LGA and its int'l council want to spark a revolution in high-wealth advisory. After less than a year in existence, Lowenhaupt Global Advisors' (LGA) Global Council, LGA itself and ethical-standards expert Don Trone have set down a broad set of principles to help ultra-wealthy families around the world assess financial-service providers and other wealth-management entities with a view of minimizing the possibility of mismanagement or fraud.

Catalysts

"The events of the past year culminating in the Madoff affair are to private wealth what Enron was to corporate governance," says Charles Lowenhaupt, CEO of LGA and managing member of the St. Louis, Mo.-based law firm Lowenhaupt & Chasnoff. "Private wealth holders must take strong steps to ensure that such catastrophes will never happen again."

Enron was a Houston-based energy-trading firm that inflated its stock price by booking potential future profits as though already fully realized. The company collapsed late in 2001, soon followed by its auditor Arthur Andersen. In response to scandals affecting Enron, Tyco, WorldCom (now part of Verizon) and other shady players of the late 1990s and early 2000s, Congress passed the Sarbanes-Oxley Act of 2002, which imposed new or enhanced -- and at any rate costly -- standards on U.S. public-company boards, management and accounting firms. Other countries have made similar laws.

Bernard Madoff is a New York-based investment advisor, philanthropist and one-time Nasdaq chairman, who was charged in December 2008 with perpetrating an investor fraud scheme of potentially staggering proportions, reach and endurance. He awaits indictment.

Standards rule

Mystic, Conn.-based Trone, an authority on ethical standards for financial-service practitioners, will take the "Principles of Wealth Management for Private Wealth Holders and Related Parties" -- touching on things like disclosure of conflicts, fee transparency, separating custody from management, portfolio-to-client suitability, and the need for investments to be transparent, reasonably liquid and readily understandable -- and turn them into standards from which training, auditing and certification, perhaps under the aegis of an international agency, could follow.

Trone says the work of translating the wealth-management principles into industry standards could start within months, with mechanisms for public comment built into the process. With the standards in place, family offices and other service providers to the ultra-wealthy could use their adherence to them as proof of their commitment to best practices.

"Once we complete these standards, they can be applied to investors with varying degrees of wealth -- from the family with $100 million to those with $1 million or less," says Trone. "These standards, along with the principles, will significantly improve the way wealth is managed around the world."

Peer review

The Family Wealth Alliance (FWA) is a Wheaton, Ill.-based consultancy to ultra-wealthy families. Its founder and head Thomas Livergood, a proponent of standards and best practices, supports LGA's initiative to promulgate principles of wealth management. "We certainly need to define this space and promote standards within the industry," he says. "It's something we owe [wealthy] families, and not only in times of uncertainty."

Charlotte Beyer, founder and CEO of the Institute for Private Investors (IPI), a New York-based education and networking resource for ultra-high-net-worth families, agrees. "There's always room for things to be clarified," she says. "It's a little 'apple-pie and motherhood' maybe, but it bears repeating."

The Investment Advisers Association (IAA) is worried that moves toward enhanced self-regulation -- on the model of FINRA's relationship to the broker-dealer space -- could create additional compliance burdens for the RIAs it lobbies for in Washington, D.C., and thinks the SEC -- now under the leadership of ex-FINRA head Mary Shapiro -- should better equip itself to weed out inevitable rogues instead of punishing an entire industry for the transgressions of a few.

But because the IAA sees LGA's and Trone's initiative to set standards for ultra-wealth managers as one rooted in "a fiduciary standard, which we believe gives investors the greatest protection, [we] would support it completely," says the RIA association's v.p. for government relations Neil Simon.

Over there

The LGA-Trone principles weren't devised just for U.S. consumption, however, so the state of the U.S. regulatory regime -- good, bad or indifferent -- means little to their authors. Private wealth holders comprise a global community whose members routinely live, work and invest across borders. As a result, "laws enacted country by country cannot alone insulate from misfortunes such as economic chaos, fraud, or failure of institutional infrastructure," goes the preamble to the "Principles of Wealth Management."

Rather, the principles are meant to formalize global standards of trust, according LGA Global Council member Michael Hutchinson, a London-based advisor to ultra-high-net-worth families and former co-head of the Guinness family office.

"Against the uncertainties of a post- Lehman, post-Madoff world, people wonder who they can trust," says Hutchinson. "It's at the point in fact now where many families wonder if the can trust their family offices."

LGA established its Global Council about 10 months ago to help it serve high-wealth families with complex, multinational needs. In addition to Hutchinson, Lowenhaupt, LGA brass Mark Brown (COO), Joseph Rechter (CFO) and senior advisor Heidi Steiger, its membership includes Geneva-based Lee Thistlethwaite, an independent advisor to wealthy families and a former managing director of JPMorgan Private Bank, New Delhi-based Pradeep Dinodia, senior partner of S.R. Dinodia & Company, a family owned tax-accounting and advisory firm that provides corporate finance, legal and tax consulting to wealthy families in India, Kuala Lumpur-based Bashir Sharif of the Palladium Group, a family-business consulting firm, and Sydney-based Stuart Black, a senior partner of Chapman Eastway, an Australian accounting firm that has been providing tax and investment advice to wealthy families for over a century and -- as of late 2008 -- CEO of Lowenhaupt Global Advisors Australia.

Prince and pauper

Thistlethwaite agrees that re-building trust lies at the heart of the LGA-Trone initiative. "Caught between, on one hand, declining markets that have overwhelmed even the most prudent money managers, with banks' having irresponsibly leveraged people's portfolios, and -- at the extreme -- outright fraud, who are people supposed to trust?" he asks. "These principles are an attempt to formulate a 'Ten Commandments' so to speak -- a set of standards that everyone can subscribe to."

But Thistlethwaite sees challenges in establishing widely-accepted standards for global ultra-wealth management. "We see with families that a set of family principals isn't drafted in an afternoon; it takes months, years even -- and if it's difficult for a family, it's harder for an industry," he says.

Overcoming this natural torpor is vital, however. "We're looking at a previously robust international financial framework that's in tatters," says Thistlethwaite. "This is a very fraught period -- and not temporarily so -- that calls for new approaches to the marketplace whether you're a beggar in the street or the patriarch of a wealthy Middle Eastern family."

Hutchinson in fact sees vast new opportunities for family offices in the face of the broader financial-service industry's troubles. "I can see the problems in banking resulting in family offices taking on some of the role of the private banks -- if they have something to offer and, most of all, if they show themselves worthy of trust," he says. "Nothing in life stands still: family offices have got to be prepared to evolve with the families they serve."

Lowenhaupt writes the Families first column in this publication. -FWR

Purchase reproduction rights to this article.