April 19, 2010

Dear Client:

Your statement is now posted to Your Online Access. Please call or email us if you require assistance logging in. As a security measure we urge you to compare the information in your statement with the statements you receive directly from your custodian, including account balances, withdrawals from, and deposits to your accounts.

Q1 2010 Market Update

Equity markets gained at least 50% in the last twelve months. Since the markets bottomed on March 9, 2009, the S&P 500 has gained 77%, the Russell 2000 is up 101% and foreign equities have gained 80%.

The U.S. equity market continued its strong performance in the first quarter of 2010, the fourth consecutive quarter with above-average returns. The broad U.S. market gained about 6% in the first quarter, with all asset classes delivering solid gains again. Performance in other developed markets around the world was mixed.

European markets as a whole had negative returns for the quarter, with Spain, Greece, and Portugal all suffering double-digit losses. On the other hand, developed markets in the Asia Pacific region, led by Japan, which had an outstanding quarter, generally fared much better. The U.S. dollar gained ground against most major currencies, especially the euro and the pound, which hurt the dollar-denominated returns of developed market equities.

After being the top-performing asset class for the past four quarters, emerging markets cooled off in the first quarter, although returns were still solidly positive. As in the case of developed markets, there was much dispersion in the performance of different emerging markets and asset classes. Most emerging markets experienced solidly positive returns in the first quarter, but some of the larger markets such as Brazil, China, and Taiwan had negative returns. The U.S. dollar lost ground against the main emerging market currencies in the first quarter, which contributed to the dollar-denominated returns of emerging market equities.

Value stocks outperformed growth stocks across all market capitalization segments in the U.S., while the opposite was true in other developed markets. In emerging markets, large cap value stocks trailed large cap growth stocks, while small cap value stocks outperformed small cap growth stocks.

Along the market capitalization dimension, small caps outperformed large caps in the U.S., in other developed markets, and in emerging markets.

Real estate securities were among the top performers in the first quarter in the U.S., but they had a flat performance in other developed markets.

Fixed income securities had positive returns in the first quarter. Longer-term securities tended to have better performance than short-term ones.

Portfolio Statements Now Include Customized Benchmark Results

You can see on Page 3 of your statement that we've added a line with the investment results of a single blended benchmark for your Investment Policy. For example, if your Investment Policy is 60% Equity and 40% Fixed Income, the Performance Summary Report includes a line below your Account performance results labeled "60/40 Benchmark". This blended benchmark is the relevant comparison for your portfolio's performance.

The customized benchmark is weighted to reflect the investment policy we are using to manage your portfolio. The specific compositions of the benchmarks follow:

Your Investment Policy is a broad definition of your portfolio's asset allocation. The specific implementation of your Investment Policy can vary from these broad ranges depending on a number of factors, including manager discretion and client preference.

We have updated the Investment Policy Statements to include benchmark data through December 31, 2009, and will send these to you in May.

Please note: some clients have different investment objectives for different accounts. For example, a charitable trust may have a higher investment return objective than personal accounts. We now have the ability to manage multiple investment policies per household. If your household has multiple investment policies, you will now receive a separate statement for each of your investment policies.

Senate Banking Committee: Financial Reform Bill

The Senate Banking Committee approved a bill for Wall Street reform, sending it to the full Senate for debate. The sponsors describe it as a bill with strong consumer protections, but the bill is weak in an issue of importance to investors: fiduciary standards for investment managers.

The initial draft of the legislation released in November 2009 called for brokers to be held to the same fiduciary standard as investment advisers: a requirement to act in their clients' best interest. The final version approved earlier this month was watered down to "require a study on whether brokers should be held to the same fiduciary standard" as investment advisers, who do have fiduciary responsibility.

As a Registered Investment Adviser, we are your fiduciary and are therefore required to:

✓    put your interests first,

✓    provide fair, informed and impartial advice,

✓    act with skill, care, diligence and good judgment, and

✓    fully disclose and fairly manage unavoidable conflicts.

How important is the broker vs. investment adviser distinction? I'm hard-pressed to think of a standard with greater impact than this. The most important issues you face are NOT whether stock A is better than stock B, but how to properly manage your risks and resources to achieve your long-term financial goals.

Should you pay off your mortgage early? Make large donations of appreciated assets to donor-advised funds? Convert retirement funds to a Roth IRA? A "yes" answer to any of these questions reduces your current assets and concomitant management fees. You can feel confident that our legal responsibility and professional commitment is to put your best interests first.

Taxes: Going Up

Relatively low income tax rates, special credits, a maximum 15% tax rate on capital gains and qualified dividends, a waiver of required IRA distributions, lower investment income and capital losses have resulted in surprisingly low tax bills/high refunds for tax years 2008 and 2009. You should expect taxes to increase after 2010.

"Front door" tax increases:

• In 2011 the maximum tax rate of 15% on long-term capital gains will revert to 20%.
• In 2011 the maximum tax rate of 15% on dividends will revert to ordinary income tax rates (maximum 39.6%).
• In 2011 the maximum ordinary income tax rate will revert to 39.6% in 2011, from 35%.
• Starting in 2013, there will be a new 0.9% Medicare tax on wages in excess of $200,000 (single) or $250,000 (joint) in addition to the existing 2.9% Medicare tax on wages (currently split by employee and employer). This 0.9% surtax will be paid fully by employees.
• Starting in 2014, investment income will be subject to an additional 3.8% Medicare tax for AGI[1] over $200,000 (single) or $250,000 (joint).
• California tax rates increased by 0.25% in 2009 and 2010.

"Back door" tax increases:

• Starting in 2013 the floor for deducting medical expenses increases to 10% of AGI, from 7.5% currently. With health care premiums rising, more clients have been able to meet the 7.5% threshold. This change increases the marginal tax rates for those who have been able to deduct medical expenses in the past.
• Starting in 2013 HSAs and Flex Spending Accounts can no longer be used to reimburse for over-the-counter drug expenses.
• Starting in 2013 contributions to Flex Spending Accounts will be limited to $2,500 per person. Currently there is no statutory limit, but most employers cap contributions at $5,000. At the top tax rate with $5,000 of qualifying medical expenses, the effective tax increase will be $990 federal (39.6% of $2,500) and about $250 California.
• States have stepped in to collect sales and use taxes. Amazon.com and other online retailers have enjoyed a federally-subsidized advantage over brick-and-mortar retailers - they often do not collect state sales tax. The California Board of Equalization (BOE) recently passed AB x4-18, requiring "qualified purchasers" to register with the Board of Equalization and report and pay use tax.

All business tax return filers (including Schedule C for self-employeds) with gross income of $100,000 automatically received a letter from the BOE with a demand to report purchases subject to use tax (i.e., no sales tax collected and not resold under a reseller's license) for 2007, 2008 and 2009. If you received such a notice and have not responded, please contact us. We expect this issue is not going to just go away.

Roth IRA Conversion - Special Opportunity in 2010

The tax increases mentioned above are currently in place. We expect more to come both at the federal and state level. Unlike the federal government which can run budget deficits, state governments have no ability to increase the money supply or to maintain budget deficits. California is in an untenable fiscal situation, one that is likely to require more tax and other fee increases.

Taxpayers have a terrific opportunity in 2010 to convert a traditional retirement account to a Roth IRA. Before 2010, only taxpayers with adjusted gross income of $100,000 or less were eligible to convert a traditional IRA to a Roth IRA.

In 2010 the $100,000 income ceiling was removed. Any individual can transfer (convert) all or some funds from a traditional IRA to a Roth IRA. The amount transferred is included in gross income, subject to ordinary income tax. Once converted to a Roth, the funds are tax-free forever. In addition, there is a one-year provision for 2010 conversions to spread and delay the tax from conversions in 2010 to the tax years 2011 and 2012.

The Roth IRA owner is not required to take distributions during his or her lifetime, unlike a traditional IRA, where an owner is required to take distributions based on a life expectancy factor each year starting at age 70.

The Roth is a wonderful gift to children and grandchildren. Beneficiaries of your Roth do have to take distributions over their life expectancy, but the distributions remain tax-free forever.

Some of our clients with gross incomes below $100,000 have taken advantage of this opportunity in earlier years, in some cases converting hundreds of thousands of IRA dollars to Roth IRAs over time, for little or no cost. If you have not been able to convert before now, you should consider a conversion in 2010.

There has been an enormous amount of information published about this opportunity, and a wide range of generic recommendations. But the determination of whether, when, and how much to convert depends on your individual circumstances. Let us help you make the decision based on your unique combination of resources, needs and expectations.

As always, please do contact us with any questions.

Regards,

Audrey Grubman
Portfolio Manager and President
GRUBMAN FINANCIAL
www.grubmanfinancial.com
ph. 510.883.1350
fax 510.548.3148

[1] Actually MAGI over $200,000 (single) and $250,000 (joint). MAGI is AGI plus the foreign income exclusion amount.