What Are Exchange-traded Funds and How Do They Work? An exchange-traded fund (ETF) is a basket of securities created to track as closely as possible a particular market index, such as the Standard & Poor’s 500 Index or the Dow Jones Industrial Average. They’re similar to mutual funds in that they represent investments in the same types of securities, but they generally have lower fees and can be bought and sold with more pricing immediacy than mutual funds. They also have some clear tax advantages. Since their launch in the early 1990s on the American Stock Exchange, there are now hundreds of ETFs available for investors to buy. As the market has struggled its way back since 2000, investors have embraced ETFs as a more efficient alternative to a mutual fund invested in the same securities. A financial planner can tell you whether ETFs are right for your portfolio, but here are some details to know beforehand: How are ETFs created? An ETF is created by large institutional investors who buy stocks aligning with the shares in a particular index, and then they exchange those shares – in baskets as large as 50,000 shares – for shares in the ETF. The redemption process works the same way in reverse -- the institutional investors exchange shares of the ETF for baskets of the underlying stocks. Are all ETFs based on indexes? Yes. Indexes, like the S&P 500 or the Hang Seng Index (the primary stock index of the Hong Kong Stock Exchange), are a listing of stocks reflecting the activity of a particular investment sector on a stock exchange. One of the first popular ETFs had an unusual nickname – Spiders – a play on its actual name, SPDR, short for Standard and Poor’s Depositary Receipts. Newer ETFs track less well-known indexes, even indexes of bonds, and some ETFs are tracking very dynamic indexes that almost act like actively managed funds. How are ETFs traded? Unlike mutual funds, which have their prices set at the end of the trading day, ETFs are priced and traded every moment of the trading day. That’s generally more meaningful to institutional investors who buy and sell constantly than long-term investors who buy and hold. Furthermore, unlike mutual funds, ETFs can be bought on margin or sold short. Why might ETFs be more tax-efficient? Generally, ETFs generate fewer capital gains due to the unique creation and redemption process as well as the usually lower turnover of securities that comprise their underlying portfolios. Financial planners note that investors can better control the timing of the tax treatment of ETFs relative to mutual funds. Most importantly -- by holding an ETF for at least one year and a day, capital gains will be treated as long-term capital gains, which are currently taxed at a federal rate of 15 percent (5 percent for low tax bracket investors). Are there other advantages? Unlike traditional mutual funds, which must disclose their holdings quarterly, ETF holdings are fully transparent, and investors know what holdings are in the ETF at any given time. Each ETF also has a NAV tracking symbol for even more precise analysis. This helps keep ETFs trading within pennies of their intraday NAV.

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What about fees? Shares of index-based ETFs may have even lower annual expenses than similar index mutual funds, which, in turn, tend to be lower than those of actively managed mutual funds. ETFs must, however, be bought and sold through brokers, and those trades do involve transaction costs. ETFs may prove to be more expensive than mutual funds to investors who add money each month to their portfolio. What’s the downside? Unlike regular mutual funds, ETFs do not necessarily trade at the net asset values of their underlying holdings. Instead, the market price of an ETF is determined by supply and demand for the ETF shares alone. Usually, the ETF value closely mirrors the value of the underlying shares, but there’s always a chance for ETFs to trade at prices above or below the value of their underlying portfolios. Also, since so many new ETFs are hitting the market, investors should be aware of the maturity of the particular ETF they are considering. -30-

December 2006 — This column is produced by the Financial Planning Association® (FPA®), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. Please credit FPA if you use all or part of this column. To connect with a member of FPA for your story, call FPA’s Public Relations Department at 800.322.4237, ext. 7172. Based in Denver, Colo., FPA has over 100 chapters throughout the country representing more than 28,000 members involved in all facets of providing financial planning services. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. For more information, visit www.FPAnet.org. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

Yours, Mine and Ours: Stepfamily Finances Require Plenty of Planning When two people with kids decide to get married, the emotional side of the equation is already complicated. How will the kids get along under the same roof? How will parents handle disciplinary issues, particularly when the other spouse’s kids are the target? How will exspouses be involved in the new blended family? And then, there’s the money. How will you and your spouse pay for your kids’ college tuition? What happens if you or your spouse dies suddenly? Any couple needs to consider emotional and money issues before they say “I do,” but for blended families, getting a financial plan in place before the wedding is especially important. Consider bringing in a financial planner to discuss the following: Getting credit histories out in the open. Any marriage, not just remarriage, requires both spouses to admit to their debts and assets no matter whether they plan to merge those assets or keep them separate. The couple should sit down to discuss their financial affairs well before the wedding. Based on the couples’ respective credit histories, they may have to consider how to divide up ownership of planned joint properties and accounts to obtain the best lending rates possible. Dealing with child support and alimony. Many remarried couples with children either pay or are paid child support for a designated period per their prior divorce agreements. Couples should discuss how this will impact the blended family in terms of fairness. Getting a prenup. As prenuptial agreements become more common between people who have never married before, remarrying couples might need them even more. In most cases, one or both members of a remarrying couple have assets they’re bringing into the marriage that they want to protect if the marriage ends – a home, cash, investments. And if there are children from a previous marriage involved, safeguarding assets necessary to their education or their financial support needs to be spelled out. Working immediately on an estate plan. There are many good reasons to develop an estate plan at the time you and your future spouse are developing a prenuptial agreement – one agreement actually informs the other. Estate planning is necessary because many remarrying couples may still have younger children to provide for, and if one spouse dies, then custody issues might arise between the ex and the current spouse if arrangements are not spelled out beforehand. An estate plan is particularly necessary if remarrying spouses vary considerably in age – if the younger spouse is the surviving spouse, they may end up with a single parent providing for an entire blended family. Also, when adult children from previous marriages are involved, the couple needs to focus closely on beneficiary issues for retirement accounts and insurance policies. Paying kids’ expenses. People who have been divorced may have particular worries about financial dependency, and those need to be aired well in advance of marriage. These concerns and biases come into sharp focus when a child’s everyday expenses or big outlays like healthcare, or tuition need to be paid. If one remarried spouse makes less than another, the idea of “you pay for your kid, I’ll pay for mine” can become troublesome.

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The remarrying couple might want to consider bringing their ex-spouses into the picture and possibly drawing up some formal agreement with them if they’ve not already addressed such expenses in their divorce and child support settlements. Paying household expenses. Couples in remarriage need to address how bills will be paid, how debts before the marriage will be paid off, how investments must be made and how spending must be controlled. Putting such issues on the table early are key to any marriage’s success. Keeping an eye on the IRS. Remarriage doesn’t eliminate tax problems that involve former spouses. Individuals who filed tax returns with former spouses take responsibility for the accuracy of those returns, and problems like under-reported income and unjustified deductions may haunt the new marriage later. Some financial planners and tax preparers may advise clients who bring substantial assets into a marriage, or suspicion that a former spouse could cause tax trouble, to use the “married, filing separately” designation as a possible protection. It is critical to obtain professional advice if there are potential “injured spouse” or “innocent spouse” claims. -30-

December 2006 — This column is produced by the Financial Planning Association® (FPA®), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. Please credit FPA if you use all or part of this column. To connect with a member of FPA for your story, call FPA’s Public Relations Department at 800.322.4237, ext. 7172. Based in Denver, Colo., FPA has over 100 chapters throughout the country representing more than 28,000 members involved in all facets of providing financial planning services. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. For more information, visit www.FPAnet.org. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.

Tax Tips to Consider as 2006 Winds Down About the last thing anyone wants to do at holiday time is think about taxes, but it makes sense to check your yearend tax situation with a tax professional or a financial planner to make sure you’ve done everything in December to be ready for April. Here’s a list of tax tips that might make a difference on your 2006 return: Face the AMT, don’t fear it. Even though Congress approved a one-year band-aid intended to prevent 15 million new taxpayers from getting hit by the dreaded alternative minimum tax (AMT), you need to check to see if you’re on the hit list. Essentially, if you qualify for the AMT, it blocks (or adds back into AMT taxable income) deductions of state and local taxes, home equity loan interest (unless you used the money solely for home improvements), personal exemptions or other potential deductions. Any of the following factors besides your income could trigger the AMT based on their size and amount: • State and local taxes paid • Deductible medical expenses • Capital gains • Miscellaneous itemized deductions • The bargain element of stock options Get some advice. If you determine that you have crossed the threshold for the AMT, you may want to defer taking some of those targeted deductions. Defer that income, raise those deductions. Again, taking factors like the AMT into consideration if you qualify, make sure you’ve reviewed all deductions you’re eligible to take while looking for opportunities to defer income into 2007 to save money on taxes. Likewise, see if you can push your annual bonus into next year to cut your 2006 tax bill. Do a last-minute energy review. The Energy Policy Act of 2005 may make you eligible for up to $500 in tax credits if you had such items as an energy-qualified furnace, windows, and solar heating equipment placed in service after Dec. 31, 2005 and before Jan. 1, 2008. Also, if you bought a hybrid car or truck in 2006, see if your purchase qualifies for a tax break of as much as $2,600 for the most fuel-efficient models. Get money into those retirement accounts. If you haven’t elected to participate in your company’s 401(k) plan or don’t have a traditional or Roth IRA, make this the year you change all that. You have until April 15 to open an IRA and make a deposit, and make a resolution to put the maximum into your company’s retirement savings plans. You’re not only saving money on taxes, you’re planning for your future. Write those checks. See if you would benefit by paying next year’s quarterly state and federal tax early and see if you can squeeze in your January mortgage payment before Dec. 31. That means more deductions in 2006. Sell some losers. Do a portfolio and tax review to see if it makes sense to peddle some money-losing investments in taxable accounts to offset capital gains for the year. While capital losses are put together with capital gains, they can be deductible against up to $3,000 in income.

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Give to charity. Both cash and property donations can be deducted for the current year, but be circumspect about getting receipts for items exceeding $250 in value or higher. If you're 70½ or older, you now can make tax-free distributions of up to $100,000 a year from your IRA directly to a charity both this year and next – this can be particularly effective for those whose charitable deductions already exceed income limitations. Give to the kids. Gifts of up to $12,000 per child don’t need to be reported. Also check whether it makes sense to deposit that gift in a 529 College Savings Plan designated for that child with your children or grandchildren as beneficiary. Check your sales tax payments. If you paid a significant amount of sales tax from the purchase of a car or boat during 2006, start totaling up all your sales tax receipts for the year. Unless Congress fails to act by the end of the year, you might have the option of choosing between deducting your state income taxes or state sales taxes for the maximum benefit to your tax situation. For more information on being a “tax survivor,” read Timeless Tax Planning in a Changing Tax World on the Financial Planning Association’s Web site (www.fpanet.org/public/tools/brochures.cfm). -30-

December 2006 — This column is produced by the Financial Planning Association® (FPA®), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. Please credit FPA if you use all or part of this column. To connect with a member of FPA for your story, call FPA’s Public Relations Department at 800.322.4237, ext. 7172. Based in Denver, Colo., FPA has over 100 chapters throughout the country representing more than 28,000 members involved in all facets of providing financial planning services. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. For more information, visit www.FPAnet.org. The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.