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Financial Professional Outlook

Posted: April 5, 2016

Russell Investments' 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 February 5, 2016 to February 19, 2016), Russell Investments collected the opinions of 258 financial advisors working for 228 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. With key challenges around increasing market volatility, changing investor and advisor demographics, a low return and rising interest rate environment and potential impacts of the proposed Department of Labor (DOL) Fiduciary Standard rule, we also took a deep dive into the topic of sustainable advisory practices.

So how are advisors feeling about the markets and what are they doing to respond to challenges faced by their practice and industry in 2016? Check out some of the highlights from the latest survey or download the slideshare which provides key data insights and Russell Investments' perspectives.

What are you doing differently to navigate through the market volatility?

% of advisor respondents

Most surveyed advisors are increasing client contact to respond to market volatility

The largest percentage (77%) of advisors are increasing the frequency of client contact in response to market volatility, followed by 22% consolidating products within lineup. Only 15% said they are reviewing client relationships, and almost an equal percentage said they are shifting staffing resources to focus on client services. It is surprising that a smaller percentage is focusing on reviewing the number of client relationships, as it’s important for advisors to increase client contact through volatile markets, and they need to make sure they have enough capacity to do so.

What factors are contributing to changes in how you manage your business?

% of advisor respondents

The highest percentage (72%) of advisors said market volatility is a key factor contributing to changes in how they manage their businesses in 2016, followed by aging client base (40%), and the proposed DOL Fiduciary Standard (34%). Rising interest rates (28%) was rated fourth as a key factor.

What are your strategies to maintain competitive advantage and enhance growth?

% of advisor respondents

To maintain a competitive advantage and enhance growth, the largest percentage (43%) of advisors say they are developing their Center of Influence (COI) relationships (accountants, lawyers, tax planners, etc.), while 38% are transitioning client accounts to advisory solutions, where appropriate. This is followed by 32% re-engineering their client service model, and 28% making investments in technology. Given the increasing average age of the financial advisor, the relatively low level of importance to "identify a successor" stands out. Advisors often underestimate the time and attention required to effectively identify, onboard, and transition a successful successor.

Russell Investments' Perspective

Looking into the future, advisors will need to be vigilant to stay ahead of disruptive trends stemming from technology, regulatory change and market shifts. In a continually evolving environment, a big picture mentality will be critical to continue meeting client needs while maintaining a competitive advantage. We believe advisors should respond by managing four pillars in their businesses that when successfully managed, can help deliver consistently lasting, high-quality client relationships – the holy grail of advisor success.

Four pillars of a sustainable advisory business:
  1. Manageable number of client households
  2. Product inventory control
  3. Documentation and implementation of key processes
  4. Optimized client experiences, including client portfolios

Download the latest Financial Professional Outlook to learn more about how advisors can adapt their practice to the changing market, competitive and regulatory environment. Learn more about the four pillars of a sustainable advisory business through this blog.

Volatility and uncertainty weighs on market sentiment again!

In each edition of the Financial Professional Outlook survey (FPO), we ask advisors how optimistic or pessimistic they feel about the performance of the capital markets over the next three years. We also ask advisors to assess how they think their clients feel about the markets over that time period. In the case of market sentiment, our research has shown a persistent gap between advisors’ optimism about capital markets over the next three years and their clients’ continuing uncertainty and pessimism.

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).

The two Advisor and Investor Sentiment Indexes shown in the chart below show advisors' optimism and investors' pessimism are both increasing and the gap in their outlook continues to widen.

How do advisors and investors compare this quarter?

In general, how optimistic or pessimistic are you and your clients about capital markets over the next three years?

Investor Sentiment

% of investors that were optimistic, pessimistic or uncertain at the time of the survey.
Sentiment Index Over the Years: Scale of -100 to +100

According to the surveyed advisors, the percentage of investors who feel pessimistic about the markets over the next three years rose from 22% to 29% over the past quarter, and 55% of them still continue to be uncertain, which has been a persistent trend through the life of this survey.

Russell Investments' Perspective

Investors are likely reacting to trends, such as market volatility, falling commodity prices and divergent global markets. Investors may be swayed by the recency bias* of the low returns in 2015 and the volatile markets experienced in 2016.

*Recency bias is the tendency to think that trends and patterns we observe in the recent past will continue in the future.

Advisor Sentiment

% of advisors that were optimistic, pessimistic or uncertain at the time of the survey.
Sentiment Index Over the Years: Scale of -100 to +100

Contrary to the pessimism about the markets that advisors observe in their clients, 67% of surveyed advisors, are slightly more optimistic about the capital markets over the next three years compared to the past quarter.

Russell Investments' Perspective

It appears that advisors are not adversely reacting to the recent volatility and are still closely watching the markets. They are likely prepared for continuing volatility through 2016—and they don't necessarily see this as a red flag, but more of an opportunity.

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.

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?

% of advisor respondents

Advisors have an opportunity to refocus client conversations

The factors mentioned in the featured point of view tab, such as market volatility, regulatory changes, and aging client base are weighing on advisor and investor market views. Advisors see stress and strain in the markets, because of the market shifts and alarmist political narrative in this electoral season.

Clients want to talk about what advisors think of as “context” (volatility, global events, and portfolio performance)—and what it means to their financial security. Top investor-initiated conversation topics are market volatility (62%), followed by portfolio performance (56%) and global events (41%). On the other hand, top advisor-initiated topics included portfolio performance (45%), portfolio rebalancing (43%), followed by global events and market volatility (both 38%).

Russell Investments' Perspective

Market volatility conversations are likely being spurred by investors due to the recent volatility in January and February 2016, while advisors are bringing up portfolio performance more than volatility. Considering this survey was fielded in mid-February, advisors were likely conducting or closing annual performance reviews. While advisors’ focus on volatility makes sense, given the prolonged period of market instability, advisors may be missing a chance to confront some impending threats as the landscape for financial advice quickly evolves.The good news is that advisors can take control by creating the right environment for purposeful conversations.

For more information, download the latest Financial Professional Outlook.

Finacial Professional Outlook Info Graph