As a Chinese patriarch once told me: “It has never been so difficult to be rich.”
He correctly pointed out that the wealthy have always been attacked by dysfunction in the family, by greedy in-laws and nonperforming children and grandchildren. But somehow, he said, now was harder. He shook his head and closed with: “China coming out of slumber leaves us wakening to attacks on private wealth and those are not governmental attacks from Beijing.” He shook his head and said “No, those are attacks coming from our era.” He was right. Since 2008, it has become obvious being wealthy is not so easy.
The financial chicanery of 2008 and the volatility of the markets have hit hard. In the United States, reaction has been legislative and regulatory. New complex tax compliance rules require providers and wealthy families to report regularly and to disclose transactions not disclosed before. The Financial Reform Act leaves family offices wondering whether regulatory determinations may require them to go through the complexities and the public “outing” of filing with the Securities and Exchange Commission (SEC). The Act also leaves families wondering whether the new “fiduciary standard” will help or hurt them.
Reaction has been a plethora of new products and services evolving for wealthy families. Accounting firms are creating further complexities to deal with complexity. Investment houses are designing new “products” built on derivatives to offer stability and all sorts of desired investment results. Lawyers are talking about moving the family office into private trust companies. Financial service organisations are urging families to “outsource” the investment advisory service as a way to avoid SEC registration.
European, Asian and South American families are facing similar bewildering challenges as they try to cope with the US rules and manage the volatility not only of markets but also of rules, regulations and initiatives in their own and other countries.
The big picture
In today’s world with dangers in every direction, managing wealth requires a focus on issues larger than the details. “What is the wealth for” is the starting question. Government regulation and taxation may be impediments to accomplishing wealth’s purposes, but first one must decide on the purpose for the wealth. Only then can some kind of analysis be done on the intrusions of government . And with regulation always inadequate, especially for a
multi-jurisdictional family, a wealth holder must look for protection from mischief and erratic markets outside the government. Indeed, protection must come with a process designed to make wealth accomplish its purposes. If Madoff investors had a proper process in place, many wouldn’t have lost billions in the biggest fraud of our lifetime.
I’m reminded how preventable and painful that financial debacle was because I saw
it unfold. I had breakfast with a friend in New York the morning after the Madoff story broke. She had run a large family office and was taking me to meet a lawyer known for his expertise in helping families. I asked her whether she knew Bernard Madoff and she replied “Bernie, of course, why?” I showed her the newspaper and she turned white. She said: “The family had all of its liquidity with Bernie, $1.2 billion. They are broke now.” When we met the lawyer after breakfast, he was frantically trying to deal with the fact that seven client families “were billionaires yesterday and are broke today” and that five foundations on whose boards he sat were similarly affected. When I asked my friend and the lawyer how this could happen, the lawyer replied: “Everyone trusted Bernie and thought he had integrity.”
Principles-based standards
Integrity and trust are the starting points in a process. That process must contain adherence to certain principles, such as separation of custody and management, which could leave a person trusting someone like Madoff but not using him for investment management.
The realisation that the process must go beyond integrity and trust resulted in a global initiative now being led by the Institute for Wealth Management Standards, a not-for-profit Institute in Switzerland. The Institute is turning 15 Principles of Private Wealth Management
(developed by the Lowenhaupt Global Advisors Global Council) into Private Wealth Standards. ([www.wealthstandards.org](http://www.wealthstandards.org)) These standards will allow a family to ensure careful process, the ultimate protection against financial principles-based standards, modified to fit the needs and goals of the family. They will allow the actualisation of rules and procedures for family offices which have at their heart fundamental notions of loyalty, alignment of interest, deliberate checks and balances, accountability and transparency. They will allow families everywhere to articulate expectations to service providers whether banks, family offices or otherwise.
This initiative goes to the heart of wealth management for families worldwide by allowing them to set out in unison what are and what are not acceptable practices. The standards are objective and apply to wealth no matter where it is located. The standards offer a process whereby a person can be named to be responsible for ensuring that the safeguards are followed – a “standards director” for each family.
So I might tell the Chinese patriarch that although it has never been more difficult to be rich, those challenges can be tamed through the wisdom to understand what one wants to accomplish and the process to accomplish it.
