russell 3000 Index closing at a record high of 1174 on June 30, But volatility is hovering near a 7-year low, as reflected by the CBOE Volatility Index (VIX). 1 The 150 advisors working for 80 firms nationwide that we heard from in the latest Financial Professional Outlook continue to rank volatility as the leading topic of conversation their clients initiate. This leaves us wondering how clients will react when volatility actually returns. Our current Financial Professional Outlook survey marks our first abbreviated version of the survey, and going forward, every quarterly report will include the latest sentiment and conversation trends. However, in the spring and fall editions, we will also take a deep dive into some of the most pressing issues facing advisors and their clients. This year, for instance, we re devoting the majority of our time to focus on taxes and retirement. In April we covered tax-aware investing. This fall we will turn our attention to the all-important topic of generating income in retirement. In this report, we wanted to know where advisors could use the most help in their practices, the kinds of clients they want to attract and where they thought the markets would end the year. All of this comes to you along with some timeless investment wisdom I gathered nearly 40 years ago from my longtime financial advisor, Arthur Lashinsky. DATE July 2014 AUTHOR Kevin Hoffberg managing director marketing private client services 1 com/thetell/2014/06/26/ the-father-of-the-vix-on-its-7- year-low-dont-worry-about-it/ Not FDIC Insured May Lose Value No Bank Guarantee Russell Investments // Financial Professional Outlook p / 1

2 1 The power of positive thinking. It s been hard to fault advisors for their persistent optimistic outlook on the markets expressed in the Financial Professional Outlook. Their sentiment has been right, after all. And they ve been bullish for an extended period of time stretching all the way back to February This quarter advisors remained strongly positive, with 82% feeling optimistic about the equity markets looking out over the next three years. Advisors said clients lagged far behind them, with just 25% of advisors saying their clients are optimistic. Both advisor and client sentiment slipped 5 points from last quarter, but this was not a meaningful amount in our view. The overall theme remains the same, though: advisors are bullish, clients are uncertain. EXHIBIT 1: MARKET SENTIMENT COMPARED WITH THE RUSSELL 1000 INDEX In general, how optimistic or pessimistic are you about capital markets over the next three years? What about your clients? Sentiment Index* Trend: Advisor vs Investor Sentiment Index (Optimistic Pessimistic) 80% 60% 40% 20% 0% -20% -40% Feb 11 May 11 Aug 11 Nov 11 Feb 12 Advisor Sentiment Index Investor Sentiment Index May 12 Aug 12 Nov 12 Feb 13 May 13 Aug 13 Russell 1000 Index Nov 13 Feb 14 Jun Russell 1000 Index value * The Sentiment Index provides a point-intime 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) Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb Jun Optimism Gap 50 % 48 % 59 % 58 % 60 % 56 % 56 % 48 % 52 % 43 % 52 % 43 % 57 % 57 % Advisor: Optimistic 86 % 76 % 72 % 66 % 78 % 76 % 68 % 65 % 72 % 75 % 83 % 79 % 87 % 82 % Advisor: Uncertain 6 % 14 % 16 % 15 % 12 % 14 % 20 % 20 % 22 % 13 % 10 % 10 % 7 % 7 % Advisor: Pessimistic 8 % 10 % 13 % 18 % 10 % 9 % 12 % 15 % 6 % 12 % 8 % 11 % 6 % 11 % Investor: Optimistic 36 % 29 % 13 % 9 % 18 % 21 % 11 % 16 % 21 % 32 % 31 % 36 % 30 % 25 % Investor: Uncertain 50 % 52 % 53 % 51 % 53 % 58 % 51 % 51 % 64 % 51 % 53 % 50 % 55 % 50 % Investor: Pessimistic 15 % 19 % 34 % 40 % 28 % 22 % 38 % 33 % 15 % 17 % 16 % 14 % 15 % 25 % 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. Russell Investments // Financial Professional Outlook p / 2

3 2 Where s all this volatility investors keep talking about? According to the VIX, volatility has been a no-show in the equity markets lately, but advisors say it s alive and well in their conversations with investors. Just like last quarter, advisors said the top two investor-initiated conversations were about market volatility (54%) and concerns with government policy (53%). Those were followed by global events (35%) and running out of money in retirement (34%). It was a repeat performance for advisor conversations, too. They continued to focus on the same topics, in the same order: portfolio rebalancing (48%), performance (43%) and running out of money in retirement (30%). It s hard to know for certain why investors seem fixated on volatility. Obviously the markets have had quite a run over the last few years and there is plenty of chatter in the press about a pullback. Yet the market s low volatility levels seem to ignore that possibility, at least for now. 2 EXHIBIT 2: 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) Portfolio rebalancing Portfolio performance Running out of money in retirement Concerns with government policy Tax implications Estate planning Global events Market going up/down Buying or selling a specific investment product Rethinking their financial goals Keeping up with inflation Starting a savings plan 10 for a specific purpose Funding financial needs of parents Other Investors Advisors % of respondents news/ /frenzy-of-volatility-betsunderpin-lowest-vix-since-2007.html Russell Investments // Financial Professional Outlook p / 3

4 3 Net spenders versus net savers. Preparing for the next generation of investors. When it comes to client acquisition, we were surprised to see where advisors are choosing to focus. Most of their efforts are focused closer to the net spending side of the scale versus the net savers. Nearly three quarters (72%) of respondents said they wanted more resources to help them acquire clients near or in retirement (net spenders). Only 39% are looking to the other end of the continuum (net savers) to gain younger clients. In between, advisors said they d like help acquiring clients in peak earnings years (70%), women investors (55%) and clients with specific tax needs (45%). The findings prompted a memory of a man named Arthur Lashinsky, a stock broker at one of the great old line firms. He had immigrated from the old country and survived both the 1929 Crash and the Great Depression. When I met him, he was my grandfather s broker, my father s, and by virtue of a gift, mine as well. Maybe everyone was this way, but it seems to me that Arthur was ahead of his time as an advisor. He solved the generational problem decades before we even knew there was a problem. He was courting Boomers when they were in their teens and twenties! He had figured out a way to be a partner to one generation (he and my grandfather loved to pick stocks together) an advisor to another (my dad wasn t as interested), and a Dutch Uncle to a third (me). He kept my dad s and my business long after my grandfather passed away (and some inheritance along with it). What I can tell you from personal experience is that he didn t consider the intergenerational wealth his right, but he did see it as a responsibility. So it might behoove advisors to take a page from Arthur s book and pay a little more attention to the next generation of investors. Net savers are the future. EXHIBIT 3: INTEREST IN INFORMATION AND RESOURCES TO HELP YOU With respect to client acquisition, do you wish you had more information and resources to help you? Acquire clients near or in retirement 72 Acquire clients in their peak earning years 70 Acquire women as clients 55 Acquire clients with specific tax-management needs 45 Acquire younger clients 39 0% 10% 20% 30% 40% 50% 60% 70% 80% Russell Investments // Financial Professional Outlook p / 4

5 4 What s the key to creating valued client relationships? This is a tough question. But we think the best way to approach the advisor/ client relationship is to put the focus on your client s goals and aspirations first. When we asked advisors where they d like more help with respect to client relationships, communicating the value of an advisory relationship was the number one choice at 74%. Advisors seem to feel the need to justify their fees. We would argue that each of the other four statements that ranked lower than the first actually does explain what advisors bring to the table. If you re doing your job well, you are educating clients about realistic returns. You keep clients focused on long-term goals in times of volatility as well as times that are calm. Sound familiar? You also explain to clients what is and what is not in their control. And, finally, you always have to come back to the topic of diversification and why there are winners and losers in a properly diversified portfolio. 74 % OF ADVISORS Want more resources to help communicate their value to clients. EXHIBIT 4: INTEREST IN INFORMATION AND RESOURCES TO HELP WITH With respect to client relationships, do you wish you had more information and resources to help you? Communicate the value of an advisory relationship 74 Educate clients around realistic return expectations 65 Keep clients focus on their LT goals during volatile periods Guide conversations toward controllable factors Help clients understand that a diversified 55 portfolio will have over- and under-performers 0% 10% 20% 30% 40% 50% 60% 70% 80% The value of conviction. My longtime advisor Arthur Lashinsky had a deep conviction in his investment process and his beliefs. He was like Warren Buffett in that his preferred holding period for a security was forever. I still remember at least one of the stocks that he more or less mandated that I own! I realize today that Arthur s deep conviction became something of a life lesson. Through it he taught me about having realistic expectations, not getting too excited when the stock went up or down, and staying focused on my long-term objectives. Back then, trading commissions were exponentially higher than they are today... and Arthur s conviction and counsel were worth whatever he earned off my account and then some. And as a testament to Arthur s own long view, he didn t churn my account, clearly figuring that if I trusted him there would be more money to invest. The thing I recall most about my relationship with Arthur was that he always put my interests first. By doing so, he created a bond that spanned generations. And after all, isn t that what a successful advisory practice is all about? Russell Investments // Financial Professional Outlook p / 5

6 5 Where from here? Advisors say up for equities, down for bonds at year-end. We wanted to get an idea of where advisors thought the equity and bond markets might finish the year. So we noted where the Russell 1000 Index, the Russell 2000 Index and the 10-year Treasury yield stood on May 31, 2014, and asked advisors where each would end up on December 31, On average, their predictions don t seem unreasonable, but would essentially amount to an annual return of 11.18% for the Russell 1000 Index, 3.58% for the Russell 2000 Index and a yield on the 10-year Treasury that would be down 12.67% for the year. So, on average, advisors are still looking up. EXHIBIT 5: RUSSELL 1000 INDEX AT YEAR-END As of May 31, 2014, the Russell 1000 Index (U.S. large cap stocks) stood at 1,072. At what level do you think it will finish the year? Advisor expectations for the Russell 1000 Index % 70% 60% 50% 40% 30% 20% 10% 0% 7 Below At Above Don't know RUSSELL 1000 INDEX On average, advisors expect the Russell 1000 Index to finish 2014 up from here by: 6.3 % As of May 31, 2014 Advisors expect the Russell 1000 Index to close out 2014 at 1139, for an expected increase of 6.3% for large-cap stocks (5/31/14 12/31/14). That translates to an annual return for 2014 (1/1/14 12/31/14) of 11.18%. Russell Investments // Financial Professional Outlook p / 6

7 5 CONTINUED EXHIBIT 6: RUSSELL 2000 INDEX AT YEAR-END As of May 31, 2014, the Russell 2000 Index (U.S. small cap stocks) stood at 1,135. At what level do you think it will finish the year? Advisor expectations for the Russell 2000 Index % 70% 60% 50% 40% 30% 20% 10% 0% 12 Below At Above Don't know RUSSELL 2000 INDEX On average, advisors expect the Russell 2000 Index to finish 2014 up from here by: 5.3 % As of May 31, 2014 On average, advisors expect the Russell 2000 Index to close-out 2014 at 1195, for an expected increase of 5.3% for small-cap stocks (5/31/14 12/31/14). That translates to an annual return for 2014 (1/1/14 12/31/14) of 3.58%. EXHIBIT 7: 10-YEAR TREASURY YIELD AT YEAR-END As of May 31, 2014, the 10-year Treasury was yielding 2.48%. Where do you think it will finish the year? 10-year Treasury on % 50% 40% 30% YEAR TREASURY On average, advisors expect the 10-year Treasury yield to rise at year-end by: 5.6 % As of May 31, % 14 10% 0% Below At 2.48 Above 2.48 Don't know On average, advisors see the 10-year Treasury yield rising to 2.62% at year-end, for an expected increase in yield of 5.6% (5/31/14 12/31/14). For the year (1/1/14 12/31/14) however, the yield would be %. Please note that Treasury prices and yields move in opposite directions. In this case the price would have risen in relation to the note s duration. Russell Investments // Financial Professional Outlook p / 7

8 Russell s survey snapshot THREE KEY TAKEAWAYS: 1. Build a diversified mix of clients by age and assets. Don t ignore the next generation of investors. 2. Educate, guide and help your clients focus on what really matters. Do this right and your clients will implicitly understand the value of the advisory relationship. 3. Have conviction in your beliefs and be willing to share them with your clients. As Arthur showed me, this quality can be contagious. Russell Investments // Financial Professional Outlook p / 8

9 Methodology Russell Investments conducted the Financial Professional Outlook survey between June 11, 2014 and June 23, The survey was sent to a broad group of U.S. financial advisors. Having a financial relationship with Russell was not part of the criteria for being included in the survey. In total, 150 survey responses were received representing nearly 100 firms. The sample size of 150 is sufficient to provide 95% confidence that the results will be within plus or minus 8.2%. In other words, if we repeated this survey 100 times we would expect to find similar results in 95 of the 100 trials. About Russell Investments Russell Investments provides asset management and investment services to institutional and individual investors. We offer mutual funds, indexes, alternative investments and implementation services such as transition management and trade execution. Russell has offices in most major financial centers and serves clients in more than 40 countries. Russell is one of the world s most influential and trusted providers of investment services. A pioneer in multi-manager investing and the creator of the Russell Indexes, Russell manages over US$259 billion in assets under management* as of March 31, We work with 580-plus independent distribution partners, ranging from small and midsized organizations to many of the world s largest and most sophisticated investors, responsible for hundreds of billions of dollars. Our innovative investment approach is made available to individuals through a network of strategic distribution alliances and independent investment advisors. Our clients include banks and insurance companies, investment advisors, defined benefit and defined contribution plans, endowments, foundations and sovereign wealth funds. We seek to understand capital markets and identify investment managers we believe have exceptional capabilities. To achieve these goals, our analysts hold thousands of research meetings each year with investment managers around the world. The cumulative knowledge we gain from this in-depth research serves as the foundation for all of our products and services. Founded in 1936, Russell is headquartered in Seattle, Washington. Russell is a subsidiary of Northwestern Mutual, and the company s executive management has a minority equity participation in the firm. More information about Russell s investment products and services is available at * Includes $74.8 billion of derivative overlay AUM not included prior to June 30, Russell Investments // Financial Professional Outlook p / 9

10 General disclosures Russell Financial Professional Outlook is a product of Russell Investments, produced independently of Russell s investment and manager research services. The information contained herein has been obtained from sources that we believe to be reliable, but its accuracy and completeness cannot be guaranteed. The information, analysis and opinions expressed herein result from surveys of persons outside Russell Investments and may not represent the opinion of Russell Investments, its affiliates or subsidiaries. This report is provided for general information only and is not intended to provide specific advice or recommendations for any individual or entity. This is not an offer, solicitation or recommendation to purchase any security or the services of any organization. Please note, advisors surveyed do not necessarily use Russell products. Russell 1000 Index: Measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market. Russell 2000 Index: Measures the performance of the small-cap segment of the U.S. Equity universe. Russell 3000 Index: Measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. Performance quoted represents past performance and should not be viewed as a representation of future results. The Russell logo is a trademark and service mark of Russell Investments. This material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from Russell Investments. It is delivered on an as is basis without warranty. Russell Investment Group, a Washington USA corporation, operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. Russell Financial Services, Inc., member FINRA, part of Russell Investments. Copyright Russell Investments All rights reserved. First used July 2014 RFS Russell Investments // Financial Professional Outlook p / 10