Russell Investments' advisor survey finds more conversation needed on best practices for tax-aware portfolios

Clients' tax burdens have risen, yet advisors are missing opportunities to make tax management part of core value offering

SEATTLE, August 4, 2015

More than half of advisors (53%) said that clients saw a larger tax burden in 2014 than the prior year, yet dialogue about tax strategies decreased in 2014, according to the latest Financial Professional Outlook (FPO). The results of the latest quarterly survey of U.S. financial advisors from global asset manager Russell Investments found 22% of advisors saying that taxes were one of the most common conversation topics this year versus 29% in 2014. Additionally, advisors have yet to align on tax strategy best practices, with only about a quarter of advisors (27%) currently encouraging clients to use tax-deferred strategies within their investment portfolios. In general, opinions vary on the types of advice to provide, as one in five advisors (19%) recommend implementing tax-loss harvesting while 14% simply recommend paying the taxes.

"Given clients' increasing tax burdens, one would expect tax strategies to be a major focus for advisors," said Frank Pape, director of consulting in Russell Investments' U.S. advisor-sold business. "Right now, many advisors and clients don't fully appreciate the drag on returns caused by taxes, which adds up quickly, especially in a low return environment. Reducing this drag and providing clients with a more complete plan for implementing a tax-managed approach is a significant way for advisors to add value, not only to their own clients, but also their businesses."

Advisors missing opportunities to differentiate themselves by not addressing tax strategies

Advisors surveyed claim that a significant majority of clients (81%) are concerned with after-tax returns, reaffirming the importance of tax-aware investing. And yet, more than a third of taxable assets (37%) are held away (i.e. not managed by their advisor), indicating that advisors who focus on tax-managed strategies could open the door to these assets. Given the whole portfolio must be considered when developing a tax-aware plan, advisors who make the decision to incorporate a tax-aware approach and include tax strategies stand to potentially increase their clients' overall wealth as well as their own assets under management.

Explained Pape, "Tax management could represent a key growth opportunity for advisors. Over the past few years, many investors have been keenly aware of government policy and market volatility, and those remained popular topics of conversation in this year's survey. Advisors can use these concerns as a way to discuss the potential advantages of a tax-managed approach, which can use market volatility to help balance losses against gains. An investor’s personal tax policy is much easier to control than government policy."

More education and support needed

Nearly a third (32%) of advisors polled were not satisfied with the level of support and education they received from asset managers on tax-managed investing, while an additional quarter were unsure. Myths continue to persist regarding who can best benefit from tax-aware investing and the range and capabilities of products available to support this approach. Advisors still need to gain a better understanding of the products available for use in tax-managed investing, yet half of them were satisfied with the products available, while only 20 percent were unsatisfied.

"Many advisors and their clients don't yet realize that there is more to tax-aware investing than muni-bonds and index funds," Pape noted, "As advisors gain a broader knowledge of the tax-aware strategies available to them they often find themselves better able to advise and aid not only high net worth investors but also those in the middle income brackets. The first step is making sure advisors receive adequate product education, and the second is educating clients."

The current iteration of the FPO survey includes responses from 295 financial advisors working in nearly 194 national, regional and independent advisory firms nationwide. The survey was fielded between May 12, 2015 and May 22, 2015.

Read the full FPO report and view an infographic featuring survey highlights.

New insights and solutions available for advisors

Russell Investments recently expanded its lineup of tax-managed mutual funds with the introduction of the Russell Tax-Managed International Equity Fund and the Russell Tax Exempt High Yield Bond Fund. Both funds were incorporated into the Russell Tax-Managed Model Strategies in June 2015 as part of an overall strategic asset reallocation of the five model portfolios, resulting in each model portfolio’s reallocation to tax-aware funds exceeding 90%.

"As advisors examine their tax-managed options, Russell Investments is excited to provide tools to help them best assist their clients." Pape said, "We see tax management as a vital differentiator for the future and expect to see continued efforts among advisors to better educate and aid their clients."

Russell Investments also regularly publishes insights on tax management strategies for advisors on its Helping Advisors Blog. Recent posts include:

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 more than 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). The firm has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell Investments also traded more than $1.7 trillion in 2014 through its implementation services business.

Headquartered in Seattle, Washington, Russell Investments 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 russellinvestments.com or follow @Russell_Invest.

Contacts:
Blair Lowman, 206-505-1858, or blairlowman@russellinvestments.com
Davis MacMillan, 718-801-8862, or russell@neibartgroup.com

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