At a time when families are worried about dwindling portfolios and global market turmoil, could a new set of principles help to minimise the possibility of financial mismanagement and fraud?
That's the view of US-based advisor Charles Lowenhaupt and Don Trone, president and founder of the Foundation for Fiduciary Studies, who have launched "Principles of Wealth Management For Private Wealth Holders" – an initiative they hope will create new safeguards for managing substantial wealth for individuals, families, family offices, foundations and private trusts.
"The events of the past year culminating in the Madoff affair are to private wealth what Enron was to corporate governance," said Lowenhaupt, CEO of Lowenhaupt Global Advisors. "If private wealth holders tell their advisors to comply with the principles, they will impose the sound process and discipline that have been missing, and we can prevent calamities which can occur when emotion drowns process."
Both the authors believe the global nature of the wealth management industry means that "contagions" can devastate the private wealth in one country and quickly spread to other parts of the world. Crucially, they insist that the laws enacted by individual countries cannot hope to protect against fraud or failure.
The time has come for individuals to impose "sound process that remains constant and stable even in perilous times or under dangerous conditions," according to Lowenhaupt and Trone, whose principles call for 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.
According to Lowenhaupt, complying with the principles will challenge many wealth advisors because they require change, but business as usual is no longer an option. If they are accepted by the world's wealthy, the authors hope to translate the principles into global standards with approval by an international agency.
Michael Hutchinson of The Hutchinson Consultancy, an advisor to wealthy families agrees such an initiative is just what is needed at the present time. "In today's uncertain world, principles like these need to be drawn up, understood and adopted by any family hoping to manage its wealth over generations," he said.
"Most family offices should welcome the opportunity to have standards and certification reflecting principles such as these, which will give much needed comfort to the families they serve."