In our last edition of Capital Conversations, we discussed the history, structure and organization and types of mutual funds. A discussion of the various types of mutual funds was started and the remainder of the conversation about the types of funds follows as well as information on fees, expenses, share classes and the advantages and disadvantages of owning mutual funds.

Fee$ and Expen$e$

There are fees and expenses charged by the fund company for the professional management of the fund that are paid by the owner of the fund. The fees can be for the initial purchase of the fund, often referred to as a front end load or sales charge. There are also fees referred to as back end loads that are charged according to a specific timetable when shares are redeemed. There might be 12b-1 fees, which are paid to compensate for the ongoing services provided to fund shareholders. There can be short-term redemption fees, when a fund owner sells shares before holding the shares for a specific time period (usually within 30, 60 or 90 days of purchase). There is also a management fee, referred to as an Expense Ratio, which is paid annually to the fund manager who organizes the fund, provides the portfolio management or investment advisory services, and has its brand name on the fund. The importance of lower expense ratios is significant. According to the ICI, at year-end 2013, equity funds with expense ratios in the lower quartile held 73% of equity funds’ total net assets, while those with expense ratios in the upper three quartiles held 27%. Many investors prefer index funds to actively managed funds due to their lower expense ratios, and so the use of index funds has increased over the years. Index equity funds with expense ratios in the lowest quartile held 72% of index equity funds at year-end 2013.

As part of REDW Stanley’s due diligence, monitoring and research on all funds used in our clients’ portfolios, fees and expenses for each individual fund are part of our screening criteria because we know that expenses and fees do impact the total performance of any portfolio.

Share ClassesMany mutual funds offer different share classes for a single mutual fund. These different share classes are identified by letters. This alphabet soup associated with each fund can be quite confusing. All of the different

share classes invest in the same assets and have the same investment goals, but each share class has different expenses and, as a result, a different purchase price, referred to as the Net Asset Value (NAV). The following are a number of share classes that may be available for purchase by mutual fund investors:

1. A shares. These shares usually charge a front endload, have a higher expense ratio than other shareclasses, and may also have a 12b-1 fee.

2. B shares. These shares usually charge a back endload, have a higher expense ratio than other shareclasses, and may also have a 12b-1 fee.

3. C shares. These shares usually have a high 12b-1fee, a higher expense ratio than other share classes,and a back end load fee schedule that is discontinuedafter one or two years.

4. I shares. These shares are normally subject to avery high minimum purchase and are known as“institutional” shares. Institutional shares are alsoknown as “no load” shares since there are no frontend or back end loads charged to buy the shares.The expense ratios for I shares are normally lowerthan other share classes.

5. R shares. These shares are normally used inretirement plans like 401(k) plans. There are no frontend loads or back end loads and the expense ratiosare normally lower than other share classes.

6. No load shares. These shares are available without afront end load or a back end load. The expense ratiosare normally lower than other share classes andthere may or may not be a 12b-1 fee.

As a Registered Investment Advisor and as a part of our custodians’ Institutional programs, REDW Stanley is able to buy

funds for our clients’ portfolios using the lowest cost funds available in terms of share class and expense ratios.

DisadvantagesThere are disadvantages to using mutual funds. One

disadvantage is the professional management provided by the mutual fund manager. There is an ongoing debate regarding the ability of professional money managers to pick stocks or bonds better than an individual investor. Professional money management is not infallible and the cost for professional management is charged whether the fund increases or

September 2014

Continued...Copyright 2014 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only. The information provided herein is for informational purposes only and should not be construed as investment, financial, tax, or legal advice.

decreases in value. Capital gains taxes that are generated by the mutual fund when a fund manager sells a security are another disadvantage. Investors who are tax conscious should be mindful of taxes generated when buying a mutual fund. Taxes can be mitigated by holding funds in tax deferred accounts like a 401(k) or an Individual Retirement Account (IRA). It is expensive to create, distribute and manage a mutual fund. Expenses such as the electricity bill, computer and software costs as well as research costs are necessary and are passed onto the mutual fund owner. Since fees vary from fund to fund, paying attention to fees is a critical component of investing in mutual funds. Mutual funds may or may not pay income to the mutual fund owner and for investors who need income, that lack of income predictability can be a disadvantage. Customization of a mutual fund by an individual investor is not an option. The fund is managed according to the terms outlined in the prospectus and the individual investor has no input as to how the fund is managed. The lack of customization is a critical reason why an individual investor must determine that the fund that he or she wants to buy meets his or her investment goals and objectives.

AdvantagesThere are advantages to investing with mutual funds. One advantage is that a fund holds many securities providing diversification that is not always possible when owning individual stocks or bonds. Liquidity, the ability to sell or buy funds on a daily basis at net asset value (NAV), is available with mutual funds. Investors can buy or sell shares in a very short period of time, in some cases in as little as 1 day because of the liquidity available with mutual funds. The US government requires that every mutual fund company must provide a prospectus describing the details of each specific fund to shareholders. This disclosure document provides information about the management of a specific mutual fund that is not available with individual stocks, bonds or other types of investments. Mutual funds also provide the ability for individual investors to participate in investments that may only be available to larger or institutional investors. Some foreign markets (buying a stock or bond in India or Turkey) may not be accessible to individual investors but it is possible to buy a mutual fund that invests in companies located in India or Turkey.

The investment professionals of REDW Stanley have determined that mutual funds provide the best means available for many of our clients to own widely diversified portfolios with reasonable costs in order to achieve their investing goals and objectives. Our Investment Committee screens funds on the basis of low costs and other portfolio statistical data so that we can select the funds that we believe provide the best opportunity for our clients to meet their financial goals. Ask any of our professionals, we’d be happy to discuss our investing processes with you.

By Laura Hall, CIMA®, AIF® Portfolio Manager/Chief Trading and Operations Officer

1. Firm news: The 2014 REDW Tribal Finance & Leadership Conference will be taking place at the Wild Horse Pass Hotel & Casino on November 5-6. For more information or to register to attend, visit redw.com/tribalconference

2. Economic news: The worst day for the S&P 500 during calendar year 2013 was a 2.5% total return loss on June 20, 2013. In the year following the June 20, 2013 tumble, the stock index gained 26.2%. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index with each stock’s weight in the index proportionate to its market value (BTN Research).

3. Client news: One of our clients owns a 1937 Studebaker President, which will be used in the WGN series which debuted on July 27th. The series, Manhattan, is about the mission to build the world’s first atomic bomb in Los Alamos, New Mexico.

Did You Know?

REDW Stanley is a highly respected investment advisory firm with a primary focus on serving clients in the Southwest. As fee-only advisors, we do not receive commissions or sell investment products, so you can be confident that our recommendations and advice are based solely on your needs and with only your success in mind. In Arizona, the firm operates under REDW Stanley Wealth Advisors, LLC, an SEC registered affiliate of REDWLLC. In New Mexico, it operates under REDW Stanley Financial Advisors, an SEC registered firm subsidiary of REDWLLC.

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