JUDITH W. LAU, Principal of Lau Associates LLC, is a Certified Financial Planner with more than 20 years of experience in personal financial planning. She founded Lau Associates as a financial planning firm in 1985 and today serves as President of the multi-family office firm of financial planning, investment and tax professionals. More

TWST: Would you please begin with an overview of Lau Associates?

Ms. Lau: Lau Associates is a multi-family office serving individuals and families of wealth with an emphasis on inherited wealth. We’ve been in business since 1985. We actually started out as a comprehensive, fee-only financial planning firm. In the last five to six years, we have migrated into a family office with multiple services and different disciplines that we think are helpful in working with clients on their entire financial picture.

TWST: What are the financial services that you can offer to clients?

Ms. Lau: First let’s talk about the standard family office which has emerged over the years. Primarily, family offices were started by wealthy families who wanted to have someone prepare tax returns, pay the bills and report on cash flows. Many family offices are headed by an accountant and their focus is on taxes and cash flow for the families they serve. We came into the family office world from a financial planning perspective. We work with clients’ cash flow, taxes, investments, estate planning with their attorneys, and bill paying. We review not only their holdings and their insurance, but we help them with just about every aspect of their financial world.

TWST: Who are your typical clients? Are they all individuals?

Ms. Lau: The common thread through our client base is people with large asset bases. We have individuals and we have members of extended families. Many times, our clients come to us and end up bringing other family members into our client fold. One of the things that we’ve really enjoyed is working with families on family dynamics and helping them work out situations that wealth brings.

TWST: In this approach to wealth management, you need a lot of expertise. Would you tell us about your investment committee and what they specialize in?

Ms. Lau: Our investment committee is comprised of six members of the firm. On that committee, we have CFPs, CPAs, a CFA and an MBA. We find it very helpful as we look at the issues that are facing our clients, to look not only at the US economic issues, but the world economic issues as well. It is important to think about what might be coming down the road for clients and their asset bases.

TWST: Do you offer your clients customized portfolio solutions?

Ms. Lau: Yes, every one of our clients has an individually designed portfolio. We have found that when you’re dealing with people with large asset bases, you need to design the portfolio around their comfort level and individual needs. We look at ourselves as wealth managers. Part of our job is to protect the asset bases of our clients, and part of our job is to grow those asset bases at reasonable rates.

TWST: What is your investment philosophy and the process you use?

Mr. Lee: The overall investment process that we use is to establish diversified portfolios with periodic strategic diversification. We use a fairly broad range of investment vehicles that are combined to meet the needs of individual clients. Those vehicles may include equities, institutional class mutual funds, private investments, as well as outside managers, where appropriate. In terms of core philosophy, we would probably be described as growth at a reasonable price (GARP), although we often use outside managers in both the growth and the value styles of investment management.

TWST: Do you have a tax management philosophy for taxable clients and those that are tax-exempt?

Mr. Lee: We do, and I think that’s one area where we distinguish ourselves from our competition. Many of our clients come to us with existing portfolios of low basis stocks that have been in their family for generations. When you move these assets to outside managers, very often they will aggressively trim down some of the positions so that these accounts can better fit model portfolios. At Lau, we’ve been able to develop methodologies to monitor client portfolios so that we can be sure the gaps are covered in terms of sector and market cap exposure. We monitor the ongoing performance of their existing holdings as well.

TWST: What about the structure of the portfolio? Would you take us through the process from asset allocation onward?

Mr. Lee: We start by talking to the clients about their risk tolerance, their comfort level and their own expectations. All of our clients have written investment policy statements, which are a shared understanding of their goals and objectives. Once we understand their goals and objectives, we talk about the stocks in their portfolio that they are personally attached to. We call these stocks sacred cows. These positions are tabled and kept off limits for future trading. The next step is to look at the portfolio and see where there are obvious gaps. Sometimes it may be in international equities, sometimes it may be in fixed income, or there may be sector-specific gaps in the portfolio that are identified after analysis so that we can get those bases covered. We will then develop a personalized asset allocation for the client and find the right mix of vehicles to make that portfolio diversified.

TWST: What is your process for fixed income and for equities? What type of holdings would you choose for your clients?

Mr. Lee: With fixed income, we generally use outside managers. We have been moving a bit more into the taxable area for fixed income and we achieved some excellent results last year. Most of our client portfolios are predominantly blue chip. We’ve done very well with small cap holdings in the past, although we’ve been trimming down small cap exposure overall since last spring. The other area that we’ve been adding to is international equities. In terms of overall process on the individual stock side, we look at three different tiers of analysis. The first are long-term trends in terms of those areas that we view as having greater than average potential over the course of the next five to 10 years. The second area is accounting screens based primarily on valuation and earnings growth. The third factor is based on the relative timing of the stock price movement. So we look at long-term trends, economic and accounting analysis, and use technical analysis to find the right entry point into the stocks that have passed the other two screens.

TWST: Are your clients asking about ETFs or alternative investments these days?

Mr. Lee: We’ve had a lot of discussions internally on ETFs; they’ve become quite a hot topic within the financial planning community. ETFs offer tax efficiency and a simple way of getting diversified exposure to certain segments of the market; they’re also very cost-effective. We reviewed all of our outside managers and benchmarked them to their respective exchange-traded fund and found that we were adding value in almost every area with a couple of exceptions. As such, it made sense for us to keep doing what we have been doing all along, rather than move toward using exchange-traded funds.

TWST: What about diversification in the portfolio?

Mr. Lee: Diversification has been an important means of generating returns over the course of the last five years, particularly with the market being relatively flat since 2000. So you’ll find that diversified portfolios with exposure in fixed income, international equities and small cap equities have generally done better than large cap portfolios. We managed to get through the bear market of 2000-2002 relatively unscathed, and that certainly helped our clients sleep at night. In terms of diversification, we try to develop portfolios that have exposure to fixed income, core stocks, small cap stocks, international stocks and alternative (or non-correlating) investments. This last segment for us has been an area that we have been moving toward over the course of the last three or four years, and it is something that has been, by and large, a good thing for our clients.

TWST: How do you achieve portfolio cash flow for your older clients that may need it more?

Ms. Lau: For probably the last 20 years, we have been using a model where we take the total return of the portfolio and calculate a drawdown on an annual basis for the client. That has worked well, and we have found that our clients are very comfortable with that approach. It allows us to manage the portfolios in a way that makes sense from an investment management perspective without trying to tilt the portfolios more toward the income side. In the last five to seven years, this has become the model that many trust companies and banks are using when managing trusts. There has been legislation in many states that allows trust companies to use a total return concept in determining the distributions to the income beneficiaries of trusts.

TWST: Do you like to invest in companies and securities in your portfolios that provide dividends?

Ms. Lau: Yes. Many of our clients have grown up with stocks in their portfolios over the years. They are used to dividends; it is a piece of stability in the overall return of the equity that they like very much. If we have two stocks and we like them equally well, we’re more inclined to take the one that’s generating dividends than the one that is not, all things being equal. It’s relatively rare that you find those situations, but we try to have as much of a tilt toward dividend-yielding stocks as we can.

TWST: How often do you look at the portfolios and consider rebalancing?

Mr. Lee: We meet quarterly to discuss overall allocation and strategy, and ongoing management is something that occurs on a daily basis for individual positions.

Ms. Lau: We tend to reposition areas in the portfolio on an as-needed basis. That works well for us and has worked well for the clients.

TWST: Are the clients able to assess recent and long-term performance? How do you give them a track record? Do they have different benchmarks?

Mr. Weaver: We provide quarterly performance reports that shows not only the performance of individual accounts, but also all the accounts of the particular client that are managed on an aggregated basis. We typically benchmark against the S&P 500 or the Lehman Aggregate Bond Index.

TWST: Do you provide aggregate performance for multiple accounts?

Mr. Weaver: Yes, we do. It really simplifies things.

Ms. Lau: We think part of our job is to streamline the reporting of client holdings so that they get a good overview of their financial world. This enables them to make much better decisions concerning the global picture, and in many cases on the more specific side as well.

TWST: How do you attempt to control risk in the portfolio or at the security level?

Mr. Lee: Risk management is a function of several aspects. One is asset allocation and the second is the position size of individual securities. We work with clients to not only grow their wealth, but to sustain their wealth and to reduce the risk of loss. We have found that diversification has been able to accomplish this for our clients.

Ms. Lau: This issue becomes a conversation point on some of the highly concentrated low basis positions that many of our clients bring with them.

Mr. Lee: There is sometimes a compromise between tax management and risk management, particularly with these concentrated positions. One of the solutions that has worked for us in the past has been to write covered calls on concentrated holdings to provide additional income and to provide discipline for trimming holdings at a good exit point.

TWST: What differentiates your approach to wealth management compared with other firms? What are you bringing to the table that others might not?

Ms. Lau: The first distinguishing factor is that we have long-term relationships with our clients; many of our clients have been with us for 20 years, some of our first clients are still with us. Having that long-term relationship allows us to get to know the family members and to help them plan not only for their investments, but also for the transfer of wealth to their children. We are able to take into account the individual differences that family members have. We spend time facilitating family meetings because there is a lot of baggage that comes with wealth, particularly in working together as a family unit in business and investment propositions. So with our experience over the years, we work with the families to help them come up with strategies that promote family harmony, as well as grow and protect their wealth.

TWST: That’s the intergenerational process.

Ms. Lau: Yes. That has been a huge benefit to the families we’re working with, because now the parents feel very comfortable that they put a game plan in place that makes sense for the kids. The kids are comfortable because they’ve been part of the process and have been able to give input. It allows everyone to go through that process and have an outcome that meets many needs, and it is very helpful in reducing friction in the family.

TWST: If a member of the family calls up, do they get a customer relations person or can they talk directly to you or your principals?

Ms. Lau: We have close working relationships with our clients. We work as a team with the clients and they are comfortable calling any one of us to talk about whatever they have on their mind. We encourage these in-depth relationships because in many cases, life drives money and you have to know someone very well in order to give them the kind of advice they need.

TWST: How are you compensated? Would you tell us about your fee structure?

Ms. Lau: We have an annual contract with our clients. We are paid a flat fee for a 12-month period of time. Every 12 months, our clients renew their contract with us. Our fees are based on the time that we need for that client and the complexity of their situation.

TWST: How much of the work is done by outside advisers to whom you outsource work? Is that mostly in the fixed income area?

Ms. Lau: It depends on the client. We have a number of different options for clients on the investment side. We can do a lot of it in-house or we can outsource it. It really depends on what the client is looking for, and we try to be as flexible as possible in designing their portfolios. We use outside attorneys in drafting the estate planning documents. We think that that is a good use of outside talent and a real addition to our team. We have great relationships with insurance people if we happen to need help in that particular arena. So we try to leverage our time by doing what we think we are good at and outsourcing things that do not fall within our expertise.

TWST: How would you explain the advantages of coming to a firm like yours to a private individual? What advice would you give to him explaining how your comprehensive solution is better than going to a mutual fund manager?

Ms. Lau: We are planners. We help people manage their money in the overall scope of their total financial picture. We help the client understand the different facets of how they look at the world, how they look at their money and what they want to accomplish with their money. We think this type of overview is helpful, and our clients have been very happy with this approach.

TWST: Is there anything that you would like to add?

Ms. Lau: We are very fortunate in that we’re in a unique position. By working with our clients in the way we do, we are able to help them achieve a higher quality of life. It’s fun to come to work every day.

TWST: Thank you. (PS) Note: Opinions and recommendations are as of 2/15/07.

JUDITH W. LAU JIM LEE JAKE WEAVER Lau Associates LLC 300 Bellevue Parkway Suite 200 Wilmington, DE 19809 (302) 792-5955