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Freedom From Wealth:  Heavy Hitters Offer Game Plan For High Earners

Freedom From Wealth: Heavy Hitters Offer Game Plan For High Earners

By turns invaluable and disappointing (and over-priced), “Freedom from Wealth: The Experience and Strategies to Help Protect and Grow Private Wealth” ( McGraw Hill, $50) is undoubtedly the big book of the season in the wealth management world.

The bona fides of co-authors Charles Lowenhaupt and Donald Trone, also the co-founders of the non-profit Institute for Wealth Management Standards, are second to none. Lowenhaupt, the founder, chairman and chief executive of St. Louis-based Lowenhaupt Global Advisors, an international multi-family office, is one of the wealth management industry’s most highly visible and experienced executives. He is also a managing member of the law firm Lowenhaupt & Chasnoff. Trone, best known for his work as an expert on ethics and standards and practices in financial services, is the founder and executive director of the Foundation for Fiduciary Studies as well as the founder of 3Ethos, a Mystic, Conn-based leadership institute.

The intellectual capital the two bring to bear in “Freedom from Wealth” is impressive, and wealth holders couldn’t ask for better guides to help them navigate the intricacies of managing private wealth. But while the authors do provide some badly-needed advice for constructing a wealth management strategy, their failure to explore critical issues facing clients is at the same time deeply frustrating.

To be sure, “the principles of wealth management” the authors espouse are rock-solid and incontrovertible. Who could argue with the need for wealth holders, trustees or foundation directors to “articulate purposes, goals, expectations and risk tolerance with respect to the wealth?” Or the need to have best fiduciary practices, succession plans, diversified portfolios, an investment policy statement, transparent fees and independent custody of assets?

As obvious as they may appear to be, the events of 2008 and the sad stories of clients of Bernard Madoff and Allan Stanford, demonstrated just how badly such principles, were – and are – in fact needed.

“Freedom from Wealth” is at its best when it clearly lays out exactly how families should approach the wealth that they have, including what they want it to be for and how they should go about managing it.

“Burdens of Wealth”

“Gaining freedom from the burdens of wealth requires wisdom and process,” the authors write, “wisdom to allow perspective and process to allow delegation of the minutiae. Together those can provide comfort to lead life free of the burdens of wealth.”

And Lowenhaupt and Trone’s advice on how wealthy families should approach philanthropy, asset allocation, due diligence, debt and family offices and family governance are particularly insightful.

In addition, the second half of the book lays out a useful (although sometimes simplistic) user’s manual, offering step-by-step guidance on how to tackle decisions necessary to put previously discussed principles in place. Unfortunately, too much of the first half of the book, while thought provoking, is spent on dubious propositions while not enough time is spent on probing deeper into critical nitty-gritty wealth management issues.

The authors, and Lowenhaupt in particular, believe that the most important issue for wealth holders is to achieve, as the book’s title states, “freedom from wealth,” by which he means “the burdens of wealth.”

Lowenhaupt cites psychologist Abraham Maslow’s famous concept of “self-actualization” as the goal for the wealth holder, to allow him or her “to be all he or she can be.” But it seems to strain credulity that someone with a lot of money really can’t do what they want to do or be what they want to be.

He goes on to blame the wealth management industry for “unnecessarily reinforcing the notion that managing significant wealth often carries burdensome responsibility.” But the argument seems like a red herring: managing a great deal of wealth obviously does involve a great deal of responsibility, and most of the book discusses the best ways to handle it.

In Lowenhaupt’s defense, he makes the case that wealth holders can make their lives better by adhering to sound principles that make wealth management more efficient, and finding the right people to do it the right way. But that in itself takes time and effort, and even when proper procedures are up and running, someone still has to keep an eye on them.

Tackling Pricing, Manager Selection

While “Freedom from Wealth” touches on key issues such as pricing for fees and services and selecting managers, it doesn’t dig deep enough. The authors point out that “the financial services industry builds efficiencies of scale into bundling,” for example, and correctly note that this can be a crucial issue for family offices “since, with the costs of the family office fixed, a reduction of assets under management increases the percentage cost of those remaining.”

They also advise, sensibly, that a “high fee schedule that is accompanied by marginal performance should be unacceptable” and caution against abuse of soft dollars and directed brokerage.

Yet there is no further discussion of pricing, which, let’s face it, is one of the most important considerations a family—or any wealth management client—is going to make when selecting a provider. The industry standard is charging clients a fee based on percentage of assets under management. How can clients negotiate the best price for the service they are looking for? And if performance is, in fact, marginal, what should a client do?

And what about other, non-investment services firms offer such as running family meetings, family governance, education seminars for the next generation and paying bills? How to charge for those services is one of the most hotly debated issues in the business. Firms are grappling with whether to include the services as part of the overall percentage of AUM fee or charge for them separately. Shouldn’t wealthy clients be aware of this point of contention?

Selecting a wealth manager is also a huge decision for the client, of course, and the authors do, to their credit, provide plenty of guidelines for how financial advisors should act once they’re on board. But there is surprisingly little advice on how to actually select an advisor or a firm, not even such fundamentals as going to the Security and Exchange Commission’s web site to check out an advisor’s past record.

Nor do the authors discuss another front-burner issue, the pros and cons of investing in an “open architecture” environment or one that offers only proprietary products. Each side has its merits, and for such an important investing decision one would think they would be fully vetted.

And for a book that is (rightfully) so concerned with exact and common sense principles for wealth management, it seems curious that the authors don’t advocate for stronger regulation of the industry, so wealth holders have legal recourse and protection if things go wrong.

Not only do Lowenhaupt and Trone not think more and stronger laws upholding the rights of investors and wealth management clients are a good idea, they even go so far as to claim, without offering a shred of proof, that “there is growing evidence that there is an inverse relationship between regulations and instances of abuse and fraud.”

It seems highly doubtful that victims of financial fraud favor fewer laws and regulations that protect investors.

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