Without the security of trust, wealth holders are finding themselves forced into micro-managing their wealth. Vetting due diligence, monitoring their advisers, even questioning decisions by their family offices have become more pronounced than ever before. In today’s environment, how can you have freedom from wealth if you are living in a lawless world of financial chicanery, spending every waking moment guarding your flank?
In light of what has transpired, a growing number of families are seeking change and a better way. To address this issue, Lowenhaupt Global Advisors, working with members of the firm’s Global Council of internationally respected private wealth advisors, drafted ‘Principles of Private Wealth Management. ’Presented to the industry in February, the Principles are designed to bring order, process and discipline back to family wealth management.
Underlying the Principles is the belief that process is critical in managing family wealth. Although family members are not intuitively process-oriented when it comes to managing wealth, it is process rather than creativity that can support wealth preservation.
The sharp and shrewd investor is not appropriate for a family preserving its wealth. Rather, like the courageous pilot who landed on the Hudson River, family wealth managers should look to process and experience to avert disaster. Improvisation would have been disastrous for Capt. Sullenberger’s flight; sticking to the book and relying on experience brought the flight in for a smooth landing.
The Principles we created are all about restoring trust through proper process. These are not rocket science and a few are controversial but all would have protected against the deceit and fraud exposed over the past 18 months. The Principles seek to achieve the following:
• Separation of custody of assets and investment management
• Complete transparency of advisors’ fees
• Full disclosure requirements to prevent conflicts of interest
• Standards for compensation of family office executives
• Discouraging investment vehicles without transparency or liquidity
• Insistence on customised investment portfolios meeting the needs of the owner
• Requirements that any trustee or foundation director perform as a fiduciary subject to fiduciary standards
• An investment strategy that can be readily understood by wealth holders
For global families in particular, Principles such as these are critical. Today’s families of significant wealth are increasingly global but so too are scam artists. Relying on the regulatory framework of any one jurisdiction is not likely to protect against the risk of danger in another. Within a global financial system, someone can cloak themselves in an Antiguan financial regulatory system to steal from residents of Switzerland. Those hurt by the mismanagement of Lehman may be helped if they live in New York but perhaps not if they live in London. Our Principles were designed to transcend geography and set the rules of engagement no matter where a family is living, working, playing or investing.
Single family offices today are feeling caught in the eddies of the currents of reduction of worth, reliance on basis point costs as justification, and the perceived need for more costly due diligence. Many are asking whether they can survive and how to ensure that even on a reduced budget, preservation can take place. As they approach members of the Global Council for advice and support, these offices understand the strength of common guidelines for protection against a financial services industry they consider no longer loyal to their interests. They can appreciate how process can protect in all times.
These days, family offices need to consider adoption of Principles and process. To do so three initiatives must be undertaken simultaneously. First, families must tell their family offices or financial institutions that they want to have greater transparency and oversight applied to the management of their wealth. Institutions must implement more integrity into their wealth management services.
Third, the industry should support an initiative to translate our Principles into industry-wide Standards. Don Trone, one of the industry’s foremost authorities on best practices and standards for investment management, is currently circulating a draft of the Standards and is seeking comment from families and industry professionals. The standards themselves will allow assessment by the wealth holder, family office by family office, in how well service providers are allowing families to adhere to the principles.
Every private wealth holder was hurt in 2008. Some were damaged by direct fraud some were damaged by the greed and mismanagement of the large financial services institution even without certifiable fraud. Others still were damaged when good investment managers were rocked by withdrawals by those who were caught otherwise by Madoff and similar scoundrels. Overall, every private wealth holder has been impacted by a violation of trust.
The time is right to act. If we all work in the spirit of cooperation, we can build systems which prevent violations of trust by introducing process, clear and enforceable for family wealth management thereby enabling families to achieve their ultimate objective – freedom from wealth.
