Financial Professional Outlook

Transcription

1 Russell Market Research Financial Professional Outlook DATE March 2011 AUTHOR Kevin Bishopp Director, Practice Management COUNTRY United States SYNOPSIS Russell s quarterly survey of financial advisors views on key issues surrounding their practices. WHAT IS RUSSELL S FINANCIAL PROFESSIONAL OUTLOOK? What are advisors thinking about? What are their clients concerned about? Have sentiments changed over time? Russell s Financial Professional Outlook survey is a quarterly snapshot of advisor and investor sentiment that s intended to answer such questions and give advisors valuable perspective on the views and practices of their professional peers. For this installment of the survey, Russell collected the opinions of more than 800 financial advisors working in 200-plus national, regional and independent advisory firms nationwide. The questions we asked were: In general, are you/your clients optimistic or pessimistic about capital markets broadly over the next three years? What are the obstacles to you/your clients reaching their financial goals? On what basis do you segment your client base? What percentage of your time do you spend with each client? What are your business growth expectations for 2011? What will drive your anticipated growth? The latest survey results convey a sense of renewed confidence and optimism among advisors, not only about the capital markets but also about their own businesses. While the global economic recovery continues slowly, investor panic has largely subsided, and advisors are again able to focus more on long-term planning and wealth accumulation than on triaging clients concerns and addressing their anxieties. Advisors views on overall market appreciation and on revenue growth in their own businesses reflect their optimism for the capital markets and their belief that as the recovery unfolds, optimism is beginning to grow among their clients as well. However, a gap still exists between the level of advisors optimism and that of their clients. In regards to their own businesses, advisors expectation is that new client acquisition will be the primary driver of anticipated revenue growth this year. p 1

2 Summary of key findings 36% OF THE ADVISORS SURVEYED BELIEVE CLIENTS ARE OPTIMISTIC OR SLIGHTLY OPTIMISTIC ABOUT THE CAPITAL MARKETS. In response to the question In general, are you/your clients optimistic or pessimistic about capital markets, broadly over the next three years?, 86% of the advisors in the Financial Professional Outlook survey said that they are optimistic, and 36% said their clients are too. Thirty-four (34) percent of advisors said their clients are slightly optimistic. However, 50% of the advisors including many who sensed an increase in optimism said their clients are uncertain about the capital markets. In general, are YOU/YOUR CLIENTS optimistic or pessimistic about capital markets broadly over the next three years? 6% 8% Optimistic Neutral Pessimistic Advisors 86% 50% 15% Investors 36% Note: Numbers do not add up to 100% due to rounding. RISK AND THE LOW-RETURN ENVIRONMENT ARE SEEN AS MAJOR OBSTACLES. When asked which three issues clients believe pose the biggest obstacles to reaching their financial goals, advisors responded that their clients view not [being] comfortable with risk (51%) and the low-return environment (51%) as being the biggest obstacles, followed by underfunded retirement (41%) and taxes (35%). When asked which three issues they believe pose the biggest obstacles to their clients reaching their financial goals, 58% of advisors said underfunded retirement, 43% said low return environment and Which of the following concerns YOU most as an obstacle to reaching their financial goals? (select up to three answers) Underfunded retirement Low return environment Inflation Taxes Not comfortable with risk Federal Reserve policy Other N/A: No concerns % said inflation. Which of the following concerns YOUR CLIENTS most as an obstacle to reaching their financial goals? (select up to three answers) Not comfortable with risk Low return environment Underfunded retirement Taxes Inflation Federal reserve policy Other N/A: No concerns 2 p 2

3 Summary of key findings (CONTINUED) ONE IN FOUR ADVISORS SAY THEY DO NOT SEGMENT THEIR CLIENT BASES. When asked On what basis do you segment your client base? 23% of advisors one out of four responded that they do not segment their client bases at all. Thirty-eight (38) percent of respondents said they segment by assets under management and 16% responded by revenue. In response to the question What percentage of time do you spend with each client?, advisors said that on average they spend 50% of their time with their top-tier clients, 30% with their second-tier clients, 10% with third-tier clients and 10% on other, such as administration and seeking new business. On what basis do you segment your client base? (choose one) Assets under management 38 N/A: I do not segment my client base 23 Revenue 16 Based on client demands (i.e. reactive) Prospects for future business/referrals 7 7 Other 6 Age What percentage of time do you spend with each client? Segment A (top-tier clients) 50 Segment B (second-tier clients) 30 Segment C (third-tier clients) 10 Other 10 median % of time ADVISORS ANTICIPATE SUBSTANTIVE BUSINESS GROWTH IN 2011; 44% OF ADVISORS EXPECT REVENUE GROWTH OF 15% OR MORE. Of the advisors who responded to the Financial Professional Outlook, nearly all (98%) anticipate some revenue growth in 2011; only 3% do not expect to see business growth this year.* Most advisors (72%) said they expect growth to come from new client acquisition, with 49% expecting growth to come from generating more revenue from existing clients. Of the 44% of advisors expecting revenue growth of 15% or more, 88% expect the growth to come from new client acquisition. In contrast, only 68% of those advisors who expect much less growth (5 9%) say that growth will come from new client acquisition. * Numbers do not add up to 100% due to rounding. What are your business growth expectations for 2011? Revenue growth of 15% or more Revenue growth of 10-14% Revenue growth of 5-9% Revenue growth of less than 5% N/A: I do not expect business growth in What will drive your anticipated growth? (select up to three answers) New client acquisition Generating more revenue from existing clients Market appreciation Existing clients consolidating assets from another advisor Additional savings from 17 existing clients p 3

4 Russell s perspective While advisors believe investors are less pessimistic about the markets than they have been, they also believe clients are still not comfortable with risk. This discomfort is having a direct impact on the long-term investing decisions that individuals are making. INVESTORS ARE MORE OPTIMISTIC BUT STILL RISK-AVERSE. The good news is that investors are starting to reflect more positive sentiments about the direction of the markets, but the not-so-good news is that they are still risk-averse, which raises the question: while trying to avoid risk, are investors risking their retirements? Investors may be drawing the wrong conclusion avoid equities from the 2008 market meltdown. While stocks are riskier and markets do fluctuate, equities help investors keep up with inflation and have the potential to leave them with significantly more money to spend in retirement. Advisors agree; 58% of those surveyed said they are concerned that their clients have underfunded their retirements. If investors remain risk-averse over the long haul, they re likely to face a different kind of risk down the road: less money to spend in retirement, or worse, running out of money in retirement. OUR ADVICE: SHARPEN YOUR FOCUS THROUGH EFFECTIVE CLIENT-BASE SEGMENTATION BY REVENUE. Russell suggests advisors consider segmenting their client bases according to client revenue. Doing so gives you an opportunity to analyze the economics and value of each client relationship. On the basis of the insights gained from this analysis, advisors can organize clients into tiered (A,B,C) segments and appropriately align services with their needs and the revenue they generate. Russell suggests a leveraged service model for B and C clients, which frees up resources (time and energy) to focus on those clients who drive the economics of an advisor s firm A clients. This way, advisors can create a business model that is positioned to provide high-quality services to all clients in an efficient and profitable manner. REVENUE GROWTH: FROM WITHIN OR FROM OUTSIDE? Forty-four (44) percent of the advisors surveyed anticipate at least 15% revenue growth in The majority of them (88%) believe that new client acquisition will be the primary driver for their growth. The reality, however, is that this is nearly a zero-sum game meaning that for every advisor who gains a new client, it s likely that another advisor has lost one. While conventional wisdom supports looking to new client acquisition as the primary source of growth, Russell suggests focusing efforts internally to drive significant results for clients and thus significant client satisfaction. Doing so can help advisors maximize their revenue and create sales opportunities via current client advocates who become sources of quality referrals. Why do we believe this strategy is viable? Maintaining an internal focus can kickstart revenue growth for advisors by reducing dependency on new clients as the sole source of business growth. With the amount of money in motion (coming out of qualified retirement plans) and with more investors taking personal responsibility for their savings, there are significant opportunities for advisors to create additional revenue streams by expanding offerings and delivering service at unprecedented levels. p 4

5 Asset class definitions Large Cap Large capitalization (large cap) investments involve stocks of companies generally having a market capitalization between $10 and $200 billion. The value of securities will rise and fall in response to the activities of the company that issued them, general market conditions and/or economic conditions. Small Cap Small capitalization (small cap) investments involve stocks of companies with smaller levels of market capitalization (generally less than $2 billion) than larger company stocks (large cap). Small cap investments are subject to considerable price fluctuations and are more volatile than large company stocks. Investors should consider the additional risks involved in small cap investments. Mid Cap Middle capitalization (middle cap) investments involve stocks of companies generally having a market capitalization between $2 billion and $10 billion and considered more volatile than large cap companies. Mid cap investments are often considered to offer more growth potential than larger caps (but less than small caps) and less risk than small caps (but more than large caps). Growth Growth investments focus on stocks of companies whose earnings/profitability are accelerating in the short term or have grown consistently over the long term. Such investments may provide minimal dividends which could otherwise cushion stock prices in a market decline. Stock value may rise and fall significantly based, in part, on investors perceptions of the company, rather than on fundamental analysis of the stocks. Investors should carefully consider the additional risks involved in growth investments. Value Value investments focus on stocks of incomeproducing companies whose price is low relative to one or more valuation factors, such as earnings or book value. Such investments are subject to risks that their intrinsic values may never be realized by the market, or, such stock may turn out not to have been undervalued. Investors should carefully consider the additional risks involved in value investments. Bonds Bond investors should carefully consider risks such as interest rate, credit, repurchase and reverse repurchase transaction risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield ( junk ) bonds or mortgage-backed securities, especially mortgage-backed securities with exposure to subprime mortgages. Real Estate Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. Investments in non-u.s. markets can involve risks of currency fluctuation, political and economic instability, different accounting standards and foreign taxation. Emerging Markets Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than U.S. and longer established non-u.s. markets. Non-U.S. (Developed Market) Markets Non-U.S. markets entail different risks than those typically associated with U.S. markets, including currency fluctuations, political and economic instability, accounting changes and foreign taxation. Securities may be less liquid and more volatile. U.S. Treasuries Treasuries are debt obligations of the U.S. Treasury. Principal and interest payments are guaranteed by the U.S. Government. Cash Short-term investments typically involve instruments such as 90-day government Treasury Bills, high quality short-term notes and commercial paper issued by major financial institutions and blue chip companies. While highly liquid, cash generally has not kept pace with inflation. p 5

6 Methodology and background about Russell Methodology Russell Investments conducted the Financial Professional Outlook survey between January 19th and February 10th, The survey was sent to a 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, more than 800 survey responses were received representing more than 200 firms. 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$155 billion in assets as of December 31, We work with more than 2,900 clients, ranging from small and mid-sized 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 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. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature than, and political systems with less stability than, those in more developed countries, which can result in greater volatility. Asset classes, investment styles, market sectors and market capitalizations are exposed to a variety of risks related to their specific category and can lead to varying financial consequences, including loss of principal. They do not typically grow at an even rate of return and may experience negative growth. 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 March 2011 RFS p 6