Your advisor worth more than 1%?

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1 Your advisor worth more than 1%? APRIL 2016 Q: What will I get for the fee I m paying? Saving for retirement. Sending a child to college. Buying your dream home. Achieving these goals may take more than money. It likely requires planning, a long-term vision, and investment know-how. When it comes to your financial goals, are you confident going it alone? A: A professional dedicated to helping you achieve your financial goals. Why work with an advisor? REASON #1: Advisors can help you avoid emotional mistakes. Letting emotions like skepticism, fear, and overconfidence make your decisions can be detrimental to achieving your desired financial goals. An advisor may prevent you from chasing returns when influenced by one or all of the following natural tendencies: BRAD JUNG Managing Director, National Sales U.S. Private Client Services EMOTIONAL INVESTING Tendency to buy high and sell low When markets go up we tend to buy positive perception. When the markets go down we tend to sell negative perception. Positive feelings can lead investors to believe there is higher potential and lower risk associated with an investment. Negative feelings have the opposite effect, causing fear of lower returns and increased risk. Put simply, when scared, investors tend to run and when they are confident, they want to buy. SOCIAL INVESTING Tendency to be influenced by those in our social network Family and friends may have good intentions when sharing their financial views. Unfortunately, this bias may influence an investor to make decisions based on the emotions of those closest to them, which may not be aligned with their goals. The same may hold true for what may be seen or heard on the news and social media. Financial Professionals and investors are in the most appropriate position to determine the suitability and fitness of any investment strategy, asset allocation or security purchase or sales decision. Russell Investments does not create, endorse or provide investment advice. Advisors are solely responsible for suitability decisions with respect to investment products and services. Not FDIC Insured May Lose Value No Bank Guarantee Russell Investments // Your advisor... worth more than 1%? 1/5

2 EGO INVESTING Tendency to overestimate knowledge and abilities Many investors don t take their own advice. In a study of investors conducted by State Street in 2012, when asked what was needed to prepare for retirement in the next 10 years, 40% responded with be more aggressive. Yet, investors indicated their top allocation was to cash, the opposite of aggressive. 1 Investors who believe they can do it all themselves may really be impeding their financial progress. THE MATH: How emotional, social, and ego behaviors may cost you! The average stock fund investor s inclination to chase past performance (buy high and sell low) cost 2.1% annually when compared to the Russell 3000 Index over the 32-year period from The chart below is an example of what a $100,000 investment may have earned when comparing a pattern of behavior focused on chasing returns versus a steady, long-term investment approach. Note: The analysis and illustration are hypothetical and for illustrative purposes only. Russell Investments believes advisors who build diversified asset allocation plans and have the skills to help investors avoid common behavioral tendencies can help their clients achieve better portfolios returns than those investors making decisions without professional guidance. THE HIGH COST OF INVESTOR BEHAVIOR OVER TIME ( ) 3,000,000 Investment return 2,500,000 2,000,000 1,500,000 $2,586,568 $1,401, % annualized return* Returns are based on the Russell 3000 Index and is an average annual return. 8.6% annualized return* Returns are based on the average investor portfolio 1,000, ,000 Initial investment: $100, Years Average investor Russell 3000 Index *The above returns do not include fees, expenses or advisory fees that an investor would pay. Returns would be lower had those costs been included. 1 Source: The Influential Investor, State Street, BNY Mellon Analytical Services, Russell 3000 Index annualized return from January 1, 1984 to December 31, Russell Investments & Investment Company Institute (ICI). Return was calculated by deriving the internal rate of return (IRR) based on ICI monthly fund flow data which was compared to the rate of return if invested in the Russell 3000 Index and held without alteration from January 1, 1984 to December 31, This seeks to illustrate how regularly increasing or decreasing equity exposure based on the current market trends can sacrifice even market like returns. 1 Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Russell Investments // Your advisor... worth more than 1%? 2/5

3 REASON #2: Implementing portfolio rebalancing may boost your returns and/or help manage risk If you re not currently working with a financial advisor, it s possible you may not have or follow a consistent rebalancing policy. What is rebalancing? Technically, it is the periodic buying and selling of assets in a portfolio to maintain an originally planned asset allocation. It is a strategy used by financial advisors to help keep an investor s portfolio near its target allocation. For example, assume you have selected a balanced portfolio of 60% stocks and 40% bonds. Assuming a year of positive stock performance, your portfolio may now have 70% stocks and 30% bonds. Rebalancing would involve selling some stocks and buying some bonds to bring your portfolio back in balance to the original target allocation of 60% stocks and 40% bonds. THE MATH: Rebalancing may potentially add incremental return while managing risk To demonstrate the potential benefits of rebalancing, Russell Investments compared annualized return and annualized standard deviation (a measure of risk) of a buy and hold strategy to annual, quarterly, and monthly rebalancing strategies for the period of January 1988 through December Take a moment to look through the results below. Note how the annualized return using a rebalancing strategy either met or exceeded the annualized return of 8.6% on the buy and hold strategy. Additionally, you can also see how the annualized standard deviation (measure of risk) on a rebalancing strategy was lower than the buy and hold strategy. So if you are not currently implementing a rebalancing strategy, working with an advisor who implements and manages a rebalancing policy for your investment portfolio may help you boost returns and manage risk. An advisor may be able to help you create a comprehensive plan that includes provisions and expectations on how and when to rebalance your investment portfolio. By implementing a consistent rebalancing policy into your plan, the advisor can help you stay focused on your goals. Potential advantages of rebalancing Allocation (prerebalancing): BUY AND HOLD REBALANCING Annual Quarterly Monthly Jan % Stocks 60% Stocks 60% Stocks 60% Stocks Dec % Stocks 60% Stocks 60% Stocks 60% Stocks Feb % Stocks 59% Stocks 59% Stocks 60% Stocks Sep % Stocks 53% Stocks 60% Stocks 60% Stocks Feb % Stocks 55% Stocks 55% Stocks 60% Stocks Dec % Stocks 60% Stocks 60% Stocks 60% Stocks Annualized return: 8.6% 8.8% 8.7% 8.6% Annualized standard deviation: 10.4% 8.8% 9.0% 9.0% Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. For illustrative purposes only. Not meant to represent an actual investment. 3 Portfolio returns throughout this paper are based on a diversified portfolio consisting of 30% U.S. large cap, 5% U.S small cap, 15% non-u.s. developed, 5% emerging markets, 5% REITs, and 40% fixed income. Returns are based on the following indices: U.S. large cap = Russell 1000 Index; U.S. small cap = Russell 2000 Index; non-u.s. developed = MSCI EAFE Index (from January 1988 through June 1996), Russell Developed ex-u.s. Large Cap Index (July 1996 to present); emerging markets = MSCI Emerging Markets Gross Index (from January 1988 through June 1996), Russell Emerging Markets Index (July 1996 to present); REITS = FTSE NAREIT All Equity REIT Index (through February 2005), FTSE EPRA/NAREIT Developed Index (March 2005 to present); and fixed income = Barclays U.S. Aggregate Bond Index. Longer period data analysis start dates correspond to index start dates (January 1988 is the inception of the MSCI Emerging Markets Index). Russell Investments // Your advisor... worth more than 1%? 3/5

4 REASON #3: Disciplined planning and investing takes time, and time is money A financial plan can be a key element in helping investors reach their goals. According to a Financial Planning Association (FPA) study, the average advisor and their team spend up to 13 hours developing an initial custom financial plan at an average rate of $200 per hour. At this rate the typical plan may cost around $2, In addition to the initial plan, some advisors add value by regularly: Conducting reviews and updating the plan accordingly Ongoing goal and risk tolerance monitoring Coordinating annual tax preparation Social security planning and setting up retirement distributions A financial advisor may provide value in building a financial plan in less time and with more expertise than most investors could do on their own. NOTE: always get a detailed list of what services may or may not be included in the fee you pay. THE MATH: Your time is valuable Making the decision to hire an advisor to help with your financial planning is important. When it comes time to decide whether to hire a professional, ask yourself do I have the time, skill, inclination, or finances to do it all on my own. Conclusion: The value of working with a financial advisor may be worth more than 1% Financial advisors can play an important role in helping investors manage their money. When making the decision to hire an advisor or whether to go it alone, here are three areas where an advisor may be adding value that you may not have considered: 1. Steering clients away from making emotional mistakes like chasing performance. Our analysis indicates that there may be a return benefit. See pages 1 and Establishing objective rebalancing strategies for clients portfolios. The comparison on page 3 shows how rebalancing may lead to additional return with lower risk. 3. Potentially save the client time and in essence money by building a complete financial plan. Everyone is different, so think about where else you would like to spend your time. A financial advisor can be an important partner to help you build and maintain a strategy for long-term investing that has the potential to provide more than just financial returns and may pay off in more ways than you considered. Additional Resources for You Here are two research resources to help you gain more information about your advisor and their firm. Broker Check: SEC Investment Adviser Public Disclosure: 4 FPA Research & Practice Institute, Financial Planning in 2015: Today s Demands, Tomorrow s Challenges. ResearchandPracticeInstitute/Documents/RPI-2015_Trends-In-Financial-Planning_ pdf Russell Investments // Your advisor... worth more than 1%? 4/5

5 Important information Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Source for MSCI data: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an as is basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the MSCI Parties.) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. The 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. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. Russell Developed ex-u.s. Large Cap Index: Offers investors access to the large-cap segment of the developed equity universe, excluding securities classified in the U.S., representing approximately 40% of the global equity market. This index includes the largest securities in the Russell Developed ex-u.s. Index. Barclays U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. (specifically: Barclays Government/Corporate Bond Index, the Asset-Backed Securities Index, and the Mortgage-Backed Securities Index). The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indexes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey* and United Arab Emirates. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom*. The FTSE NAREIT All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. Equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property. The FTSE EPRA/NAREIT Developed Index is designed to track the performance of listed real estate companies and REITS worldwide. By making the index constituents free-float adjusted, liquidity, size and revenue screened, the series is suitable for use as the basis for investment products, such as derivatives and Exchange Traded Funds (ETFs). The Russell Emerging Markets Index measures the performance of the largest investable securities in emerging countries globally, based on market capitalization. The index covers 21% of the investable global market. Standard deviation is applied to the annual rate of return of an investment to measure the investment s volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility. Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. The Russell logo is a trademark and service mark of Russell Investments. Fees will reduce investment returns and over time can have a major impact on your investment portfolio. Be sure you understand and compare the fees being charged. Copyright Russell Investments All rights reserved. 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 Financial Services, Inc., member FINRA ( part of Russell Investments. First used: December Revised: April 2016 RFS (1 3/16) Not FDIC Insured May Lose Value No Bank Guarantee Russell Investments // Your advisor... worth more than 1%? 5/5