GLOSSARY

"Best In Class"

"Best In Class" funds are chosen using a rigorous, multi-step process which analyzes a manager's historical volatility, risk, performance, tenure, correlation to other funds, and more. Of more than 17,000 funds in the market today, only half of 1% make the IPS "Best In Class" list.

Allocation

Allocation defines the blend of funds in a portfolio among various sectors or types of investments. Portfolios may allocate funds to corporate debt, growth, international, domestic equities, and more.

Alpha

Alpha reflects the value a manager adds to the portfolio over and above the benchmark he or she competes against. The higher the Alpha, the more impact the manager is having on the performance and success of the fund he or she directs.

Beta

Beta measures a fund's sensitivity relative to an index, such as the S&P 500. A Beta above 1.0 means the fund has more sensitivity than the index. A number below 1.0 means it's less sensitive. For example, a Beta of 1.5 means the fund is 50% more sensitive than the index. So a 10% rise in the S&P 500 would be expected to result in a 15% rise in the fund. An investor could also expect a 10% drop in the index to mean a 15% drop in the fund.

Correlation Matrix

The Correlation Matrix is used as a diversification tool to see how closely related selected funds are to one another or to an index. You want an overall portfolio correlation that is very low—indicating any particular economic event will not have a dire effect on the overall portfolio.

Diversification

Diversification in a portfolio marks the degree to which various funds move in similar or disparate directions from each other through market cycles. Diversification lowers risk and generates safer returns. Diversification is not necessarily created by owning several funds in a portfolio— to determine the mathematical level of diversification, you need to assess your correlation coefficient.

Efficiency

A portfolio is considered efficient when its volatility is lower than its historical return.

Equilibrium

A portfolio is said to be in equilibrium when its various asset classes are diversified to create a blend that results in overall lowest portfolio volatility with highest overall return. A portfolio in equilibrium will have high Sharpe ratios and low correlation coefficients.

Equity Index Annuity

Created in 1995 to serve as a hybrid between fixed annuities and variable annuities, an Equity Index annuity allows participation in the stock market without the risk. There are over 200 Equity Index annuities on the market today and not all are created equal. You want to make sure you understand the terms of the contract, which can often limit the gains you experience with this investment. Caps, spreads, margins, etc. can all impinge on your ability to earn interest, so meet with an advisor to make sure you're not locking your money up in a long term, tax-deferred investment that may never earn you significant money. Good Equity Index annuities, however, can be value added and are a nice, guaranteed supplement to portfolios.

Feasibility Study

Feasibility studies are conducted to determine if a small business is an eligible candidate for a 412(i) plan. An inventory is taken of employee ages, tenures, expected retirement ages, and salaries and then calculated to determine how much a business can legally contribute to a 412(i). Once a feasibility study is conducted, a plan design is developed. An IPS advisor then meets with the business owner and their tax professional to ascertain if it is a useful tool or not for their enterprise.

Fixed Annuity

Fixed annuities are issued by insurance companies and offer a set interest rate for a contractual period of time. They grow on a tax-deferred basis and cannot be liquidated without penalty until the investor is 59.5 years old. Some fixed annuities advertise a "guaranteed fixed interest rate" to lure customers in, but actually only provide the rate for an introductory period. The subsequent years of the contract may have a much lower guaranteed interest rate. This is a very safe investment, but should be closely examined to confirm the actual rates over the lifetime of the contract.

GST/Dynasty Provision

GST or Dynasty provisions are written into Living Trusts and offer additional protection for litigation or divorce, as well as transfer tax savings to the heirs. The provision allows the beneficiary to use the assets they inherit through the trust, without technically being the owner of said assets— the subsequent generation become the final owners.

Irrevocable Trust

An irrevocable trust can be written in a variety of ways and is used in estate planning to separate assets from the original estate.

Mean

Mean is also commonly referred to as "expected return" and is what an investor hopes to maximize for any given measure of risk.

Nobel Laureates' Theoretical Models

We draw on the work of Nobel Laureates Harry Markowitz, PhD; Merton Miller, PhD; and William Sharpe, PhD. Their studies in economics and mathematics have established portfolio management systems which quantify data and then mathematically calculate the precise risk, return, and diversification of a portfolio through all economic conditions. This takes the guesswork out of the planning process. Their work teaches managers how to take the luck out of planning, and focus on the science of portfolio engineering.

No-Load Funds

No-load funds are non-commissioned funds. B-share funds are NOT an example of a no-load fund, though they are often proclaimed to be non-commissioned funds. True no-load funds allow the investor to buy and sell them without any commission to the advisor.

Optimization

Optimization defines the process of selecting "Best In Class" funds, then mathematically quantifying their impact on each other to create a mix that produces the lowest volatility for the strongest return.

Probate

Probate is the public process that an estate must go through when a person dies. The estate goes before a magistrate who directs assets to heirs according to the instructions available at the time. The probate process is public, could involve legal costs, and involves a period of time to settle.

R2

The R2 factor demonstrates mathematically how diversified a portfolio is, or measures how closely a fund correlates to the movement of an index. It ranges from 0 to 100, where 100 is a perfect correlation with an index, and 0 is no correlation whatsoever. A reading of 35 means 35% of the fund's movements are explained by the movement of the index. We believe a diversified portfolio should have an R2 factor at 50 or below.

RMD

At age 70.5, Americans are required to begin an annual withdrawal from their IRA. This figure is called your RMD, or Required Minimum Distribution, and is calculated based on the age of the investor and increases over time. To make sure you're not taking out more than you need to, be sure to use the most current tax tables from the IRS which change every few years. If an investor has more than one IRA, they can calculate their RMD based on total assets in all IRA accounts, then take their distribution from a single IRA to meet the total threshold. Others like to receive separate RMD checks from each individual IRA.

Schwab IRA

A Schwab IRA account is a qualified account for qualified assets. These accounts can only be held by one individual. They grow on a tax-deferred basis— holdings are taxed only when withdrawn.

Schwab One Account

A Schwab One account is a brokerage account for non-qualified/non-retirement assets. Account features include an optional check book and Visa Debit Card for personal transactions. These accounts are 100% liquid and insured by the FDIC.

Schwab Roth

A Schwab Roth account is a retirement account but is funded with post-tax funds. It grows tax-free and the principal can be withdrawn tax-free.

Schwab SEP

A Schwab SEP account is a qualified account for businesses. Business owners can contribute up to 25% of gross earnings or $40,000 to a SEP each year, whichever is less.

Sharpe Ratio

The Sharpe Ratio is a risk-adjusted measure developed by Nobel Laureate William Sharpe, PhD. It is calculated by using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe Ratio, the better the portfolio's historical risk-adjusted performance. It can be used to compare two portfolios directly on how much excess return each portfolio achieved for a certain level of risk. Sharpe ratios are calculated by taking the return of a portfolio minus the riskless rate of return, divided by the volatility.

Standard Deviation

Standard deviation is the statistical measurement of dispersion about an average which depicts how widely a stock or portfolio's returns varied over a certain period of time. Investors use the standard deviation of historical performance to try to predict the range of returns that is most likely for a given investment. When a stock or portfolio has a high standard deviation, the predicted range of performance is wide, implying greater volatility.

Variable Annuity

Variable annuities allow investors to buy individual mutual funds within the annuity account and grow on a tax-deferred basis. They have extremely high administrative costs which eat into returns. In general, we find variable annuities are risky, offer sub-par mutual fund choices, and are generally not advisable. They are, however, some of the most popular investments for seniors due to the high commissions rates paid to agents.

412(i)

A 412(i) is a Defined Benefit Plan for small businesses, authorized by the IRS in section 412(I) of the Internal Revenue Code. With tax law changes in 2000, this plan can now be highly skewed to business owners, with minimized contributions required for employees. This plan creates sizeable deductions and allows contributions 3-4 times higher than the $40,000 annual thresholds of other pension plans. Guaranteed investment instruments are used to hold the funds in these accounts so that the pension can grow independent of the market. Defined Benefit plans offer 100% liability protection and are significantly less expensive to administer than off-shore accounts offering the same benefits.