Events of 2008 prompt thought leaders to consider ways out of the morass. Charles Lowenhaupt is chairman, CEO and president of Lowenhaupt Global Advisors, a St. Louis, Mo.-based advisory to ultra-high-net-worth families, and managing member of the law firm Lowenhaupt & Chasnoff.

During and soon after the dark days of the Great Depression, a handful of investment-management innovators -- among them men with names like Stein, Roe and Farnham, and Scudder, Stevens and Clark -- reviewed the existing system of investment advice and concluded that investors would be better off with advisors whose pecuniary interests were aligned with their own. As a result, these pioneers decided that wealth management -- as it's now called -- worked better for the investor if services were rendered on an advisory rather than a commission basis. Since then, a growing number of institutional and private clients have demonstrated their approval of this view and altered the investment-advisory business forever.

Clients demanded change; the industry followed.

A new era

In the late 1980s and early 1990s a new set of visionaries -- Sara Hamilton of the Family Office Exchange (FOX), Charlotte Beyer of the Institute for Private Investors (IPI), |image4|family-office advisor Jay Hughes and others -- articulated the view that the needs of private-wealth holders differed from those of institutional investors. They promulgated the message that investment performance is as much about appropriateness of strategy as return; an insight with profound implications uncovering a need for special sensitivities and understanding of human and family dynamics, By shining light on the unique issues for the private investor over the past twenty years, these latter-day wealth-management pioneers have raised awareness and made life better for many people -- for service providers as much as for wealth holders.

In terms of finance, last year was one of the most tumultuous on record. With the events around Bear Stearns, Lehman, Madoff, Stanford, auction-rate securities, and the near-collapse of capital markets around the world unfolding before their very eyes, economists and financial experts should have learned some indelible lessons.

In fact, the investment industry seems to be dashing headlong down another dangerous road. Goldman Sachs and JPMorgan Chase returned to profitability this year not by doing a good job of providing traditional banking services, but -- in the main -- because they took enormous trading risks. Derivatives have re-entered the picture as wealth managers again talk up alternatives as easers of volatility.

Was nothing learned from 2008?

Other industries

In certain circles, maybe not. But some leaders of the private-wealth industry are encouraging thought and consideration of steps that need to be taken by private investors and those who serve them. The IPI has published its Principles of Principals; FOX focuses on due diligence in the context of its Best Practices; Campden has showcased Principles of Private Wealth Management; and the Family Wealth Alliance has launched a new education initiative. These moves are attempts to help private investors learn from 2008 -- in terms beyond the bare notion that the "endowment model" may not work.

This good work lays the foundation for the next step: developing standards of universal application in the private wealth sphere.

By changing the way we think and act, the development and application of standards have brought order from chaos. Consider the effects of standardization on the automobile, electrical, aeronautics and other industries. Your hometown-bank ATM card gives you access to cash from machines around the world because of ISO standards governing bank numbering systems and electronic strips on bank cards -- and these standards have changed the face of banking forever.

In the world of the ultra-wealthy, the benefits of standards are obvious. They |image2|establish independently verifiable prudent practices and procedures. The wealth holder can deal with the dilemma "We think we are doing a good job -- but compared to what?" Standards can help advisors gauge themselves against competitors, prioritize tasks, and identify procedural and behavioral risks. And they can help keep service providers and clients, wherever located and under whatever jurisdictional governance, working together under common assumptions, mandates and procedures.

Global acceptance

Just as standards helped auto makers build and sell cars worldwide, they can help advisors serve families around the globe, however far flung individual family members may be, wherever investments may be, and wherever the family is leaving its mark.

Globally accepted standards address the very fundamentals of sound private-wealth management. They govern adherence to process and the implementation of systems that don't require the constant monitoring of service providers and they place wealth management's many "moving parts" in a framework that's comparatively easy to evaluate and assess. Objective and detailed standards are a construct that can facilitate the delegation of compliance to standards-savvy professionals.

Standards embody the importance of objective process in managing private wealth. They allow easy adherence to the fundamental view that a private-wealth holder must evaluate performance in broader terms than mere return on investment. They require articulation of purpose, design of governance structure, compliance with fiduciary laws, transparency on all levels, and many other elements of sound wealth-management procedure.

Widely accepted standards allow the consumer to speak with one voice and demand un-conflicted advice, transparency, respect for goals, and other fundamental prerequisites. They form a framework for auditing, assessing and perhaps even certifying professionals to whom compliance can be delegated. Money managers, banks, funds, attorneys and accountants can be evaluated in terms of their compliance with clear standards. Standards make wealth-management less dependent on trust and more reliant on process.

Comments wanted

Private wealth holders are recognizing the power of standards as a worthy protection against mismanagement and as a way to restore order. Surveys taken at a recent Campden Conference reinforce the response to an early internet survey that private wealth holders believe that a standards initiative is important and worth supporting.

A case can be made for supporting the standards being drafted by ethical-standards expert Don Trone. They include provision for |image3|creating a "standards director" for every wealth holder. This person takes responsibility for ensuring that every wealth holder -- and its individual members -- receives advice and service consistent and compliant with the standards and the principles on which they are based. The standards director can engage assistance, turn to auditors and may ultimately be able to secure certification.

Trone's standards will soon be open to comment by wealth holders worldwide. Educators, service providers and others will have the opportunity to encourage family offices and wealth holders to review the standards and submit comments on them so that the further steps of Standards adoption can take place. Education programs, auditing services, and perhaps even a global certification program may arise from the standards.

Thought leaders of the wealth-management industry have laid the foundation for the steps that must be taken in a post-2008 world. Their words and work have set the stage for restoring and maintaining order for wealth-service providers and providing security for wealth holders. Developing clear universal standards is indeed the next step in the evolution of an industry. These standards will help families and family members get back to leading their lives in freedom from the burdens of wealth. -FWR

The illustrations for this column are details from a Japanese woodblock print in the Charles A. Lowenhaupt Collection.

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