Financial Professional Outlook

Transcription

1 Financial Professional Outlook Tracking the opinions, conversations and market sentiment of U.S. financial advisors since Tax-aware investing: Are advisors doing and getting their fair share? This is our second annual Financial Professional Outlook focused on taxaware investing. The current survey was fielded from May 12 through May 22, 2015, and during that time we heard from 295 advisors working for 194 firms across the country. 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. So what are advisors doing to address their clients higher taxes? This year, three quarters (74%) of advisors said tax-managed investment solutions are important or critical to their business. However, that number is down from 86% last year. Advisors appear to be paying attention to their clients tax situations, but could this 12-point decline be a reason for concern? Might advisors be doing more to help their clients and their own businesses? We ll examine these questions and others in greater depth. We ll also have a look at the latest market sentiment trends and the most common conversation topics among advisors and their clients. DATE August 2015 AUTHOR Frank Pape DIRECTOR OF CONSULTING PRIVATE CLIENT SERVICES Not FDIC Insured May Lose Value No Bank Guarantee Russell Investments // Financial Professional Outlook p / 1

2 Russell s survey snapshot KEY TAKEAWAYS: 1. Advisor sentiment declines Advisor sentiment (70% optimistic) has been trending down since peaking in February 2014, while advisor pessimism (16%) is increasing. We believe this is likely due to advisors anticipation of a Fed rate hike and 6 consecutive years of positive equity returns. Investor sentiment remains largely unchanged with 51% of advisors saying they are uncertain. 2. Opportunities in conversation trends Government policy and market volatility have been investor obsessions for years. Advisors can counter these concerns by explaining how a taxmanaged approach may be able to use market volatility to balance losses against gains. What s more, an investor s personal tax policy (investing around taxes) is far easier to control than a government policy. 3. Taxes went up for most investors 53% of advisors said their clients faced a larger tax burden in 2014 versus We believe this rise will likely continue, creating more opportunities for advisors to develop their tax-managed expertise and help clients achieve greater after-tax wealth. 4. Investors care about after-tax returns 81% of advisors believe maximizing after-tax returns is a concern for many of their clients. We couldn t agree more. If investors care, advisors should care, too. We believe advisors could be doing more and should consider reaffirming their commitment to tax-aware investing. 5. Nearly 37% of taxable assets are held away Tax-smart advisors can have a real advantage over those who don t focus on the topic. By leveraging tax-managed strategies, advisors may open the door to assets held away. That s because the whole portfolio must be considered when developing a tax-aware plan. 6. Advisors need more education and support 32% of respondents said they were not satisfied and 25% not sure about the education and support they receive from asset managers on taxmanaged investing. There is work to be done here and hopefully these findings may help the industry move forward. 7. Dispel the myths There s more to tax-aware investing than muni bonds and index funds. As advisors gain a better understanding of the range and ability of the products available, they ll see that tax-aware investing may help investors in the middle tax brackets as well as the top achieve greater after-tax wealth. This opportunity isn t just for clients in the top tax bracket. 8. Create a culture of tax-aware investing Advisors who make a conscious decision to weave a tax-aware approach into every aspect of their practices stand to potentially help their clients increase their fair share of after-tax wealth, as well as potentially increase their share of client assets under management. Russell Investments // Financial Professional Outlook p / 2

3 1 Why tax-aware investing matters. In our discussions with advisors, we often find they don t fully appreciate the 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 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 1A). That works out to about $450,000 per taxable account (Exhibit 1B). 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. We see an opportunity to uncover those hidden assets and add some real value here. Advisors should consider engaging these investors in deeper discussions about providing a more complete plan and how their taxable assets may benefit from a tax-managed approach. * Morningstar all U.S. Equity Mutual Fund/ ETFs universe EXHIBIT 1A: TOTAL AUM IN TAXABLE ACCOUNTS Approximately what percentage of your total AUM is in taxable accounts? % 48% 30 26% 26% % % 25-49% 50-74% % of respondents % Average taxable AUM in accounts EXHIBIT 1B: 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-deferred account? What is the approximate size of client taxable assets that are held away (not managed by you)? $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 Average account total: $1,500,680 $784,856 $715,824 Average account total Average account total: $715,824 $263,423 $452,401 Average taxable accounts Average taxable account Average amount held Average tax-deferred account Average amount held away Russell Investments // Financial Professional Outlook p / 3

4 2 For most investors, maximizing after-tax returns is important. A majority of advisors (81%) said that maximizing after-tax returns was a concern for many clients across the wealth spectrum. That s good news. We re encouraged to hear so many investors are paying attention to this issue. However, the question then becomes what are advisors doing to help them? And what role do tax-managed solutions play in the advisor s business? EXHIBIT 2: IMPORTANCE OF AFTER-TAX RETURNS 50 47% % 19% 10 0 Most important issue Only relevant to high net-worth Many clients across the wealth spectrum expressed some concern Wasn't a big issue at all Russell Investments // Financial Professional Outlook p / 4

5 3 Taxes place 4th as most common conversation topic for advisors, 5th for investors. 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 Interestingly, advisors said 14% of investors wanted to discuss taxes in That s up 4 points from 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. 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 (). 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%). EXHIBIT 3: 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) Market volatility 21% 43% Portfolio performance 36% 39% Portfolio rebalancing 9% 39% Concerns about rising interest rates 31% 28% Running out of money in retirement 21% Tax implications of investing Global events 14% 22% 19% 21% Estate planning 16% Concerns with govt policy Buying/Selling specific investment product Rethinking financial goals Keeping up with inflation Start savings plan for specific purpose 14% 18% 11% 7% 11% 15% 7% 6% 5% 5% Investors Funding financial needs of parents 1% 2% Other 2% 1% Advisors 0% 40% 50% % of respondents Russell Investments // Financial Professional Outlook p / 5

6 4 Government policy and volatility = potential tax-managed opportunities. We know clients always want to talk about market volatility and government policy. We also know those issues are essentially beyond everyone s day to day control. So why not use this time as an opportunity to talk about the one government-related topic that you do have control over how you invest around taxes? The potential opportunity here is to work around maximizing their after-tax wealth. Use this time to explain how a tax-managed approach can actually use market volatility to potentially take advantage of tax-loss harvesting and tax gains. Advisors can reinforce their value by shifting the discussion from government policy to the individual s personal tax policy. Want to address a client s fear of running out of money in retirement? Increasing after-tax wealth is a good place to start. Tax-managed strategies can help clients gain greater control over investment outcomes. These conversations don t have to be trivial. They can be teachable moments. When your clients become more successful, your practice succeeds, too. EXHIBIT 4: TOP INVESTOR-INITIATED CONVERSATIONS AND THE RUSSELL 1000 INDEX OVER THE LAST 4 YEARS How often are investors bringing up these topics with advisors? 80% 1400 Percent of advisors saying investors initiate these conversations 70% 60% 50% 40% May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 Aug 13 Nov 13 Feb 14 Jun 14 Oct 14 May Russell 1000 Index value R1000 ($RUI from msn.com) Running out of money in retirement Concerns with government policy Concerns about rising interest rates Market going up/down Russell Investments // Financial Professional Outlook p / 6

7 5 Tax-managed investment solutions are less important for Nearly three quarters (74%) of advisors said tax-managed solutions are important to their businesses for the year ahead. While still a large number, it s down 12 points from the previous year s 86%. What might account for this drop? It s possible that 2014 was something of an anomaly with the new tax laws that took effect. There were a lot of articles in the press, and great fanfare on business and political TV. So it was top-of-mind for investors and advisors. But tax-aware investing requires more than one mention and moving on. It involves thoughtful planning and a specific expertise when it comes to portfolio management. We certainly hope this pullback doesn t become a trend, because we don t see investors tax burdens heading lower anytime soon. EXHIBIT 5: IMPORTANCE OF TAX-MANAGED INVESTMENT SOLUTIONS Looking forward, how important is the development of tax-managed investment solutions to your business? 45% 42% 40% 35% 33% 37% 25% 15% 5% 11% 12% 2% 13% 24% 21% 5% 0% Feb-14 May-15 Critical: It's at the core of my value proposition Very Important: It's a significant part of how I serve most clients Important: I make it available to high net-worth clients Somewhat Important: I make it available to those who ask for it Not Important: My clients would not benefit Russell Investments // Financial Professional Outlook p / 7

8 6 Taxes went up for most investors. For the 2014 tax-year, advisors said 53% of their clients faced a larger tax burden versus This is in-line with our view that tax rates would likely rise in 2014 for many investors. Once again, we see this as an opportunity for advisors. The time is right for advisors to create a culture of greater taxawareness throughout their advisory practice. 53 % OF ADVISORS SAID Clients faced a larger tax burden for EXHIBIT 6: TAX BURDEN FACED In general, compared to the previous tax year (2013), did your clients with taxable accounts face: 60% 50% 53% 40% 28% 9% 0% A larger tax burden for 2014 A similar tax burden A smaller tax burden I don't consider my clients' tax situations Russell Investments // Financial Professional Outlook p / 8

9 7 What can you say about big taxable distributions? The majority of advisors (58%) didn t have a word of advice for clients who received substantial taxable distributions in Or at least they didn t answer the question. Of the 42% of advisors who provided at least one response, the top 3 categories were: 1. Use more tax-deferred strategies (27%) 2. Harvest losses/offset [gains] with losses (19%) 3. Pay the taxes and move on (14%) It s hard for us to argue with the top two responses, but it s easy to argue with the third. In our opinion, those advisors who are not taking the time to research tax-managed solutions for clients with sizable taxable distributions are doing their clients and themselves a disservice. We believe more advisors need to take the initiative and learn how tax-aware investing can potentially help a broader range of investors achieve a higher level of after-tax wealth. With taxable distributions from funds likely going up in 2015, a little planning can help advisors get in front of the issue and really help their clients. 58 % OF ADVISORS Had no advice for clients with large taxable distributions in EXHIBIT 7: ADVICE TO CLIENTS What advice did you give clients with substantial taxable distributions in 2014? 60% 58% 50% 40% 42% 0% Gave at least one answer Did not answer Russell Investments // Financial Professional Outlook p / 9

10 8 Tax-efficient products: What s hot and what s not. The hottest product this year is actually a combination of products. For 2015, 52% of advisors said they most-often use a combination of taxefficient products. This is in stark contrast to the 31% of advisors who chose tax-managed mutual funds as their top product last year. Only 7% of advisors selected tax-managed mutual funds for 2015 as the only option. While those results were surprising, other answers caught our attention, too. For instance, of advisors chose municipal bonds this year versus 25% in Again, municipal bonds are almost certainly included in the combination of products, but perhaps there is a shift underway as advisors learn more about tax-efficient products and how best to use them. We ll certainly know more after next year s survey. 52 % OF ADVISORS Use or recommend a combination of tax-efficient products. EXHIBIT 8: TAX-EFFICIENT PRODUCT MOST OFTEN USED What tax-efficient product do you use or recommend most often? (Choose one) I use a combination of products 52% Passive products like index funds or ETFs Municipal bonds Tax-managed mutual funds Separately managed accounts 11% 7% 7% Limited partnerships Annuities REITS Other We don't recommend any 3% 3% 0% 4% 1% 0% 40% 50% 60% Russell Investments // Financial Professional Outlook p / 10

11 9 More advisors satisfied with products than with support. Is the glass half-empty or half-full when it comes to product satisfaction? Perhaps the best way to answer that is most advisors seem comfortable with the tax-managed products they know and use, but they d like to know more. Advisors told us that 50% are satisfied with the products they use, unsatisfied and not sure. 50 EXHIBIT 9: SATISFACTION WITH TAX-MANAGED PRODUCTS In general, are you satisfied with the tax-managed products asset managers are offering? % OF ADVISORS Are satisfied with taxmanaged products asset managers offer. 50% 50% 40% 0% Yes No Not sure Russell Investments // Financial Professional Outlook p / 11

12 10 Could the industry do more to educate advisors on taxmanaged investing? It seems so. With only 43% of advisors expressing satisfaction with the support and education they re offered on tax-managed investing, there s clearly room for improvement. That left 32% of advisors unsatisfied and 25% not sure. We know that taxes are not the most exciting subject to discuss with clients, but a little knowledge can go a long way. Simply getting a handle on the difference between before- and after-tax returns is a good starting point for investors. Asset managers need to do a better job of educating advisors. In turn, advisors need to do a better job of helping investors become more tax-aware. 43 % OF ADVISORS Are satisfied with the support/education offered on tax-managed investing. EXHIBIT 10: SATISFACTION WITH SUPPORT/EDUCATION In general, are you satisfied with the support/education asset managers are offering on the topic of tax-managed investing? 50% 43% 40% 32% 25% 0% Yes No Not sure Russell Investments // Financial Professional Outlook p / 12

13 11 Advisor sentiment cools. Investors remain uncertain. With advisor optimism dropping 8 points since our last report 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 Not only that, but they are currently twice as pessimistic (16%) as they were in the previous report (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. What conclusion can we draw from this? As noted earlier, 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. EXHIBIT 11: MARKET SENTIMENT SENTIMENT INDEX* TREND: ADVISOR VS INVESTOR In general, how optimistic or pessimistic are you about capital markets over the next three years? Sentiment Index (Optimistic Pessimistic) 80% 60% 40% 0% - -40% Aug 2011 Nov 2011 Feb 2012 May 2012 Aug 2012 Nov 2012 Feb 2013 May 2013 Aug 2013 Nov 2013 Feb 2014 May 2014 Aug 2014 Nov 2014 Feb 2015 May 2015 Advisor Sentiment Index Investor Sentiment Index Russell 1000 Index *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) Aug Nov Feb May Aug Nov Feb May Aug Nov Feb Jun Sep May Optimism Gap 59% 58% 60% 56% 56% 48% 52% 43% 52% 43% 57% 57% 46% 39% Advisor: Optimistic 72% 66% 78% 76% 68% 65% 72% 75% 83% 79% 87% 82% 78% 70% Advisor: Uncertain 16% 15% 12% 14% 22% 13% 7% 7% 13% 14% Advisor: Pessimistic 13% 18% 9% 12% 15% 6% 12% 8% 11% 6% 11% 8% 16% Investor: Optimistic 13% 9% 18% 21% 11% 16% 21% 32% 31% 36% 25% 32% 31% Investor: Uncertain 53% 51% 53% 58% 51% 51% 64% 51% 53% 50% 55% 50% 52% 51% Investor: Pessimistic 34% 40% 28% 22% 38% 33% 15% 17% 16% 14% 15% 25% 17% 18% 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 1000 Index value Russell Investments // Financial Professional Outlook p / 13

14 Methodology Russell Investments conducted the Financial Professional Outlook survey between May 12, 2015 and May 22, 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, 295 survey responses were received representing 194 firms. The sample size of 295 is sufficient to provide 95% confidence that the results will be within plus or minus 5.8%. 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 is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell Investments stands with institutional investors, financial advisors and individuals working with their advisors using the firm s core capabilities that extend across capital market insights, manager research, asset allocation, portfolio implementation and factor exposures to help each achieve their desired investment outcomes. Russell Investments has more than $272 billion in assets under management (as of 3/31/2015) and works with over 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell Investments has $2.4 trillion in assets under advisement (as of 12/31/2014). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Headquartered in Seattle, Washington, Russell Investments is wholly owned by London Stock Exchange Group (LSEG) and operates globally, including through its offices in Seattle, New York, London, Paris, Amsterdam, Milan, Dubai, Sydney, Melbourne, Auckland, Singapore, Seoul, Tokyo, Beijing, Toronto, Chicago, Milwaukee and Edinburgh. For more information about how Russell Investments helps to improve financial security for people, visit or Russell Investments // Financial Professional Outlook p / 14

15 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. 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. 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 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. Russell Financial Services, Inc., member FINRA, part of Russell Investments. Copyright Russell Investments All rights reserved. First used July 2015 RFS Russell Investments // Financial Professional Outlook p / 15