Sales & Distribution

Mutual Fund Direct Forum

On November 30, 2005, National Financial (NF) hosted the Mutual Fund Direct Forum in Boston. The core themes of the event were to assist NF's Broker/Dealer clearing clients in migrating direct-held mutual fund assets to NF's brokerage platform, continued regulatory and compliance support, and shared best practices with our clients and Fidelity's FundsNetwork mutual fund company partners. Since then, NF has remained focused on pursuing these goals. We are pleased with the results of the program to-date and are confident that momentum will continue to build in 2006 and beyond. Below is a brief summary of our efforts in working with our clients and Fidelity's FundsNetwork partners in the areas of mutual fund asset consolidation, regulatory response, product enhancements, and broadening program participation. If you would like to learn more about any of the topics below, please talk with your FundsNetwork Relationship Manager.

NF's top priorities have been to assist clients' re-direct new business from funds direct to brokerage. Over the past few months, eight clients have realigned their operational flows, trained their representatives, and implemented new policies and procedures to direct all new funds business to brokerage. Additionally, we are encouraged by a recent trend of broker-dealers in the process converting to NF asking for assistance to re-direct their funds direct business as part of their new brokerage solution. Directing new funds to brokerage has proven to be an invaluable learning experience for the home office and representatives as a first key milestone towards consolidating all of their funds business onto the brokerage platform over time and we expect this trend to continue.

NF has created and enhanced our systems functionality to better meet our clients' and FundsNetwork partners' needs. We are building upon our current breakpoint processing capabilities (rights of accumulation and reinstatement) with April delivery of enhancements to our letter of intent and share class maximum functions. In Q4 2006, NF will release enhancements to our load waiver functionality which will include the ability to automatically waive certain transaction types (such as SWPs.) We are also assisting our clients in complying with SEC rule 22c-2 with a mandatory compliance date of October 16, 2006 by developing a communications, reporting, account restriction link between our clients and the fund companies.

Our funds direct program is centered on helping clients create operational efficiencies, improve compliance oversight, strengthen client relationships, and build clearing scale by transitioning funds held direct to brokerage. However, many of our clients are already doing all the business they can on brokerage. To assist clients achieve the same objectives for assets that likely will remain away, we are developing a robust account aggregation solution and plan to announce the details of our offering in the coming months.

NF is actively working with a number of clients to convert their existing positions to brokerage. We support the process through data collection and analysis, customer communications, new account setup, and position transfer. This work has transitioned from pilot to full production readiness and fully leverages our existing planning process, operational infrastructure, systems resources, and experienced Implementation team.

Finally, the program continues to be a high priority for clients. Presentations were delivered at National Financial's February Advisor Council meeting and at our Service Steering Committee conference calls. From a fund partner perspective, we are actively engaged in individual and group discussions centered on realizing operational efficiencies, streamlining implementation conversions, and other improvements. Over the past few months, we talked with the leading transfer agents to gain their perspective in advance of setting the first Implementations fund family meeting.

2005 Year In Review

The FundsNetwork program continued to flourish in 2005. Assets in the program grew a tremendous 37.5% in 2005 and net flows were up an astounding 110% over 2004.

FundsNetwork also expanded its product offering during the year, adding more than 1,500 new funds (2,900+ CUSIPs) and 30 new fund families. The program now offers 5,900 funds, 13,400 CUSIPs and 425 fund families as of 12/31/05.

Additionally, the FundsNetwork team supported two new business ventures in 2005. These included the launching of two new blended portfolios in the Fidelity Charitable Gift Fund^SM and the introduction of Strategic Advisers' first Small Cap Fund of Funds for Fidelity Portfolio Advisory Service^®.

The program also had conversions of several businesses this past year and the FundsNetwork team successfully negotiated over 20 new relationships to enable these important conversions.

2006 Off to a Strong Start

2006 has started with a bang! In Q1, net flows into FundsNetwork funds were up 50% over the first quarter of 2005 and they have remained strong through Q2. Here is a look at 2006's top selling No Transaction Fee (NTF) funds and families through June 30th:

As evidenced by our early results, the outlook for FundsNetwork sales for 2006 is strong. We are planning events throughout the year to further promote the program. In June, we hosted two FPI Investor Forums in Laguna Beach, CA and in Chicago. Similar events are also being planned for our other distribution channels.

*Funds available without a transaction fee to the customer.

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