“Lively” is about as kind of a word as we can come up with for the 3rd quarter of 2011. October saw some nice recovery, but the excitement isn’t over yet. Enclosed are thoughts and observations from our friends at Litman Gregory.

For those of you that have hired us for more active account management, this letter will reflect the thinking behind the changes in your accounts. For those of you who have more traditional mutual funds, these changes would not necessarily have been made by the fund managers. If you would like more information about our actively managed accounts, just let us know. Enjoy!

3Q11

Concerns about Europe’s debt woes and negative global economic news sparked recession fears and drove stock markets down steeply in the third quarter. Large-cap domestic stocks fell 13.9% during the third quarter and have lost 8.8% year to date. Smaller-cap stocks suffered larger losses, down 21.8% for the quarter, and 17% for the year through September. International stocks also suffered double-digit losses, with developed-market equities losing 20.9% for the quarter and 18% year to date. Emerging-markets stocks were hit hardest, losing 24% for the quarter and 23.4% year to date.

Scary headlines and market volatility, while unnerving, can also create buying opportunities for disciplined investors. In the third quarter, we took advantage of stock market declines on two occasions to incrementally reduce our underweighting to equities. We made our first move in early August, typically adding to larger-cap U.S. equities in our more risk-tolerant balanced portfolios. As a result of these recent portfolio changes we are less underweighted to “equity risk,” with a slightly higher underweight in our more conservative portfolios.

Investing is a Marathon Not a Sprint

As one investor we respect put it, “You need to be a marathon runner when investing. Investors should never judge their decisions based on a moment in time.” Earlier this year when markets where shooting higher, some of our decisions and portfolio positions may have looked overly pessimistic or defensive. More recently, as markets tumbled and headlines blared about the possible collapse of the eurozone, perhaps our positioning looked overly optimistic or risky. But, in our opinion, that type of short-term thinking is what leads most investors to get whipsawed, chasing the market (or asset classes or fund managers) on the way up and then riding them down before jumping into the next hot asset class or manager. Conversely, we believe sticking with a process that has been successful over time, if not all the time, and using an appropriate time horizon to assess the success or failure of one’s investment decisions is critical to winning the marathon of investing.

A final note on risk and expectations: We think we do a very good job analyzing and weighting possible outcomes, but it’s worth a reminder that no one knows for sure how things will play out. Intellectually honest investors know what can and cannot be analyzed with confidence and communicate this clearly, as we endeavor to do each quarter. As always, we remain focused on making the best long-term allocations based on thorough, careful analysis, taking risk and return into account.

Thank you for your friendship, business, and trust. Enjoy the holidays safely and stay in touch!

Tom Hofbauer

Jill Powers, CFP®

Steve Hess, CFP®

p.s. If you would like to receive our weekly e-newsletter, please contact us!

p.p.s. If you have dropped your home phone line and are now using a cell phone, please make sure we have that number so we can reach you.

p.p.p.s. Please remember that as CERTIFIED FINANCIAL PLANNER™ professionals, we are committed to helping you make good planning decisions throughout your life. Call us for more information about how we can help!

According to popular definition, a “Trilogy” is a series of three related items that together create a complete work of art.

Trilogy Wealth Advisors is a culmination of many years of experience in personal wealth advisory services and the coming together of our three Managing Partners – Tom Hofbauer, Jill Powers, and Steve Hess – each with a different set of professional financial skills, that when combined, create a positive and professional planning experience for our clients. And while you might not consider our Peace of Mind Wealth Management Process to be “art” in the traditional sense, we feel that the same qualities go into our work: technical knowledge, years of experience, quality tools, and a passionate commitment to excellence.

What’s Different About Trilogy?

At Trilogy Wealth Advisors, we are dedicated to a collaborative, team-oriented approach. Each Trilogy client is served by the complete team and has access to the tools and planning experience of all of our Managing Directors. We consider your total financial picture – debt, cash flow, insurance, as well as investments – important to consider in the planning process. In addition, Trilogy Wealth Advisors provides objective, independent advice; we do not have production quotas or utilize proprietary investment products.

Our mission is simple – to provide our clients with a clear and understandable long-term plan for meeting and sustaining their personal financial goals. We accomplish this by:

• Unlocking the “mysteries” of investing so our clients understand what they own and why they own it;
• Explaining complicated processes in a clear and concise way;
• Working to maintain flexible and cost effective solutions personalized for each client;
• Understanding what is important to each client, both in terms of money and in life.
• Providing consistent on-going service, monitoring, and advice as market conditions and your personal needs dictate.

What We Don’t Do

What Trilogy Wealth Advisors won’t do is perhaps as important as what we strive to accomplish. We won’t:

• Chase the latest investment fad;
• Give advice for which we are not qualified. When necessary we collaborate with a wide array of professionals such as attorneys and CPAs;
• Act against our written professional ethical guidelines.

Let’s Work Together

If you would like to know more about beginning a personal wealth journey with us, please look at our Team and our Peace Of Mind Wealth Planning Process. You might also enjoy taking our Confidence Index Diagnostic and learning more about the financial advisory industry overall at our Frequently Asked Questions link.

Best wishes for a successful wealth planning journey. Please let us know if we can be of help to you.

Our Peace of Mind Wealth Planning™ Process is built upon 5 distinct modules of planning: cash flow analysis, debt analysis, asset performance analysis, risk management, and legacy planning. Although these modules can be completed individually and at different times throughout your personal wealth journey, each of these modules plays an important role in the complete wealth planning process.

Due to the complex structure of the many life insurance products available on the market today, regular analysis and review of existing life insurance policies is not only prudent, but – as in the case with trustee-owned life insurance – a fiduciary requirement. Unfortunately, this strategic review process requires not only significant time resources, but also an on-going and continually engaged knowledge of the ever-expanding life insurance marketplace.

When the financial commitment made to the life insurance solution (in the way of premium dollars or current cash value) is significant to the overall wealth management plan, then we feel strongly that the life insurance solution chosen should receive the same regular, disciplined review and oversight that the other financial assets receive. Imagine investing several thousands of dollars each year into an investment product, then never asking whether that investment product is performing as expected or whether the investment is still relevant to the current financial plan – yet, this scenario is typically how we see insurance products managed within overall financial and estate plans.

Unfortunately, due to the structure of the life insurance industry, there is often a innate conflict of interest in the policy management process.  This is why we developed our multi-policy performance analysis and review, as well as a process that can document the trustee’s annual review and the oversight process utilized to ensure that the trust is meeting its stated objective for managing the life insurance assets.

Learn more about Trilogy Policy Performance Management Services, and our Insurance Analysis Company The Efficient Edge.

Design Implement & Manage

• 401k Plans – analysis and performance due diligence services
• Defined Contribution Plans – new plan design, implementation, enrollment and employee consultation

Executive Retirement Planning

Design & Implementation

• Deferred Comp
• Key Man
• Executive Bonus Plans

Business Succession Planning

Design, Implementation, and Management

• Buy-Sell Planning
• Disability Buy-Sell Planning
• Succession Funding Planning

At Trilogy Wealth Advisors our approach to asset management services is based on a core philosophy that “Return in absolute terms means nothing without the context of Risk.” Often we hear individuals talk about their returns (or lack thereof) but they never mention what level of risk they took to achieve said return.

Risk and the management of that risk is also the driving force behind our portfolio strategy. In summary, our portfolios reflect our belief that:

• Markowitz Portfolio Theory is a solid foundation upon which to build consistent portfolio performance;
• Portfolio Risk is a key measure of a portfolio’s return, not just the absolute return. In other words, achieving a similar return while taking half the risk is deemed a preferable return in comparison;
• Demographics trends can provide a long-term view of the potential of certain markets and can assist in developing sector weighting strategies that may lower risk and/or enhance return;
• A Contrarian approach to sector and asset selection can offer greater value;
• History and research show that diversification, including international investing, can reduce risk and increase return over time.

Asset Management Customized for Each Need

At Trilogy Wealth Advisors, we use a multi-disciplined approach to selecting investment tools that meet the specific needs of each client. As mentioned previously, the management of portfolio risk, relative to the return needed for the individual client, is a key driver for decision making during portfolio construction. In general terms, we can group client needs into three categories:

• Consistent Income Needs – for this client, receiving consistent income and cash flow from the portfolio is of utmost importance, superseding even returns. A significant drop in market value cannot be tolerated, even if short lived. For this client, investment solutions that include underlying rate guarantees and living benefits would be most appropriate. These solutions tend to increase the overall internal cost of the portfolio, and limit the upside potential for growth, but can deliver peace-of-mind in turbulent market conditions.
• Long Term Asset Accumulation Planning – for this client, consistent contributions to a growth-oriented portfolio is key to developing a future nest egg from which supplemental retirement income can be drawn. Small investment amounts, accumulated over time can have an amazing compounding effect – whether invested through an employer sponsored plan, or through a portfolio established by the client. Professionally managed investment vehicles with good growth potential are generally most appropriate here and can be established with smaller investment amounts and opportunities for direct deposits from checking or savings accounts.
• Customized Portfolio Management – for this client, a more comprehensive wealth management approach is desired. Analysis of cash-flow, debt, insurance, and estate structure are all taken into account during a long-range wealth planning process. Utilizing indexing through Exchange Traded Funds (ETFs), our customized portfolios offer greater sector and asset control, heightened tax efficiency, lower internal costs, and intra-day trading capacity.

It’s important to note that a combination of these solutions may be the best fit for the different needs of clients. Cost, risk, potential return, potential loss, time frame, and customer needs all play a role in designing the right wealth management solution for your personal wealth journey.

Wealth Planning & Management Services

(Peace of Mind Wealth Planning Process)

• Hourly  OR
• Asset-based fee using no-load, no-commission assets

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Brokerage Services

• Individual Security trading (stocks, bonds, etc.)
• Prospectus-based products (mutual funds, variable annuities)

Generally best for those who want to direct their own trading accounts or for those who want investment selection services but do not need on-going wealth management advice.

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Insurance Services

• Individual needs-based policy analysis and competitive policy comparison
• Long Term Care and Disability Insurance policy comparison and consultation

Generally best for individuals who want an independent evaluation of their current insurance assets’ performance and continued viability in the context of their current wealth plan.  (Note: These services are included as a part of our Peace-of-Mind Wealth Planning Process)

“The vast majority of life insurance policies funding trusts are not performing as originally projected.” – Pennsylvania Bar Association CE Credit Course Textbook on trust owned life insurance – 12/7/2003.

“A 1998 study showed that in 75% of trust policies that were at least 5 years old, the death benefit could be increased by 40% without any increase of premium.” – Trust & Estates Magazine, May 2003.

The Uniform Prudent Investors Act (UPIA) provides guidelines for trustees and is a valuable resource for measuring the prudent management of trust assets including life insurance.  For instance:

• No particular investment is inherently prudent or imprudent;
• The trustee’s liability for improper conduct will be measured by reference to the total return that should have been expected.  Thus, a positive return will not necessarily protect a trustee from liability;
• A trustee is at risk, even with a positive return, if the trustee cannot demonstrate that it conducted a thorough and ongoing process for each trust, incorporating the current standards in the investment management industry;
• Delegation is permitted, encouraged and in some cases required; and
• A professional trustee should not remain in the business unless it has the resources required by the UPIA process and that it can prove its compliance.

The Office of the Comptroller of Currency (Section 12, Banks and Banking, Part 9, Fiduciary Activities of National Banks) 9.6 outlines the Review process for Fiduciary Accounts.  Simply put, the process includes:

• Pre-acceptance Account Review
• Initial Post Acceptance Account Review; and
• Annual Account Review

The UPIA places significant emphasis on trustee’s process and reviews and the OCC Regs require it.  If a policy has not been reviewed in several years, immediate action is recommended.

Establishing a Policy for Review

At Trilogy Wealth Advisors we can help you establish your trust’s process for review and annual documentation requirements.

There are several components necessary to establish a process for managing trust owned life insurance.  For example:

• Establish written guidelines and measures for the performance of the asset – an Investment Policy Statement (IPS.)  This statement will establish critical items such as: Goals of the Trust, funding measures for the policy, types of policies allowed, death benefit requirements, review of policy, replacement guidelines.
• Annual In-Force Ledger Review – Carrier financial analysis, current policy performance, estimated policy performance, policy design options, current funding commitments, surrender charges.
• Marketplace Review – Has the marketplace created more competitive policies, are economic trends positive or negative for the current policy, is the policy still appropriate for the trust per the IPS?
• Documentation – Have appropriate Crummey notices been sent to beneficiaries, have annual gift notices been sent to Grantors, have premiums been paid on time, are 5×5 and Hanging Powers being tracked appropriately?

The term “financial planner” is used by many financial professionals. You should ask any planner what qualifies him or her to offer financial planning advice.

A CERTIFIED FINANCIAL PLANNER™ must have passed a rigorous CFP certification process that includes significant education and experience requirements, as well as pass a comprehensive exam that tests their personal financial planning knowledge and skills.

Additionally, CFP registrants must meet regular continuing education requirements (30 hours/2 years) and ethics requirements. You may visit www.CFP-Board.org to check whether your financial planner is a CERTIFIED FINANCIAL PLANNER™.

Both Jill Powers and Steve Hess are CERTIFIED FINANCIAL PLANNERS.™

Every investment product has some sort of investment management cost associated with it – even so-called “no load” mutual funds inside retirement plans. These management fees vary widely and can range from a few basis points (fractions of a percent) to nearly 2 percent per year. This management fee is deducted from your account’s return every year. You don’t see it, but you do pay it by a reduction in return.

When Trilogy Wealth Advisors manages money for a fee based on the asset value, we use low-cost index funds called Exchange Traded Funds or ETFs. These are very low cost index funds that have internal management fees ranging from as low as 0.09% to 0.60%. The average cost is about 0.30%. When we add our fee for managing qualified retirement plan money, the total cost is often very competitive when compared to the rate currently paid inside a typical 401k plan.

We feel that the value of our full financial planning and investment advice is a valuable and worthwhile option – especially when you can get it for a price similar to what you now pay to self-direct your 401k. Why not get professional help with the investment that, next to your home, is probably the largest financial asset you own?

As a part of our wealth planning services, Trilogy Wealth Advisors directs the placement of customer investment assets, however, we do not actually CUSTODY, or hold, those investment dollars. Your assets are invested in one of two places – either at a CLEARING FIRM (Schwab, Bear Stearns, Pershing) or directly with the FUND COMPANY (Templeton, Pacific Life, Putnam, etc.) Each of these entities insures client accounts against employee fraud or theft. In addition, Trilogy Wealth Advisors and Cambridge Investment Research, Inc. carry similar insurance to protect customers against fraud or theft. Additionally, every account is protected by SIPC for up to $500,000 ($100,000 cash) in the event of broker/dealer insolvency. As you know, none of these policies insure your account against market fluctuation or loss.

Every employee of Trilogy Wealth Advisors and Cambridge Investment Research, Inc. who has access to customer funds has been fingerprinted and had a complete FBI background check, per industry regulations. Every time a change in your client data (for example: address, investment objective, occupation) is made, this change should be reported to your financial advisor for documentation. This change will generate a regulatory-required letter stating that the change has been made to your account. This helps protect you in two ways: in the event of unauthorized changes to your client account, you will receive written notice to alert you, and if a key-stroke error or typo has created an input error, you will also have the opportunity to correct your account. If no such changes occur, you will receive a letter every 3 years just to verify that the information on file is still accurate.

For more tips on avoiding investment-related fraud, go to the FINRA Investor Information Center.

Trilogy Wealth Advisors is a fee-based financial services provider. “Fee-based” means that we can charge either fees or commissions for the work we do, based on the needs of each client we serve. You can click on our Client Services Menu for more details.