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The Mutual Fund Funnel

A financial plan should include an investment management section which outlines your strategy for managing your investment portfolio. First and foremost, this section should identify an appropriate asset allocation mix between stocks, bonds, and cash. This mix should coincide with the investors’ risk tolerance. Next, the plan should determine a diversification strategy that outlines how much of the portfolio will be invested in certain asset classes, such as large cap stocks, international bonds, and money markets.

However, after we determine how much of our portfolio is going to be invested in each of these asset categories, we still need to identify high quality investments. This is where the mutual fund funnel can be of use. There are currently over 26,000 mutual funds. How do we know which ones to trust?

Start by only considering funds that invest in the asset category you are looking for. In our example, we’ll assume we are looking for a large cap value fund. Of the 26,000 funds available, only 1,076 invest solely in large cap value stocks.

Of course, we want a mutual fund that is going to achieve superior investment performance. As we all know by now, past performance is not an indicator of future success. However, if you were looking for a coach for your basketball team, would you want a new coach with an unproven track record, or would you jump at the chance to hire Phil Jackson? We can further narrow our search by looking for a fund that has achieved above average performance over 3, 5, and 10-year investment horizons. This reduces the number of funds under consideration to only 143.

What are the remaining steps of the mutual fund funnel? Click the link to visit the blog of one of Net Worth Advisory Group’s financial planners to learn how to narrow the number of quality mutual funds to just 9.

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The Benefits of Financial Planning — Investment Management

One of the major components of a financial plan is a complete, objective analysis of your investment portfolio. Note, a portfolio analysis is only one element of a comprehensive financial plan. If your financial advisor presents you with a review of your investments but not a retirement, insurance, estate, and tax analysis, you do not have a truly comprehensive financial plan.

A financial plan should be objective in nature. If the investment section of the plan revolves around pitching certain products, you may be working with a commission-based financial advisor. From my experience, the best comprehensive financial plans are developed by fee-only financial planners who are not motivated to sell products.

The investment section of a financial plan should begin with general, basic financial principles, such as determining an appropriate asset allocation between stocks, bonds, and cash. After identifying an asset allocation, the investor can then narrow their focus and develop a diversification strategy. Only after committing to an asset allocation and a diversification strategy is an investor ready to again narrow their focus and evaluate certain stocks, bonds, mutual funds, or ETFs.

Click on this link to learn more about these investment management techniques.

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Retirement Planning Workshop at La Caille on Thursday, March 25th

Net Worth Advisory Group will be teaching a retirement and financial planning seminar at LaCaille on Thursday, March 25th at 7:00 pm. Both those who are retired and individuals who will be retiring in the next 12 months are welcome.

We will be covering many of the topics outlined in Ray LeVitre’s book (The Retiring Boomer’s Financial Handbook) and each guest will receive a complimentary copy of the book. Mr. LeVitre, our firm’s managing partner, will be available to address questions after the presentation. Topics covered will include:

-How do I know how much money I need to save?
-How much can I withdraw from my portfolio?
-When should I begin taking Social Security?
-How much should I invest in stocks, bonds, and cash?
-How should I diversify my investment portfolio?
-What criteria should I use to identify the best investments?

Date: Thursday, March 25, 2010

Location: LaCaille
9565 Wasatch Blvd.
Sandy, UT 84092

Time: Dinner at 7:00, Presentation at 8:00

RSVP to Lon Jefferies at (801) 566-0740, or lon@networthadvice.com.

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The Hidden Costs of Mutual Funds

According to the Wall Street Journal, the average U.S. stock mutual fund has an expense ratio of 1.31%. Investors pay these fees to compensate a mutual fund manager and cover operating expenses. However, the expense ratio isn’t the only fee investors must pay when owning a mutual fund. Trading costs, which aren’t required to be reported and can be nearly impossible to identify also weight down investment performance in mutual funds. In fact, recent studies indicate that the average stock mutual fund incurs an additional 1.44% in trading costs, bringing the total cost of investing in the average mutual fund to 2.75%!

That’s right. The average mutual fund must earn 2.75% per year to simply break even. So what other options do you have? The “Best Stocks, Best Funds” investment strategy offered by Net Worth Advisory Group rarely costs more than 1.5%, and can be as low as 1%, depending on the amount of assets invested. This fee is all-inclusive, and covers not only all investment and trading costs, but includes the services of a full-time financial planner. A comprehensive financial plan, including retirement planning, portfolio management, estate planning, and an insurance analysis is also covered by this fee. Further, our financial advisors will meet with you at least every six months to update your financial plan, review investment performance, and answer your questions.

What sounds like the better deal: investing 2.75% for an average mutual fund, or paying 1.5% to have a custom built portfolio developed by a full-time financial planning professional who will be in your corner to answer questions and deal with issues that come up? Call to schedule a complimentary consultation.

For more information on fees and the trade-off between mutual funds and the services provided by Net Worth Advisory Group, click here.

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Utah Business Magazine – What to Look For in a Financial Advisor

One of Net Worth Advisory Group’s advisors, Lon Jefferies, was honored to have the opportunity to write an article for Utah Business Magazine focusing on what you should look for in a financial planner. The article, titled “Adding it Up: Advisors Help You Get the Most for Your Money,” appeared in the February 2010 issue and advises people to focus on a couple key issues:

  • Look for a fee-only financial advisor
  • Make sure your advisor is a Certified Financial Planner
  • Your planner should accept a fiduciary responsibility to act in your best interest. No exceptions!
  • Your advisor should provide you with a written comprehensive financial plan
  • You should be meeting with your advisor at least once a year to update your plan, review performance, and ensure your actions reflect your changing goals

Swing by a news stand and check it out.

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“Using a Financial Plan to Boost Your Wealth” Webinar

For those of you who were interested in attending our webinar event back on February 18th but had a scheduling conflict, click here to view a recording of the presentation.

This is our firm’s first webinar, and addresses the importance of having a written comprehensive financial plan. It also provides value information about what should and should not be included in a plan. Finally, the presentation illustrates how having a financial plan and updating it frequently is one of the best ways to ensure you reach your financial goals.

Of course, we’d appreciate feedback. Did you feel the information contained in the webinar was useful? Was the information conveyed in a way that made it easy to understand? Thanks in advance.

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Retirement Planning Workshop at LaCaille – 2/25

Net Worth Advisory Group will be teaching a retirement and financial planning seminar at LaCaille on Thursday, February 25th at 7:00 pm. Both those who are retired and individuals who will be retiring in the next 12 months are welcome.

We will be covering many of the topics outlined in Ray LeVitre’s book (The Retiring Boomer’s Financial Handbook) and each guest will receive a complimentary copy of the book. Mr. LeVitre, our firm’s managing partner, will be available to address questions after the presentation. Here are the details.

Date: Thursday, February 25, 2010

Location: LaCaille
9565 Wasatch Blvd.
Sandy, UT 84092

Time: Dinner at 7:00, Presentation at 8:00

RSVP to Lon Jefferies at (801) 566-0740, or lon@networthadvice.com.

Thanks for your continued confidence. Please let us know if there is anything we can do to enhance the services we provide. We love our jobs, and appreciate your business.

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One last reminder about our financial planning webinar that will be taking place tonight at 7:00 MT. The webinar will contain great information concerning what should and should not be included in a comprehensive financial plan, how to utilize the written financial plan to boost your wealth and maximize the probability of obtaining your retirement and other financial goals, and how to ensure your financial plan is frequently updated to reflect your changing situation.

The webinar can be viewed from the comfort of your home. Simply click the “Register Now” link below, and you will be provided with a web address to visit tonight. Once you arrive at that site at the appropriate time, the webinar will take place right on your screen. Please let me know if anyone has questions. Of course, all are welcome to the educational session.

Space is limited.
Reserve your Webinar seat now at:
https://www1.gotomeeting.com/register/815413008

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Educational Webinar — 2/18/10

Join us for a Webinar on February 18

Space is limited.
Reserve your Webinar seat now at:
https://www1.gotomeeting.com/register/815413008

According to the SEC, individuals with a written financial plan have twice the money in savings and investments as those who don’t. Investors with a comprehensive plan are twice as likely to take actions that lead to financial success, such as saving enough to meet their retirement goals, rebalancing their portfolio, and selecting low-cost investments. In addition, 88% of those with a financial plan feel they have a clear financial direction, twice the percentage of those without professional support.

During this educational web seminar, an industry expert will discuss how a comprehensive financial plan:

• Will identify the amount you need save and the return your investments must achieve to enjoy the lifestyle you’ve envisioned.
• Ensures your investment portfolio is customized to achieve your retirement goals and reflect your risk tolerance.
• Can determine the best strategy for managing Social Security, 401(k)s, and pensions.
• Allows you to accurately assess your insurance coverage, ability to fund a child’s education, and estate planning efforts.
• Will identify potential liabilities that can decimate your nest egg, such as an undiversified portfolio and long-term care costs.

Don’t miss this opportunity to learn how to construct a financial tool that will benefit you for the rest of your life. REGISTER TODAY!

Title: Using a Financial Plan to Boost Your Wealth
Date: Thursday, February 18, 2010
Time: 7:00 PM – 8:00 PM MST

After registering you will receive a confirmation email containing information about joining the Webinar.

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Financial Planning Benefits — Life Insurance

It is vital to ensure your financial plan identifies and defines your current financial situation and your financial goals, and provides a comprehensive path between the two. Most importantly, a holistic financial plan should not include a sales presentation. Unfortunately, many insurance and annuity salespeople commonly develop “financial plans” for their potential clients, but these documents are little more than a step-by-step explanation of why the product they’re selling is a perfect fit for that individual.

Insurance agents frequently come up with incredibly detailed (and confusing) documents to illustrate why their product is great for a potential purchaser. They have many “rules of thumb” to estimate how much life insurance a client needs. However, remember that an insurance agent’s compensation is a function of how much life insurance he can sell. Consequently, individuals are frequently sold more life insurance than they need.

How much life insurance would a fee-only financial planner, someone who doesn’t even have the ability to sell insurance, suggest you need? Likely, the fee-only planner would have a simple methodology that would enable the client to easily determine whether they are under or over-insured. Here is an example:

Suppose a couple determines that if the primary wage earner were to pass away, the other spouse would need $75,000 per year to maintain their standard of living. This non-wage earning spouse is 60 years old, and would like to have enough funds to support their lifestyle until reaching age 100. If we assume 3% inflation, the survivor will need approximately $2,147,778 to provide for themselves throughout their lifetime. In addition, we’d want to make sure this individual’s final expenses are taken care of, so we’ll add in $29,000, and we’ll also include enough funds to pay off the families debts – in this case $23,041 of credit card debt – bringing us to a total need of $2,176,778.

From this figure, we can subtract the sources of income the surviving spouse anticipates. For instance, this individual expects a lifetime total Social Security benefit of $361,066, and this person could also continue their part-time job, which is expected to produce another $71,314 of income over the survivor’s lifetime. Thus, after subtracting our anticipated sources of income we are left with a net estimated survivor needs shortage of $1,744,398.

Now, we can subtract out the assets we already have available to meet this shortage, such as retirement and bank accounts. We’ll suppose this couple has accrued $923,500 of assets to cover their retirement. After subtracted our accumulated assets from our survivor need, we come up with a figure of $820,898. This is the shortage that the couple will look to fill with life insurance. In this particular instance, the individual in question had a $1,000,000 term life insurance. As this analysis indicates, this individual is over insured by approximately $180,000.

It is important to conduct this analysis frequently. For every year an individual survives, the insurance need is reduced in two ways. First, the survivor will now need one year less of survivor benefit, and second, the primary wage earner will have produced one additional year of income. Consequently, insurance needs can decrease rather quickly.

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