Exclusive Interview with Luminous Capital

We are pleased to share with you our recent interview with Alan Zafran and the investment management team of Luminous Capital, which includes partners David Hou, Mark Sear, Robert Skinner and Eric Harrison, and is headed by partner Kim Ip and senior analyst Wayne Lou. The Luminous partners have extensive experience serving as investment advisers to wealthy families and individuals. The firm has offices in Los Angeles and Menlo Park.

Mr. Zafran has served as a financial adviser to wealthy families and institutional investors for the past 26 years. He began his career at Goldman Sachs in 1990 in the Private Client Group. After seven years at Goldman Sachs, Mr. Zafran and his entire team joined Merrill Lynch in 1997, where they helped to build the Private Banking and Investment Group. In May 2008, Mr. Zafran co-founded Luminous Capital, an independent Registered Investment Advisory firm. Luminous Capital had $5.9 billion of assets under management when it was acquired by First Republic Bank in December 2012.

The following transcript has been edited for space and clarity.

The Manual of Ideas: Please tell us about the genesis of your firm. What motivated you to set up Luminous Capital and what operating principles have guided you since then?

Alan Zafran and team: Luminous Capital was founded in May 2008. Our core team began working together at Goldman Sachs in the early 1990s and, after successfully building a business at Goldman, joined Merrill Lynch in 1997 to help establish its private banking business. The six partners of our firm all have had distinguished and successful careers ranging from private banking, investment banking, and venture capital/private equity. We currently advise over 300 clients – primarily high net worth individuals and families, for whom we have $5.3 billion of assets under management.

We founded Luminous Capital as an effort to better serve our clients’ investment needs and interests. Luminous is a fee-only, SEC-Registered Investment Adviser (“RIA”), meaning that we are legally required to assume the role of fiduciary and put the interests of our clients ahead of our own. By doing this, we achieved our goal of purposefully removing ourselves from the inherent conflicts of interest that exist in many brokerage firms, which have much less onerous “suitability” standards and frequently combine various firm-driven profit initiatives with their wealth management practices. We believe we can provide unique benefits to our clients that are oftentimes not clearly communicated and/or delivered through the traditional investment advisor channels: full transparency of fees and costs; customized and unbiased investment experience; and a full-service platform integrating estate planners and accountants into key decision-making processes for our clients.

MOI: What are the key considerations when formulating an asset allocation strategy for a client?

Luminous: We understand that one client’s needs and objectives will differ from another, so we have developed a broad framework in which to construct individual and customized asset allocation strategies.

The first tenet of our investment philosophy is that we are, and always will be, focused on protecting client assets with an emphasis on absolute return and consistent growth of a client’s portfolio. Our definition of risk is loss of principal, and we believe that the traditional definition of “volatility” is mischaracterized. Indeed, volatility provides selected opportunities for investing at attractive entry points.

The second tenet is that we believe optimal investment management advice for our ultra-high-net-worth clients is best provided in a clear, transparent atmosphere. Prior to making changes or recommendations, we will describe our rationale and thought processes behind all of our recommendations, commenting on historical returns, volatility, and various other metrics that justify our recommendations. We are big proponents of educating our clients throughout the process.

The third tenet is that we believe, to effectively execute on our goals of absolute return and consistent growth, we must strive to access the best managers, regardless of platform. As independent advisors, we have the flexibility to draw upon a very broad scope of products and services without bias as to which manager to employ and without bias as to the firm at which the manager holds his portfolio’s securities.

Lastly, we are firm believers in diversification. Diversification is the key to maximizing risk-adjusted returns over time and is the last “free lunch” in the investment world whereby combining asset classes and managers allows for participation in the market’s upside but lowers overall portfolio volatility.

MOI: To what extent do you allocate capital into the public equity markets, and how do you decide on the managers to execute that strategy?

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