John Olmstead and Judy Lau merged firms because their practices were different yet complementary.

If financial advisors have assumed anything in the last three years about growing advisory practices, it's that consolidation might be a necessary evil to create economies of scale to gain more operating leverage to enhance a firm's competitive position.

In contrast, the notion that two separate independent firms might enter into a merger agreement because their two leading principals have disparate, but highly complementary, skill sets was relegated to the backseat. But that's exactly what Judy Lau of Wilmington, Del., and John Olmstead of New York City did when they decided to merge practices earlier this year to form Lau Olmstead LLC.

Throughout most of their careers, Lau and Olmstead moved in very distant circles within the larger financial planning/wealth management universe, circles that rarely touched each other. Lau was a skilled but more traditional financial planner whose practice, like those of many other advisors, gradually gravitated upstream toward the wealth management arena in the 1990s.

A former teacher, Lau switched careers to financial planning in 1985. "I had an experience with a financial advisor that was not comfortable, and I wanted to do it right," she recalls. "Two or three years later I started to get inherited-wealth clients, and over time they started referring more business." Today, her client list includes some of America's wealthiest families.

A one-time civil rights litigation attorney in the South, Olmstead also earned a master of laws (LLM) degree in taxation, worked in Citicorp's private banking arm, and then, in the mid-1980s, became managing director of a very large family office. "I found I wanted to deal with more than one family's affairs," he says.

In 1991, he formed his own firm, Olmstead & Co., and used his expertise with hedge funds and other alternative investments to work with affluent families on a project basis. "I acted as a project manager, helping people achieve a particular business or philanthropic objective," he explains. "Finding creative ways to accomplish goals, sometimes mixing business and philanthropy, was very rewarding."

Over the years, he has helped several families buy and sell major assets. One of his roles has entailed keeping a careful eye on investment bankers. "This means selecting the investment bank, structuring the transaction and managing the implementation of the purchase or divestiture," he says. Today, he also serves on the board of a venture capital firm.

During his years at Citicorp, Olmstead became an expert in international taxation, a specialty that attracted clients from different corners of the globe. One affluent American family he worked with engaged in extensive philanthropy in foreign countries. Another project involved helping a family build homes around the world.

Because of the project nature of his work, Olmstead's practice lacked the recurring revenue stream that Lau's possessed, though he was often deeply involved in several projects and rarely at a loss for business. "Normally, I've never had more than five projects or family groups [clients] at one time," Olmstead says.

His in-depth focus on one or two issues of paramount importance to clients who had no shortage of potential advisors reflected the quality of advice he could provide. But intriguing as this work was, Olmstead felt something was missing. "What I had not done was develop their organizational issues," he says. "I hadn't developed services for budgeting, bill-paying and other functions. Without this, it can be difficult for them to address the larger goals within their lives."

Simply because Olmstead preferred to work on complex projects didn't mean that he lacked enduring client relationships. "He has long-term relationships," Lau says. "He just didn't want to spend the time to build the infrastructure to [manage them]."

Like Olmstead, many of Lau's clients were living off their assets, even those who worked. But she had developed the family-office type of services, like cash management systems and budgeting processes that make clients in this position feel more comfortable. "Clients were starting to ask for more services, including paying the bills, doing taxes, cash management and estate planning," she says. "We have to have the background and expertise to help clients figure out what's important to them and what kind of legacy they want to leave. John brings creativity and knowledge of what's possible to these situations. If you can help someone figure out what makes a difference in this world, that's huge and it lights up their eyes. This is where we get really excited."

Lau and Olmstead were introduced about one year ago by a mutual friend, who said, "I know this person you need to meet," Lau remembers. "She had been in the family office world for a long time." Lau was looking for a person who was a good fit for what her firm did in the financial planning world, but who also had skills and expertise to perform some of the sophisticated services for which clients increasingly were looking.

As Olmstead viewed it, Lau's growing portfolio of services frequently were services his clients were seeking somewhere else. "We [Judy and I] were in different worlds with some overlap, but it was the areas of overlap where we were both focusing," he explains. "The Lau group doesn't just give investment advice and financial planning advice. They offer a lot more different services and go way beyond allocating assets."

In fact, her firm was already involved in some of those services before it merged with Olmstead's in February. "We do a lot of family consulting and facilitating of family meetings," she says. "We try to come up with a common vision of what families want to do with different pots of money."

Why is finding a common vision so important? "Because a lot of family members who have a lot of assets have assets that are joined by trusts," she explains. "Some family members get along famously. Some don't. Often they have different points of view. But if you can get a consensus, it's a real accomplishment. Sometimes you can't. We do a lot of client mentoring, helping them understand both money and their relationship to money. Money is inherent in all family relationships."

Olmstead himself is more than familiar with the issues confronting wealthy families. Often it's a matter of explaining the individual situations of different family members, he says. "A little bit of clarity goes a long way," he adds.

Olmstead, for one, doesn't believe F. Scott Fitzgerald's comment that the "rich are different from you and me." Families with great wealth "aren't that different," but their financial issues are more complex. "With our clients, it's important to be coach of the team because they often get very different advice from their different advisors," he continues. "Many have lawyers and outside business advisors. Understanding the relationship between tax law, trust law and developing a risk/return profile is critical."

In the 1990s, Lau's client base migrated toward the high-net-worth market but, unlike many advisors in a similar situation, she didn't abandon the smaller clients who helped the firm get started in its early days. "We need to honor both groups of clients," she says. Today, the firm's minimum is $2 million in assets, but most new clients have significantly more.

Although a common thread running through both their client pools is that many are living off, or at least relying on, their asset bases, they also have clients with other issues. Some clients have built sizeable businesses, but reinvesting in their companies has limited the growth of their investable asset base. "Quite a few clients are doing the job that lights up their eyes," Lau says. This group includes artists, writers and musicians. "A smaller group is making large amounts of money and building their asset base."

When it comes to investments, Lau says, the level of client sophistication covers the entire spectrum. "Many of them are often exceptionally knowledgeable in one area of our business, say real estate," she notes.

Lau acknowledges that some clients make the firm's investment chief, Jim Lee, "jump through all sorts of hoops on investments. Some understand all the different financial ratios and make him drill down seven or eight levels."

Lee, a chartered financial analyst who Lau hired away from American Express Financial Advisors several years ago, says the firm uses a wide variety of investments ranging from mutual funds to individual stocks to venture capital and hedge funds. In these last two areas, Olmstead's expertise has proved a valuable addition. Lee says part of the decision on whether to invest in funds or individual stocks depends on what type of investments the person has when he or she becomes a client and how the firm can best diversify the portfolio.

In this low-return era, the firm has looked at many different ways to boost client returns. One tactic is to write covered call options on large holdings in a client's portfolio. Although Lau custodies most of her clients' assets at Schwab Institutional, she has placed about $75 million in assets, much of it large positions in equities, at Legg Mason because they are far more willing to facilitate covered call option writing than Schwab is.

In contrast to a growing number of advisors, the firm believes investments and returns are extremely important to clients. This doesn't mean it touts portfolio results. "We tell clients we may not make you as much as someone else might in an up market, but we'll protect you in a down market," Lau says. "A client recently told me, 'I never thought I'd be happy to lose money but when I talk to my friends, I feel really good.' Clients did eventually get tired talking about their portfolios, though they are thrilled that they are starting to make money again. But I've encouraged them to take up hobbies and stop worrying about their money. Many have. They've learned that if your portfolio is well-balanced and diversified, you can relax. It's important that their money doesn't control them, rather they control their money."

One statistic that confirms Lau's feeling that her firm delivers value is its client retention rate, which ranges from 95% to 98% a year. "We feel good about that because clients are paying fees directly to us," rather than having them deducted from accounts, she says.

The ability to pull all of a client's assets together and examine them in this context was one of the factors that attracted Olmstead to join Lau. Many of the high-powered families he worked with needed these services. "If these services are not performed, they can be at sea and they worry," he says. "That worry can prevent them from doing the things they like to do."

Unlike many advisory firms that encourage clients to give them overall control of all their assets, Lau and Olmstead try to work with clients' other advisors. "Many clients have generation-skipping trusts at banks, and we're not about to go after that," she says. "Tax laws were once very favorable to dynasty trusts, and we don't want to mess it up." She adds that many banks haven't figured out "how to talk to clients in plain English," creating an opportunity for the firm to serve as a translator. "Our clients love it when we help them get organized and understand what's going with their investments and estate plans. Then they can make decisions."

At another level, the firm is tiptoeing gingerly into a few concierge services, though it focuses on issues that have a direct impact on a client's financial life. "We just ran credit card checks on our clients to make sure they weren't victims of identity theft," she says. But in areas like travel, the firm opts to recommend travel agents rather than perform those services themselves.

Lau and Olmstead have avoided entering the business consulting arena, an activity that has attracted many full-fledged family offices. "We view a client's business as one of their assets," she says.

Lau and Olmstead both say the complementary nature of their practices has produced synergies that many firms still find elusive after they merge. Lau says that while Olmstead's project approach to his practice differs from her more consultative, ongoing style, they are philosophically in sync. "I couldn't do what he does, and he doesn't want to do what I do," she says.

Without revealing details about the finances of either practice or the newly combined entity, Lau says outsiders might be surprised at how similar the numbers would appear. While her revenue stream may be more predictable than Olmstead's future projects, "he has a lot of projects coming across his desk, and he has a lot of choices and flexibility. For example, he may know he has a few projects in 2004, but not know the full scope or venue of them."

Lau believes that mergers like theirs are likely to become more frequent. "If you look at the banks buying financial planning practices, they are very complementary. New people are looking at how to integrate financial planning into their business. What I've learned is that the request for financial planning services migrates into family office services," she says. "What we're doing is just one example. We're just not doing it with the usual suspects."