Jeffrey A. Scales, CFP, AIF, MBA. 7 Livingston Street Rhinebeck, NY Telephone: Facsimile:

Transcription

1 Jeffrey A. Scales, CFP, AIF, MBA 7 Livingston Street Rhinebeck, NY Telephone: Facsimile: Website: General clientservice@jsafinancial.com Rev 06/12

2 TABLE OF CONTENTS Our Philosophy and Vision 1 The Benefits of Independence 1 Our Services 2 Managing Principal 3 About the CFP Certification 4 Value of Working With an AIF 5 Team Biographies 6 Code of Responsibility 8 Assigning Responsibility 9 Introduction to Commonwealth 10 National Financial Services LLC 11 What to Expect When Opening an Account 12 Features of Preferred Portfolio Services 13 PPS Custom Fee Schedule 14 Discretion 15 Periodic Table of Asset Classes 16 Correlation of Various Asset Classes 17 Model Portfolios (as of April, 2012) 19 Emotions of Investing 21 Firm Research Capabilities 22

3 OUR PHILOSOPHY Welcome to JSA Financial Group! We are an independent financial firm that has been helping people throughout the Hudson Valley, and those beyond, establish and maintain their long-term financial goals since It is important to review your financial position through all stages of your life. We can help create a strategy that covers all areas of wealth management including: Retirement Planning (Personal and Business & Qualified and Non-Qualified Plans) Protection Planning (Including Life and LTC Insurance) Tax Planning Estate Planning Education Planning Asset Allocation Investment Planning We also offer our clients the option to utilize socially responsible investments. The criteria for such investments could include a range of considerations such as corporate governance and ethics, the workplace, the environment, product safety and impact, international operations and human rights, indigenous peoples rights, and community relations. OUR VISION JSA Financial Group is dedicated to making investors feel comfortable seeking help with their financial goals, and assisting them in a knowledgeable, courteous, and professional manner. We appreciate your interest in JSA Financial Group and sincerely look forward to serving you. THE BENEFITS OF INDEPENDENCE Our commitment to always putting your interests first is evident in every aspect of our business. We ve chosen to partner with Commonwealth Financial Network, an independent broker/ dealer with a 30-year history of focusing solely on the needs of its affiliated advisors and the clients they serve. This partnership means that we remain free to make recommendations based solely on what s right for you, without bias or pressure to promote a particular product or strategy which is not the case with some other types of financial advisors. 1

4 OUR SERVICES We help shape financial solutions for a lifetime, through a comprehensive and personalized financial services approach built on a long-term relationship with a knowledgeable consultant. While we offer a multitude of financial services with a particular focus on personal financial planning for investments, retirement, insurance, and wealth preservation strategies we prefer not to think that we work to enhance the bottom line of a portfolio. Rather, we work to enhance people s lives and help them to pursue their dreams, which in many cases, include incorporating socially screened investments into their asset mix. Through Commonwealth Financial Network (Commonwealth), member FINRA/SIPC, and a Registered Investment Adviser, we primarily use mutual funds and ETFs in our investment portfolios. To construct the portfolio, we take into consideration all pieces of a client s financial picture plus objectives, time horizon and future needs as discussed during initial and ongoing semi-annual meetings. To determine an appropriate portfolio for each client, we take advantage of the resources offered through the Research department at Commonwealth. We also have several tools to assist us with this process that will analyze products individually and the portfolio as a whole, report diversification/asset allocation, style analysis, investment performance, volatility and expenses. We also meet regularly with representatives from the product sponsors. A well-rounded portfolio may include other investments and products according to each individual s needs and suitability, such as: Alternative Investments which can help provide diversification from traditional portfolios. Individual stocks, based on either legacy holdings or particular interests. Insurance products, such as Long-Term Care, Annuities, Universal and Term Coverage are also offered when appropriate. JSA Financial Group maintains mostly managed accounts, but we also offer commission and direct investment accounts. Consulting and Financial Plans are also available. 2

5 MANAGING PRINCIPAL Jeffrey A. Scales, CFP, AIF, MBA CERTIFIED FINANCIAL PLANNER TM practitioner Accredited Investment Fiduciary Managing Principal We live in a fast-paced, constantly changing world. One of my responsibilities is to help my clients maintain their financial focus, so that they can pursue the things that are important to them and their families. My staff and I work diligently to provide a high level of quality in financial planning, guidance, and service. I received my undergraduate and graduate degrees from the University of New Mexico. Later, I earned my CERTIFIED FINANCIAL PLANNER TM practitioner certification and most recently, my Accredited Investment Fiduciary designation. I am also a member of the Social Investment Forum, which offers terrific support for pursuing environmental, social and corporate governance issues for client investment policies. I am proud to have been recognized as a President s Club advisor for 2012 a distinction attained this year by just 9 percent of advisors affiliated with Commonwealth Financial Network. Each year, Commonwealth recognizes President s Club advisors by inviting them to an exclusive gathering of their peers, leading industry experts, and Commonwealth home office staff. President s Club advisors benefit from an intensive learning and networking experience designed to help them hone their expertise, share best practices, and provide ever-higher levels of service, education, and leadership to their clients. In addition, I stay involved in local community organizations. I volunteered as a driver for the Meals On Wheels program in Northern Dutchess County, and ran a weekly evening men s basketball program for the Rhinebeck PTSO, until finally passing the ball to a younger (more nimble) player. I served as a panel participant in the Poughkeepsie Journal free financial question and answer session to help readers with the economic downturn (8/20/2008). Currently, I am a member and past president of both the Alzheimer s Association of the Hudson Valley and the Rhinebeck Rotary Club where I serve on the International Committee. I live in Tivoli, New York, on the Hudson River waterfront, with my wonderful wife, Barbara. Our four young men Will, Max, Ian, and Zach are in college or starting their careers, but periodically make their way back to recharge with a great home-cooked meal. I enjoy yoga, basketball, biking, movies, listening to jazz, and especially kayaking on the Hudson River. 3

6 ABOUT THE CFP CERTIFICATION When selecting a financial planner, you need to feel confident that the person you choose to help you plan for your future is competent and ethical. Many people believe that all financial planners are certified, but this isn t true. Only those who have fulfilled the certification and renewal require ments of the CFP Board can use the CERTIFIED FINANCIAL PLANNER certification. CFP Certification Requirements Education: CFP professionals must develop their theoretical and practical financial planning knowledge by completing a comprehensive course of study at a college or university offering a financial planning curriculum approved by the CFP Board. Examination: CFP practitioners must pass a comprehensive, two-day, 10-hour CFP Certi fication Examination that tests their ability to apply financial planning knowledge in an integrated format. Based on regular research of what planners do, the exam covers the financial planning process, tax planning, employee benefits and retirement planning, estate planning, investment management, and insurance. Experience: CFP professionals must have a minimum of three years experience in the financial planning process prior to earning the right to use the CFP certification. As a result, CFP practitioners possess financial counseling skills in addition to financial planning knowledge. Ethics: As a final step to certification, CFP practitioners agree to abide by a strict code of professional conduct, known as the CFP Board s Code of Ethics and Professional Responsibility, which sets forth their ethical responsibilities to the public, clients, and employers. The CFP Board also performs a background check during this process, and each candidate for CFP certification must disclose any investigations or legal proceedings related to his or her professional or business conduct. 4

7 VALUE OF WORKING WITH AN AIF Overview Simply put, the term fiduciary applies to the more than five million individuals who have the legal responsibility for managing someone else s money. A fiduciary is required by law to always act in the best interests of his or her client, beneficiary, or retirement plan participant. Yet, many fiduciaries are not even aware of their duties and responsibilities. Accredited Investment Fiduciary (AIF ) designees have been provided with the tools and training to help them acquire a thorough knowledge of fiduciary responsibility and can be an invaluable resource to investment fiduciaries and individual investors alike. Don t risk going it alone; AIF designees have the expertise to help ensure that an investment management process is managed to an appropriate fiduciary standard of care. Training AIF designees have successfully completed a specialized program on investment fiduciary standards of care at the Center for Fiduciary Studies. The Center, in association with the University of Pittsburgh Joseph M. Katz Graduate School of Business, was established in 1999 to provide the investment industry with the first full-time training and research facility focused exclusively on investment fiduciary responsibility and portfolio management. Designees have passed a comprehensive examination on the 27 Prudent Investment Practices that formed the basis of their training. Designees are also required to strictly adhere to continuing professional education requirements, which aids them in staying abreast of recent events in the industry that are affecting every fiduciary. Prudent investment process The 27 practices that designees follow have been derived from interpretations of legislation, case law, and regulatory opinion letters that govern the fiduciary. Prudent Investment Practices, the published handbook that describes these practices, was co-produced by the Center and the American Institute of Certified Public Accountants (AICPA). Each of the 27 practices also makes good investment sense, and using the process they define should help to improve long-term investment performance. More information For more information on the AIF designation, please contact us. 5

8 TEAM BIOGRAPHIES Debbie Stanton Operations Manager I have lived in the Hudson Valley all of my life and bring a wide variety of life experiences to Jeff s practice. I attended the Wappingers Central School District and I graduated from Marist College with a BS in Business Administration, concentrating in Finance. I have worked in many different fields since then. I began my career as an intern at IBM in their financial department until my first permanent job at a pharmaceutical company where I did everything from finance to marketing. Years later I found employment with a local real estate company where our department maintained and sold foreclosure homes. I took a break from the workplace to enter the toughest and most rewarding career of my life, starting a family with my husband Doug. Once my daughter, Jamie, and son, Brandon, became school-aged, I returned to work as a part time assistant to Jeff. Over the years my hours increased, the knowledge of Jeff s business expanded, and I studied and passed my Series 7 and 63 exams to reach the point I m at today. Feel free to contact me on anything from opening a new account, placing trades on current accounts, setting up online access, to financial questions, etc. My life away from the office consists of time with the family going EVERYWHERE, volunteering as a soccer coach, listening to alternative rock and watching or going to NASCAR races...go KYLE! Katie Wilson Registered Planning Assistant After being lucky enough to grow up in serene and rural Northeastern Vermont, I studied Finance as an undergraduate at Thomas College in Waterville, Maine where I also earned an MBA. During school, I undertook internships in the Budget and Accounting Departments of Maine General Medical Center and Putnam Investments to gain some perspective of the field. The experience that would ultimately convince me to pursue financial planning as a career was time under a tax preparer and Registered Representative affiliated with the independent Broker/Dealer HDVest. There, I realized I could make a difference for clients and their families by sharing my education and interest in finance and combining that with my passion for helping others. Soon after, my husband and I relocated to the Hudson Valley and I began working under JSA Financial Group. My role in the practice is that of Paraplanner to aid in meeting preparation, conduct investment research, attend educational conferences, and help work through advanced planning issues with clients. I m proud to work alongside Jeff and to be a part of an independent team that consistently strives to offer the best service. We offer clients a more intimate business relationship and take a truly comprehensive approach to financial planning. I hold the FINRA Series 7 and 63 registrations as well as my NY State Life/Accident/Health Insurance license and I am a candidate for the CFP certification. Beyond work, I enjoy cooking, running, taking photos, and finding new music; mostly, though, I enjoy spending time with my husband and our Black Lab, Brody, hiking, backpacking and visiting with friends and family all over New England. Our favorite spot is beautiful Boothbay Harbor, Maine where we met and married. 6

9 TEAM BIOGRAPHIES continued Gail Decker Customer Service Assistant In the summer of 2003 I began working for JSA Financial part-time as a customer service assistant. In this position, the duties include scheduling and confirming appointments, client check-ins and everyday office duties. Prior to this position I was employed for Germantown Telephone Co. as a customer service manager. In that position the responsibilities covered a wide rage of areas including telephone, cable TV, internet and cellular duties. I have been a resident of Columbia County all of my life. In my spare time, I enjoy spending time with family and friends, traveling and following the NY Mets. Kathline Joseph Customer Service Assistant In 2012, I joined Jeff s team at JSA Financial Group and began working as a Financial Assistant, specializing in Insurance products. Like the rest of our team, I seek to provide a high level of customer service while assisting Jeff to provide insurance solutions for our clients, as well as administrative support for the office. I grew up in the Hudson Valley, attending Kingston High School, where I graduated in Upon completion, I moved to Washington, D.C. where I attended Howard University. I completed my studies at Howard where I received a BBA in Insurance with a concentration in Actuarial Science in During my tenure I had the opportunity throughout the summer months to gain experience in underwriting through the Housing Authority Insurance Group (HAIG) in Cheshire, CT. I spent my time at HAIG gathering and comparing statistical data for housing authorities across the country and making necessary recommendations on profit margins. Outside of work, I enjoy spending time spending time with close friends and family. I love to listen to music and play my violin in my spare time. I also enjoy staying active and watching sports, especially football. 7

10 CODE OF RESPONSIBILITY Our clients comfort and happiness are very im portant to us. Whether you are visiting the office, corresponding by mail or , or calling us on the phone, you deserve a timely response to all inquiries. Our Code of Values Our clients are not dependent on us; we are dependent on them. Our clients honor us by giving us an oppor tunity to earn their business. Our clients are not to be argued with; The customer is always right. Our clients privacy is paramount. We will hold in strictest confidence, and consider as privileged, all business and personal in formation pertaining to our clients affairs. Our Customer Service Policy To provide the optimal level of service and guidance to our clients, we request that our clients be forthcoming with all relevant financial information. If you are displeased with any element of our service, we request that you contact us by phone or so that we may address any issues that arise. If you are unable to keep an appointment, we request that you notify us a minimum of 24 hours in advance. If you are pleased with the service and the results you are receiving, we would be honored to receive introductions to friends, family members, or business colleagues whom you believe would appreciate the same level of service you get from us. 8

11 ASSIGNING RESPONSIBILITY As you now know, an important partnership exists between a client and his or her advisor. Often there are misunderstandings as to where responsibility for certain actions falls. In the interests of clarifying this relationship, the roles of both the advisor and the client are laid out below. Advisor Responsibility Knowing the client s financial needs, goals, and changing situation Maintaining confidentiality keeping all information pertaining to the client s finances private Constructing an asset allocation to match the client s objectives Selecting specific securities for the client s portfolio Frequently communicating with the client through monthly and quarterly reports, as well as through meetings Rebalancing the client s assets over time Reallocating the client s assets as circumstances change Joint Responsibility Determining the investment objectives having a mutual understanding between the client and advisor as to the client s risk tolerance and anticipated returns Determining product selection the advisor and the client will agree on the types of investments (mutual funds, stocks, annuities, etc.) that will be incorporated into the client s portfolio Monitoring performance Determining taxable consequences the client must inform the advisor of his or her tax situation so that the client and the advisor can build a tax-efficient portfolio Client Responsibility Providing the advisor with all financially relevant information Establishing a financial goal Notifying the advisor of liquidity needs and expected cash flow Informing the advisor of any change in objectives and financial situation Trusting the advisor s expertise 9

12 INTRODUCTION TO COMMONWEALTH Commonwealth Financial Network was founded to serve as the home office for investment professionals committed to providing unbiased financial guidance to their clients. Unlike traditional Wall Street firms, Commonwealth does not produce or market any proprietary investment products, nor does it impose any sales quotas on its affiliated advisors. Accordingly, its national network of independent financial professionals is unique in its ability to make your needs the only motivating force and that is the way it should be. As Commonwealth advisors, we are provided access to all national exchanges, as well as to a full range of quality investment products and services. After working to understand your risk tolerance, personal values, and time horizons, we can recommend a suitable combination of: Mutual funds Full-service stock and bond trading Unit investment trusts Real estate investment trusts (REITs) Fixed and variable annuities Life insurance Managed investment programs Limited partnerships CDs and money market accounts Retirement plans Commonwealth s goal is to ensure that we are able to direct the maximum amount of energy possible toward our role as financial caregivers. It makes this feasible by supporting us with: Technology Commonwealth s continual investment in leading-edge systems strives to provide superior account processing and management, as well as access to critical data. Unprecedented 10-Time Broker/Dealer of the Year Commonwealth is a 10-time recipient of Investment Advisor magazine s prestigious Broker/Dealer of the Year award, which is based on criteria that includes overall service and payout (1991, 1992, 1994, , 2001, 2002, 2005). Research In-house experts at Commonwealth pore over vast amounts of financial data to offer advisors an additional perspective on investment decisions. Professional Education As Commonwealth advisors, we participate in a rich curriculum of technical seminars and educational programs reflecting the best practices in the growing complexity of financial issues. Account Support Informed investors enjoy greater personal comfort. Through consolidated monthly statements, online account access, and Commonwealth s Service Center, we can provide you with all the information you ll ever need. In today s complex economic environment, the major difference between making money and keeping money is knowledge. Investment decisions vital to your economic security are far too important to be ignored or left to a machine or to anyone whose primary responsibility is not you, the investor. Commonwealth believes in supplying primary financial care through independent financial professionals. Commonwealth Financial Network is a member of the SIPC, which protects securities customers of its membership up to $500,000 (including $250,000 for claims for cash). An explanatory brochure is available on request or at 10

13 NATIONAL FINANCIAL SERVICES LLC NFS Behind the scenes of every trade and statement With National Financial Services LLC (NFS), a Fidelity Investments company, you can feel confident that much of the critical trade processing, clearance, client reporting, and systems work that backs your investment professional is performed by an industry leader. NFS processes tens of thousands of transactions for millions of investors like you every day. NFS has the vision and resources to provide you with innovative services for years to come. Strength, knowledge, leadership, experience Your advisor can deliver substantial benefits from the important service relationship that Commonwealth maintains with NFS. Knowing that every investor s account is serviced with the commitment and resources of an industry leader allows us to focus on what we do best: providing the personalized guidance and comprehensive investment services you need to pursue your goals. 11

14 WHAT TO EXPECT WHEN OPENING AN ACCOUNT Once your new account is established, you can expect to receive a variety of correspondence from National Financial Services (NFS). If your account is being funded via transfer from another custodian, the typical time frame for completion is two to four weeks.* As we make initial and periodic adjustments to your portfolio, you may receive any or all of the following: Prospectus: Document issued by a mutual fund company (or other investment firm), which includes the history of the fund, the background of managers, fund objectives, a financial statement, and other essential data. Proxies: Shareholders with a voting interest are asked to authorize an individual to vote on their behalf at corporate meetings. Proxies normally pertain to the election of the board of directors or to changes in the structure or objective of a mutual fund. Confirmation statements: Formal notice giving details of a securities transaction. Annual report: Yearly record of a corporation s or a mutual fund s financial condition that must be distributed to shareholders. It includes a description of operations, as well as a balance sheet and an income statement. Quarterly report: Each quarter you will receive a detailed performance report showing exactly how your account has performed for the preceding quarter, year-to-date, and since inception. The quarterly report also includes a portfolio appraisal showing the percentage breakdown of your account by asset class, as well as an easy-to-read pie chart. Monthly statements: Formal notice of your monthly balances and transactions. Additionally, you should be aware that management fees are debited quarterly in January, April, July, and October. Your account may initially be billed a prorated quarterly fee depending upon when it was fully funded. *This time frame is general and assumes all paperwork was received in good order. Certain types of transfers may take longer. 12

15 FEATURES OF PREFERRED PORTFOLIO SERVICES Preferred Portfolio Services (PPS) is a premier fee-based asset management investment program. PPS accounts offer me as your financial advisor the flexibility to construct portfolios tailored to help meet your long-term investment goals. Each portfolio is individually crafted by weighting various asset classes and by making periodic adjustments, such as rebalancing or reallocating the asset allocation. Through portfolio construction, we can work together to balance your personal goals, time horizons, and risk profile. Why PPS? Investment options abound in the financial services arena. With literally thousands of mutual fund providers, most investors feel bombarded by investment choices and financial jargon. Commission structures, contingent deferred sales charges, rights of accumulation, an ever-increasing multitude of share classes these all make the investment process complicated and difficult to understand. PPS is different from other investment vehicles. One of its greatest advantages is its simplicity you pay as you go. When you use PPS, you pay your financial advisor a management fee based on a percentage of the assets you invest. In addition, there are other features: You have a variety of fund types from which to choose. You have virtually unlimited product options, including more than 5,000 mutual funds. Your financial professional has the ability to rebalance your portfolio across different fund families. You can give your advisor discretion without experiencing concern about churning or exposure to continuous commissions. You can transfer existing positions into a fee-based account. You can terminate your relationship at any time without paying closeout fee-based surrender charges. We provide you with enhanced quarterly investment progress reports, including state-of-the-art performance reporting. You also have the ability to access your account information at any time through our client website, As your financial advisor, I am committed to helping you find the best investment vehicle for your unique situation. With the PPS program, we sit on the same side of the investment table: I prosper as you prosper; I suffer when you suffer. This may help alleviate concerns about continuous commissions or conflicts of interest. By using PPS, I am committed to pursuing your individual, long-term financial goals. 13

16 PPS CUSTOM FEE SCHEDULE ANNUAL FEE PPS Custom account investors will pay an annual account management fee. Other transaction charges and third-party custodial fees may apply; see below for details. Account Size Between $50,000 $249, % $250,000 $499, % $500,000 $999, % $1,000,000 $2,499, % $2,500,000 $4,999, % $5,000, % Maximum Annual Fee* TRANSACTION CHARGES** Equities OTC $25 Maximum Charges Listed $25 up to 1,000 shares, + $0.01 per share thereafter Fixed Income Treasuries, CDs, & Federal Agencies Maximum Charges $30 Corporates & Municipals $30 UITs $20 CMOs $30 Options Maximum Charges Options Mutual Funds Buy $20 Sell $20 Exchange $20 $20 + $1.25 per contract Maximum Charges * The maximum annual fee for certain account size and type may be negotiated. (Fees as of 4/2012) ** Plus $4 confirm fee for all transactions, except for mutual fund exchanges, NTF funds, and periodic investment/systematic withdrawal transactions. 14

17 DISCRETION The partnership that exists between our clients and our firm is built on trust, mutual responsibility, and goodwill. Investors who entrust their finances to us have every reason to believe that we will act with great foresight and care to pursue their goals and manage their assets. Managing your assets requires discretion. This means that we are authorized to place trades in your account before notifying you. In the area of managed accounts, advisor discretion is common business practice. The reasons for this are twofold. Discretion allows us to react quickly to changing market conditions and therefore place trades before waiting for feedback. More importantly, it empowers us to make decisions consistent with your financial goals without getting bogged down in phone calls. For example, when your portfolio deviates from its specific asset allocation due to changing market conditions over time, we must rebalance the portfolio in order to maintain its structural integrity. Such rebalancing efforts are aligned with your risk/reward profile and can be effective controls to minimize risk. Discretion does not mean that we will make frequent and haphazard trades without contacting you. In fact, because of the way our contract is set up, we have no incentive to behave in this manner. Discretion means that if we are unable to or don t have the time to contact you, we can place an intelligent trade. All trades executed in a managed account generate trade confirmations, which you will receive within a couple days of the trade, making it easy for you to keep track of any adjustments we make to your portfolio. Of course, by the time you receive the trade confirm, we may have already explained what was done and why. Due to this discretionary authorization, managed accounts are subject to stricter regulatory suitability requirements than commission-based accounts. Accounts are closely monitored to help ensure that unsuitable investments are not purchased and held inside the account. We believe that discretion helps us to deploy our wisdom and experience to grow your assets. The precise use of discretion is a symbol of the trust between our advisors and our clients. 15

18 PERIODIC TABLE OF ASSET CLASSES Highest Return Lowest Return Commodities 23.86% Intermediate- Term Bond 10.27% Muni National Intermediate 9.60% Real Estate 3.81% High-Yield 3.11% Neutral 2.04% Money 1.70% Long/Short 1.60% Managed Futures 1.63% Emerging s -6.00% World Stock 15.64% Mid-Cap 16.20% Small-Cap 20.50% Large-Cap 21.70% Emerging s 56.28% Small-Cap 47.30% Mid-Cap 40.10% World Stock 39.16% Real Estate 37.08% Large-Cap 29.90% High-Yield 27.93% Commodities 22.66% Long/Short 17.27% Neutral 8.83% Muni National Intermediate 4.32% Intermediate- Term Bond 4.11% Managed Futures 3.92% Money 1.07% Real Estate 31.56% Emerging s 25.95% World Stock 20.70% Mid-Cap 20.20% Small-Cap 18.30% High-Yield 11.96% Long/Short 11.56% Large-Cap 11.40% Commodities 7.64% Neutral 4.97% Muni National Intermediate 4.47% Intermediate- Term Bond 4.34% Managed Futures 3.52% Money 1.24% Emerging s 30.31% Commodities 17.54% World Stock 13.54% Mid-Cap 12.70% Real Estate 12.16% Long/Short 9.68% Neutral 7.11% Large-Cap 6.30% Small-Cap 4.60% Managed Futures 3.75% Muni National Intermediate 3.51% Money 3.34% Intermediate- Term Bond 2.43% High-Yield 2.26% Real Estate 36.14% Emerging s 32.59% World Stock 26.34% Small-Cap 18.40% Large-Cap 15.50% Mid-Cap 15.30% Long/Short 14.38% High-Yield 11.85% Neutral 7.64 Money 5.08% Muni National Intermeidate 4.84 Intermediate- Term Bond 3.84% Managed Futures 0.40% Commodities 2.71% Emerging s 39.39% Long/Short 13.66% World Stock 11.17% Commodities 11.08% Intermediate- Term Bond 6.97% Neutral 6.48% Large-Cap 5.80% Mid-Cap 5.60% Money 4.71% Muni National Intermediate 3.36% Managed Futures 2.87% High-Yield 2.66% Small-Cap 1.60% Real Estate 15.69% Managed Futures 13.60% Intermediate- Term Bond 5.24% Money 1.51% Neutral 0.61% Muni National Intermediate 2.47% Long/Short 19.76% High-Yield Small-Cap 33.80% Large-Cap 37.60% Commodities 37.61% Real Estate 37.73% Mid-Cap 41.50% World Stock 45.09% Emerging s 53.33% Emerging s 79.02% High-Yield 58.21% Mid-Cap 40.48% World Stock 32.46% Large-Cap 28.43% Small-Cap 27.17% Long/Short 22.13% Real Estate 20.15% Commodities 18.91% Muni National Intermediate 12.91% Neutral 6.24% Intermediate- Term Bond 5.93% Managed Futures 2.23% Money 0.14% Real Estate 28.48% Small-Cap 26.85% Mid-Cap 25.48% Emerging s 18.88% Commodities 16.83% Large-Cap 16.10% High-Yield 15.19% World Stock 7.75% Intermediate- Term Bond 6.54% Long/Short 3.70% Neutral 2.70% Muni National Intermediate 2.38% Managed Futures 2.01% Money 0.13% Muni National Intermediate 10.70% Real Estate 8.69% Intermediate- Term Bond 7.84% High-Yield 4.38% Large-Cap 1.50% Money 0.07% Mid-Cap 1.55% Small-Cap 4.18% Managed Futures 4.19% Neutral 4.23% Long/Short 7.31% World Stock 12.14% Commodities 13.32% Emerging s 18.42% Source: MPI Stylus and FactSet. This example is for illustrative purposes only. Performance data quoted represents past performance. Past performance does not guarantee future returns. Investors should note that diversification does not assure against market loss and that there is no guarantee that a diversified portfolio will outperform a nondiversified portfolio. The return and value of investment products will fluctuate with market conditions. Indices are unmanaged and investors cannot invest directly in an index. The above asset classes are represented by the following indices: Large-Cap Russell 1000; Mid-Cap Russell Midcap; Small-Cap Russell 2000; World Stock MSCI EAFE; Emerging s MSCI EM; Intermediate-Term Bonds Barclays Capital U.S. Aggregate Bond Index; Muni National Intermediate Barclays Capital U.S. Municipal Bond; Real Estate Nareit Equity-REITs; High-Yield Bond Barclays Capital High-Yield Index; Money Citigroup 3 Month T-Bill, Long/Short DJ Credit Suisse Long/Short; Managed Futures DJ Credit Suisse Managed Futures; Neutral CISDM Equity Neutral Index; Commodities Dow Jones USB Commodity Index. 16

19 CORRELATION OF VARIOUS ASSET CLASSES What is correlation within the portfolio management context? Correlation describes the degree to which assets tend to move together over time. And from a practical standpoint, it can provide important insight into the level of portfolio diversification. Portfolio correlations range between 1.0 and 1.0. If two hypothetical investments have a correlation of 1.0, they are said to be perfectly correlated, meaning that they generally move in exact linear unison. When two investments have a correlation of 0, they are said to Large-Cap Growth Large-Cap Value Small-Cap Growth Small-Cap Value World Stock Emerging s Real Estate Intermediate-Term Bond Multisector Bond Muni National Intermediate High-Yield Bond Moderate High Moderate None Negative Negative 0.70 to to to to to 1.0 Short-Term Bond World Bond Neutral Managed Futures Long/Short Commodities Money This example is for illustrative purposes only. Correlation data quoted represents past performance. Past performance does not guarantee future returns. Investors should note that diversification does not assure against market loss and that there is no guarantee that a diversified portfolio will outperform a nondiversified portfolio. The return and value of investment products will fluctuate with market conditions. Data provided by MPI Stylus. Indices are unmanaged and investors cannot invest directly in an index. Data reflects the 10-year time period of 1/1/ /31/2011. The above asset classes are represented by the following indices: Large-Cap Growth Russell 1000 Growth; Large-Cap Value Russell 1000 Value; Small-Cap Growth Russell 2000 Growth; Small-Cap Value Russell 2000 Value; World Stock MSCI EAFE; Emerging s MSCI EM; Real Estate MSCI REIT; Intermediate-Term Bonds Barclays Capital U.S. Aggregate Bond Index; Multisector Bond BofA ML US Corporate Master; Muni National Intermediate Barclays Capital U.S. Municipal Bond; High-Yield Bond BofA ML High Yield Master II Index; Short-Term Bonds Barclays Capital Government 1 3 Yr; World Bond Barclays Capital Global Aggregate Bond; Neutral Morningstar Neutral; Managed Futures DJ Credit Suisse Managed Futures; Long/Short CISDM Equity Long/Short; Commodities Dow Jones-AIG U.S. Commodity Index; Money ML 3-Month T-Bill. 17

20 CORRELATION OF VARIOUS ASSET CLASSES continued have no linear relationship; thus, they typically move independently of each other. It s also possible to have two investments that have a perfectly negative linear relationship with a correlation of 1.0, meaning that when one investment is up a specific percentage, the other investment will be down a multiple of the same amount. Most investments have correlations that range between 0.1 and 1.0. Historically, real estate, international, and fixed income investments typically have had low positive or even negative correlations in relation to U.S. equity investments. Past performance does not guarantee future results, however, and there is not necessarily one particular set of asset classes that will perform most contrary to the overall market. When interpreting correlation values, historically, higher incidences of lower correlations within a portfolio have denoted a higher degree of portfolio diversification, and volatility has been lowered. 18

21 MODEL PORTFOLIOS (AS OF APRIL, 2012) The amount of risk you are comfortable with will help determine the asset allocation of your portfolio. For our purposes, there are five investment objectives: Primarily Fixed Income, Balanced Fixed Income- Oriented, Balanced Equity-Oriented, Primarily Equity, and Equity.* Target Allocations are subject to change. Primarily Fixed Income Target Allocations: 7% Equity; 85% Fixed Income; 8% Bank Deposit Sweep Program Majority of assets invested in interest- and/ or dividend-bearing securities. Goal is to keep principal steady while earning interest and/or dividends. Portfolio is not expected to keep pace with stock markets. g Large-Cap 4% g Developed Foreign Stock 3% g Short-Term Bond 28% g Interm./Long-Term Bond 22% g High-Yield Bond 10% g Foreign Bond 10% g Bank Deposit Sweep Program 8% g Private REIT 15% Balanced Fixed Income-Oriented Target Allocations: 25% Equity; 69% Fixed Income; 6% Bank Deposit Sweep Program Focus on reducing short-term losses. Willing to accept some fluctuation of principal, but should be kept to a minimum. Portfolio is designed to underperform the stock market during positive markets and to overperform during negative markets. g Large-Cap 6% g Mid-Cap 3% g Small-Cap 2% g Developed Foreign Stock 6% g Emerging s 3% g Short-Term Bond 23% g Interm./Long-Term Bond 17% g High-Yield Bond 7% g Foreign Bond 7% g Bank Deposit Sweep Program 6% g Private REIT 15% g Alternative/Tactical 5% Investments in fixed income and equity securities are subject to the following principal investment risks: the risk that the price of securities may decline in response to general market and economic conditions or events, as well as investment rate risk, or the risk that the issuer s earnings prospects and overall financial position will deteriorate, causing a decline in the security s value over short or extended periods of time. Mid- and small-cap investments may be subject to additional risk due to reduced market share. International investments are subject to certain risks, such as currency fluctuations, economic instability, and political developments not present with domestic investments. Emerging market investments can offer higher potential returns to long-term investors but also carry higher risk. Emerging market investments entail higher political and liquidity risks than domestic investments and, as such, may be more volatile. Currency risks also affect emerging market investments. REITs, which own real estate, are subject to a number of risks, including possible declines in the value of real estate; risks related to economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; and dependency upon skills of the management of REITs. The return and principal value of any investments in securities may fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Fixed income investments are subject to interest rate risk and prepayment risk. Bond values may change due to current interest rate changes and are subject to the risk that the issuer may default. An investment in the money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency; although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. 19

22 MODEL PORTFOLIOS (AS OF APRIL, 2012) continued Balanced Equity-Oriented Target Allocations: 45% Equity; 49% Fixed Income; 6% Bank Deposit Sweep Program Should expect more risk than conservative investor. Portfolio should experience more fluctuation than conservative because of reduced fixed income exposure and higher stock exposure. Portfolio is designed to underperform the stock market slightly on the upside and to lose less on the downside. g Large-Cap 9% g Mid-Cap 5% g Small-Cap 4% g Developed Foreign Stock 12% g Emerging s 5% g Short-Term Bond 12% g Interm./Long-Term Bond 12% g High-Yield Bond 5% g Foreign Bond 5% g Bank Deposit Sweep Program 6% g Private REIT 15% g Alternative/Tactical 10% Primarily Equity Target Allocations: 65% Equity; 30% Fixed Income; 5% Bank Deposit Sweep Program Should expect more risk than moderate growth investor. Portfolio is expected to fluctuate; however, the investor accepts this in the pursuit of higher returns. Portfolio seeks to keep pace with the broad stock market on the upside and to lose less on the downside. g Large-Cap 14% g Mid-Cap 7% g Small-Cap 7% g Developed Foreign Stock 18% g Emerging s 7% g Interm./Long-Term Bond 7% g High-Yield Bond 4% g Foreign Bond 4% g Bank Deposit Sweep Program 5% g Private REIT 15% g Alternative/Tactical 12% Equity Target Allocations: 97% Equity; 3% Bank Deposit Sweep Program Focus on seeking highest rates of return with little or no concern for portfolio fluctuation. Portfolio seeks to outperform the broad stock market during positive markets and to underperform in negative markets. g Large-Cap 20% g Mid-Cap 11% g Small-Cap 11% g Developed Foreign Stock 20% g Emerging s 10% g Bank Deposit Sweep Program 3% g Private REIT 10% g Alternative/Tactical 15% 20

23 EMOTIONS OF INVESTING Logic and emotion have never been a perfect pairing. It is logical for investors to stay focused on their long-term goals during volatile markets, but emotionally it is very difficult to follow this reasoning. Emotional instincts, which may be valuable in certain aspects of our lives, may contradict sound investment decisions. The image below depicts the emotional cycle relative to market changes. When the market is doing well, investors are excited, even blissful. This can be the riskiest time to invest, however, because it may foster a can t lose attitude that strays from a disciplined investment approach. During these times, it s important to review and rebalance as appropriate and stay focused on long-term investment goals. When the market is low, investors often feel defeated. Although the market may be down, buying at this time can offer investors a great opportunity to make money. We all know the old adage that investors should buy low and sell high, yet few investors take advantage of down markets in this way. If it makes sense for your risk tolerance and goals, we may take advantage of market downturns. Positive Bliss Opportunity to Make Money Nervous Bold Performance Riskiest Time Desperate Hopeful Defeated Negative This hypothetical scenario is for illustrative purposes only and does not reflect actual market performance, nor is it a prediction of future market conditions. 21

24 FIRM RESEARCH CAPABILITIES Our access to state-of-the-art independent research helps evaluate current and future portfolio positions. There are research reports on more than 7,000 stocks, 10,000 mutual funds, and 7,300 variable annuity sub-accounts. We can provide you with hundreds of investment ideas, asset and sector allocations, earnings estimates, and overall portfolio guidance. Additionally, the companies providing this research do not bring companies public, make markets in any of the stocks they analyze, or advise companies on mergers and acquisitions. Because these research firms are not broker/dealers and do not underwrite initial public offerings, you can feel confident that their analysis is not driven by any hidden agenda. 22