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January 23, 2009

Dear Clients and Friends,

Investment Commentary

The past year has been the worst for financial assets in more than three decades. The traditional tool of asset allocation provided little downside protection as no asset classes, with the exception of U.S. Treasuries, were spared from the recent financial meltdown. There is little doubt that 2009 will be tumultuous for the markets as the world governments continue to aid in the healing process of the credit markets, and consequently, the global economy.

Deflation, defined as a reduction in a representative basket of goods and services, places the heaviest fiscal burden on an economy. It stalls spending and investment as people hold off consumption based on the view that their money will be able to afford more goods tomorrow than today. It also reduces asset prices, erodes equity, and makes debt more expensive. The winning asset class in this scenario is long-term U.S. Treasuries (UST). Currently, UST’s are priced (returning low yields) as if deflation is highly probable. Our belief is that the U.S. government will throw everything possible at this problem to mitigate a long-term debt deflationary cycle similar to the one experienced by Japan from the late 80s to now. We believe the eventual outcome of government stimulus will lead to inflation and a return to higher interest rates.

Core Equities - We believe you should continue to hold equities for the long-term and without regard to expectations of how the economy will perform in the short-term. As obvious as things may seem, the reality is that no one can be certain about how the market will perform. If you ask Warren Buffet how the market will perform in the near term, his standard answer is that he has no idea. The cover of a Businessweek issuein 1979 issue was titled, “The Death of Equities,” just a few years prior to the greatest bull market in history. What we do know, however, is that the market will follow long-term economic progress, and we should maintain exposure tied to this progress.

While some of our equity managers did not perform well, especially those that focus on financial sector stocks, we believe that individual stock selection will provide better performance than simply maintaining index exposure. Consequently, we will continue to favor active managers. In addition, we will continue to maintain a broad-based global portfolio to benefit from long-term global demand growth. With regards to market cap, we will continue to carry lower exposure to small cap stocks in favor of large caps, since the price-to-earnings (PE) ratio of large caps is more attractive on a historical basis than the current small cap PE ratio.

Core Fixed Income: Fixed income investments often provide stability to portfolios during periods of stock market declines. Unfortunately, the only fixed income investment that provided an effective safe haven during this period of market declines and credit deterioration was U.S. Treasuries (UST).

As a result of the stampede into UST’s, prices across all other sectors of the bond market, including municipal, high-yield, TIPs, emerging market, and investment grade corporate debt, are much more attractive relative to UST’s.

Despite the fund’s disappointing performance in 2008, we have confidence in the managers of the Loomis Sayles Bond Fund. They are considered among the very best in performing bottom-up credit analysis and will be maintained as client’s multi-sector bond option. For clients in high tax brackets, we will substitute Vanguard High-Yield Tax-Exempt Bond Fund for the multi-sector bond exposure in non-retirement accounts.

Satellite Strategies - The satellite part of portfolios will be used to incorporate investments we believe will perform well in a reflationary environment, while still providing reasonable downside protection should it take time for this to play out. Below is a description of the new funds we will be adding in various proportions to your portfolios, along with the reason for each addition.

Profunds Rising Rate Opportunity Fund – This fund’s goal is to return 125% of the inverse of the 30-year Treasury bond. In a reflationary environment, interest rates rise as investors’ desire to earn an inflation-adjusted return on their money. When inflation takes hold, rates can rise rapidly. Until this happens, rates could stagnate or even go lower as deflation appears the more likely short-term scenario.

Calamos Convertible Fund I – This fund invests in convertible bonds (bonds which can be converted into stock at a specified price). Based on option modeling, convertibles are trading at good values from a historical standpoint. This fund will benefit from an economic turnaround and reflationary environment with less downside risk (as a result of the bond maturity) than a pure equity play. Calamos was a pioneer in convertible investing. This fund just recently reopened to new investors.

PIMCO Floating Rate I – This fund invests in bonds that float with interest rates rather than bonds with fixed rates. These bonds are typically lower credit quality and are based on the London Interbank Offered Rate, commonly referred to as LIBOR. Many small to medium size businesses obtain their financing from banks that peg the interest rate to the LIBOR. The fund will perform well in a recovery and should provide a hedge against rising interest rates. The downside of a continued slowdown in the economy and rising default rates are buffered by the 7% yield currently being paid by the fund.

The addition of these funds in the satellite part of the portfolio will require us to sell some of your existing positions. The PIMCO All Asset Fund, which is a fund of funds that provides exposure to non-correlated asset classes, will be replaced. Instead of the All Asset Fund setting the allocation to this space, we will incorporate the strategies discussed above. In addition, we will trim the allocation to the Ivy Asset Strategy Fund, which also invests in multiple asset classes.

Implementing Recommended Portfolio Changes

We are in a transitional stage with regards to implementing new client service contracts that include the preparation of customized Investment Policy Statements (IPS). In order to expedite the communication of investment recommendations and the execution of required trades, we may use email, phone, or short memos delivered through regular mail in lieu of the “Open Planning Items” section of quarterly reports.

In addition, recommendations will take the form of a desired target allocation in percentage terms, allowing our trading software to calculate the actual dollar trade using the most up-to-date account values. However, any recommended cash holdings will be spelled out in dollars. As always, please contact us if you wish to discuss any recommendation in greater detail.

Net Worth Statements

We are in the process of preparing personal net worth statements as of December 31, 2008. These statements provide important information about your current financial position, often used as a starting point for reviews of casualty insurance, debt management, asset ownership, and estate planning issues.

Please respond to our requests for information in a timely manner. We only need rough estimates of requested values.

Brokerage Form 1099 Statements

The reporting deadline for mailing out Form 1099 statements has been changed from January 31 to February 15, 2009. While we encourage all clients to assemble the required information to prepare their returns as soon as possible, you may want to wait until February 28, 2009 to allow for some Form 1099 statement revisions.

Annual Delivery of Privacy Statement

We are committed to maintaining the confidentiality, integrity, and security of the personal information entrusted to us. The SEC requires delivery of the enclosed copy of our Privacy Statement on an annual basis.

Our Website

We have updated our website with recent group and individual photographs of our staff. In addition, you will find links to video presentations we made through a financial education program sponsored by Delaware’s Department of Justice. To visit our site, go to SDFinancialAdvisors.com.

Misplaced Trust

In addition to the most challenging financial and economic environment of our lifetime, we are reminded of the pain and suffering of the innocent and not so innocent victims of financial service criminals such as Bernard Madoff. His confidence scheme relied on an air of investor exclusivity and the seductive promise of consistently good returns with little downside risk.

Fraudulent acts by financial advisors, consultants, or brokers almost surely have a negative effect on how all advisors are viewed. This justified skepticism may keep individuals away from seeking the services of advisors at a time when the need for impartial and trustworthy advice could not be greater.

Our business has been built on trust, the quality of our judgment, and superior service. There are stark differences between how we operate and the Bernie Madoffs of the world.

Madoff held client assets with his own in-house broker dealer. Schiavi + Dattani’s client assets are held at an independent custodian, Fidelity Investments.

Madoff was compensated solely by commissions. Schiavi + Dattani is compensated solely by fees.

Madoff solicited new clients by paying significant finder’s fees to smooth talking agents who preyed on unsuspecting victims. Schiavi + Dattani has never paid a referral fee or shared any compensation with any agent, accountant, lawyer, or anyone else.

We can assure you that our commitment to enhancing your financial security is resolute and our commitment to providing impartial financial advice is unwavering.

In these difficult times, you may come across friends or colleagues in obvious need of help. You can refer them to us with full confidence that they, like you, will be treated with a level of service and impartiality unmatched by any other financial advisory firm, large or small.

Best regards,

Vincent A. Schiavi, CFP®, CPA/PFS


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