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Russell Market Research

Financial Professional Outlook


September 2010 Russell’s Financial Professional Outlook generates a meaningful
snapshot of advisors’ sentiment each quarter. For this installment
of the survey, Russell collected the opinions of nearly 350 financial
Phill Rogerson, Managing Director, advisors nationwide from a collection of more than 130 national,
Consulting & Client Service regional and independent advisory firms.

United States
Russell’s Financial Professional Outlook provides insight into how
SYNOPSIS advisors view the direction of the markets and key issues affecting
Russell’s quarterly survey of their practices and investors.
financial advisors’ views of key
issues surrounding their practices.

Russell Investments // September 2010 p1


The advisors’ clients & asset class allocations

SUMMARY OF KEY FINDINGS Over the next 12 months, how will you shift your
Advisors are taking action in response allocations among the following asset classes?
to a jittery client base.
7 59
common open-ended response to the 16 48
question, “How has your approach to
assessing and managing your clients’ 17 45
portfolio risk changed in the past few 18 46
years?,” 22% (65 advisors) said that they
are being more conservative or reducing 22 42
risk in their clients’ portfolios, and most 24 41
cited client fear or uncertainty NON-U.S. (DEVELOPED MARKET) EQUITIES
as the cause. 11 40
20 43
who plan to shift allocations, 59% expect U.S. SMALL CAP GROWTH
23 33
to increase allocations to emerging market 28 31
equities, up 11 percentage points from the
June 2010 survey. REAL ESTATE
13 33
asset allocation remains the most U.S. SMALL CAP VALUE
frequently used strategy for diversifying 21 33
clients’ portfolios, with 90% of advisors 24 35
using it and 35% using it extensively. (See U.S. MIDCAP GROWTH
page 4). 19 32
19 32
However, almost as many advisors are
employing tactical asset allocation (TAA) 17 32
as their most frequently used portfolio 16 37
diversification strategy, with 85% of
respondents using TAA and 27% using it 29 28
extensively. 39 23


indicate that investors may be slowly 33 22
43 21
creeping back into the market, as the
percentage of advisors who plan a shift CASH
43 18
away from cash increased 10 points from 33 23
the June survey to 43%.
The movement out of cash is tempered 47 12
by opposite sentiment for other more 54 7
conservative asset classes. Compared to
% Decreasing % Increasing
three months ago, an average of 27% Sept. 2010 Sept. 2010
more advisors indicated they are shifting June 2010 June 2010
assets into corporate bonds, high yield
bonds, and U.S. Treasuries.

Russell Investments // September 2010 p2


The advisors’ practices

SUMMARY OF KEY FINDINGS In light of decreasing margins and abnormally risk averse
Advisors are evolving their practices clients, what, if anything, are you doing to generate new
to keep up with the changing business revenue and/or diversify your revenue streams from
environment. clients for whom a change is suitable? (please choose all
that apply)
›› ADVISORS TAKING ACTION. From a practice
management perspective, 45% of advisors
indicated they are moving transactional I'm transitioning transactional
clients to fee-based accounts to generate clients to fee-based accounts.
new revenue given decreasing margins and
increased investor risk aversion. Others I'm selling more annuities. 39

are taking short-term steps to respond to

I’m using new methods for
current demand for guaranteed income prospecting. 26
products, including 39% who are selling
more annuities. Also, 26% of advisors are I'm selling more mutual funds. 18
using new methods for prospecting.
I’m investing in technology to manage
›› ADVISORS PREFER BETWEEN 210 AND 240 low revenue clients, so I can spend 16
more time with high revenue clients.
CLIENTS. Exactly half of respondents want
fewer clients than they currently manage. I'm doing more securities trading. 12
On average, these advisors have 392 clients
and would like to reduce to an average of N/A; I’m not doing anything
differently. 9
211 clients.
In contrast, 43% of advisors said they I’ve thought about it, but haven’t
implemented any ideas. 3
would ideally prefer to add clients.
However these advisors have much fewer 0 10 20 30 40 50
clients—an average of 140—and want to % of respondents
increase to an average of 238 clients.
What is your ideal number of clients?
not many advisors are using social media
How many clients do you currently manage?
to connect with clients, 45% are “using
a CRM system to help manage client
communications,” 43% are “leveraging 392
technology to help scale their practice,” and 400
35% are “discontinuing the use of hard 350
% of clients (averages)

copy material by emailing or delivering 300

electronically.” (See page 5). 255
250 228
All responses Those who want Those who want
more clients fewer clients

What is your ideal number of clients?

How many clients do you currently manage?

Russell Investments // September 2010 p3


Russell’s perspective
Advisors use a wide range of investment As you strive to provide your clients with an appropriately
solutions to meet clients’ demands. diversified line-up of products and strategies, to what extent
›› CHALLENGING TIMES FOR ADVISORS. are you using each of the following?
Financial advisors are telling Russell that
these are some of the most challenging Strategic asset allocation
years in their career because they are
facing both declining revenue and a
Tactical asset allocation
more demanding clientele, as well as
extremely volatile markets. In response,
some advisors are taking a longer-term Global strategies
approach by transitioning their clients to a
fee-based planning focus, while others are Annuities
making short-term changes in response to
investor demand for guaranteed income Guaranteed products
products and tactical market calls.
Passive ETFs
also is seeing recurring themes of yield
chasing, employment of annuities, and Non-correlated products (commodities, infrastructure, etc.)
increasing exposures to global markets
in response to investors’ unease about Alternative Fixed Income strategies
the economic recovery in the U.S. and
developed markets abroad. While many Active ETFs
of these shifts may be sensible (i.e. a
reduction in the long standing home
country bias), shifts in strategy based on 0 10 20 30 40 50 60 70 80 90 100
short term market movement or lower risk % of respondents
solutions should be carefully evaluated
on the basis of their ability to achieve Not sure Some use
client goals (enough potential return) and No use, and not considering Extensive use
objective and researched opinion on the
No use, but considering
merits of the investment process.
Indeed, it is encouraging that so many
advisors are working hard to keep clients
committed to a long-term investment
strategy. Russell perceives the fact that
more advisors are moving their clients out
of cash and into bonds and Treasuries as
a sign that they are attempting to match
risk aversion with a desired and necessary
return to achieve client objectives.

Russell Investments // September 2010 p4


Russell’s perspective (continued)

›› SHORT-TERM TACTICAL MOVES CAN BE In an environment where clients want and expect more
RISKY. As a firm believer in strategic asset
communication, how are you leveraging technology to
allocation—and given the risks associated diversify your modes of communication? (please choose
with short-term tactical moves—Russell all that apply)
continues to believe that investors are
best served by working with an advisor
to create a strategic allocation as the I’m using a CRM (Client Relationship
primary investment tool based on an Management) system to help 45
manage client communication
analysis of investor goals. Deviations
from that asset allocation should be made I’m leveraging technology to help 43
scale my practice
modestly, with great caution, and only
when the conviction behind the research I’m discontinuing the use of hard copy
is strong. material by emailing or delivering 35
N/A; I’m not leveraging technology 20
STRATEGY IS STILL THE BEST APPROACH. to communicate with clients.
Russell is encouraged by the diligent
work done by a contingent of advisors Engaging with existing and prospective 1
who are working with clients to re-assess clients on Facebook
their current situation and plans for
saving, retirement dates, and spending Posting or sharing videos on YouTube 0
adjustments. These advisors depend on
firms like Russell to screen and hire skilled
Sharing updates on Twitter 0
money managers to make necessary
portfolio changes so that advisors can 0 10 20 30 40 50
spend more time with their clients. % of respondents
Russell believes that the most successful
financial advisors will be the ones who
focus first on goals-based planning and
second on providing a diversified, global
investment solution to implement the plan.
METRIC. Rather than just looking at
the number of clients, Kevin Bishopp,
Russell’s director of practice management,
recommends advisors consider revenue
per client as a key metric for business
development. Russell’s analysis in
conjunction with advisory practice data
from Moss Adams® suggests that the
most profitable firms in the industry earn
revenue per client ranging from $7,000
to $13,000, depending on the type and
size of firm. Russell regularly provides
guidance to advisors regarding effective
strategies to measure and increase
revenue per client.

®Moss Adams is a registered trademark of

Moss Adams LLP.

Russell Investments // September 2010 p5


Asset class definitions

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

Russell Investments // September 2010 p6


Methodology and background

about Russell
Methodology many of the world’s largest and most sophisticated
investors, responsible for hundreds of billions of
Russell Investments conducted the Financial
dollars. Our innovative investment approach is
Professional Outlook survey between July 27th
made available to individuals through a network
and August 13th, 2010. The survey was sent to
of strategic distribution alliances and independent
a group of U.S. financial advisors. Having a
investment advisors. Our clients include banks
financial relationship with Russell was not part
and insurance companies, investment advisors,
of the criteria for being included in the survey.
defined benefit and defined contribution plans,
In total, 348 survey responses were received
endowments, foundations and sovereign wealth
representing 132 firms.
About Russell Investments We seek to understand capital markets and
Russell Investments provides asset management identify investment managers we believe have
and investment services to institutional exceptional capabilities. To achieve these goals,
and individual investors. We offer mutual our analysts hold more than 5,000 research
funds, indexes, alternative investments and meetings each year with investment managers
implementation services such as transition around the world. The cumulative knowledge we
management and trade execution. Russell has gain from this in-depth research serves as the
offices in most major financial centers and serves foundation for all of our products and services.
clients in more than 40 countries. Founded in 1936, Russell is headquartered in
Russell is one of the world’s most influential Tacoma, Washington. Russell is a subsidiary
and trusted providers of investment services. of Northwestern Mutual, and the company’s
A pioneer in multi-manager investing and the executive management has a minority equity
creator of the Russell Indexes, Russell manages participation in the firm. More information about
approximately US$140 billion in assets as of June Russell’s investment products and services is
30, 2010. We work with more than 2,900 clients, available at www.russell.com.
ranging from small and mid-sized organizations to

General disclosures
Russell Financial Professional Outlook is a product to provide specific advice or recommendations for
of Russell Investments, produced independently any individual or entity.
of Russell’s investment and manager research
services. This is not an offer, solicitation, or recommendation
to purchase any security or the services of any
The information contained herein has been organization.
obtained from sources that we believe to be
reliable, but its accuracy and completeness cannot Please note, advisors surveyed do not necessarily
be guaranteed. The information, analysis, and use Russell products.
opinions expressed herein result from surveys of Russell Investment Group is a Washington, USA
persons outside Russell Investments and may not corporation, which operates through subsidiaries Russell Financial Services,
represent the opinion of Russell Investments, its worldwide including Russell Investments, and Inc., member FINRA, part
affiliates, or subsidiaries. This report is provided is a subsidiary of The Northwestern Mutual Life of Russell Investments.
for general information only and is not intended Insurance Company.
Copyright © Russell
Investments 2010.
All rights reserved.
First used September 2010.
RFS 3887

Russell Investments // September 2010 p7