In this article, Susan Grivno reviews Brooke Harrington's Capital without Borders: Wealth Managers and the One Percent. Here's her view of this fascinating look at the world of those who manage the money of the super wealthy.

Book Review: Capital without Borders: Wealth Managers and the One Percent (Harvard University Press, 2016)

by Susan Grivno

I first heard of Capital without Borders from Valerie Anastasio, who mentioned it during her excellent session on the wealth management industry at this year’s NEDRA conference. Valerie recommended Harrington’s work to those who wanted insight into the wealth managers of high net worth individuals (HNWIs), and it is indeed a fascinating and accessible read with little in the way of technical jargon or legalese.

 

Harrington is a Harvard-trained sociologist and professor in the Department of Business and Politics at Copenhagen Business School in Denmark. Capital without Borders is the culmination of eight years of research, including two years she spent training be a wealth manager. With a “TEP” in hand, she went on to interview 65 wealth management professionals—lawyers, accountants, and other advisers—in 22 locations across eighteen countries in order to gain a deeper understanding of this world that has historically been shrouded in secrecy.

  

I was familiar with CFPs, CFAs, CAs, and other designations in the alphabet soup of financial credentials, but had not heard of the program Harrington went through to become a Trust and Estate Practitioner (TEP). The Society for Trust and Estate Practitioners (STEP)* is a professional body established in London with membership of more than 20,000 across 95 countries. “The most experienced and senior practitioners in the field of trusts and estates,” TEPs are subject to a Code of Professional Conduct requiring them to behave professionally and ethically. U.S. focused prospect researchers may not be aware of TEPs as only 3% of STEP’s membership reside in the United States. The majority, 37%, are from the UK and Ireland. Canadians make up the next largest pocket of TEP professionals at 12%.

 

By enrolling in this intensive program, which consisted of courses in both Liechtenstein and Switzerland, Harrington was able to create a network of contacts not accessible to her as a researcher. That said, she did not go undercover. Much like the ethical prospect researcher who is transparent about their identity and the identities of the organizations they represent, Harrington was always frank about her role as a researcher and her purpose in pursuing the TEP certification and subsequent interviews. The result of this “immersion ethnography” is a study that proceeds along two paths: Who are wealth managers and what do they do? And what are the economic and social implications of their work?

Harrington traces the origins of wealth management back to the medieval practice of trusteeship. Trusts provided landowners away on military service a means to protect themselves by transferring the title of their assets into a trust. The first trustees were family and friends who became protectors of family wealth from the state’s inheritance taxes. Initially, the rules around this role were so strict that trustees were prohibited from being paid—what Harrington calls a formidable and intentional barrier to professionalism. The recognition of trustees as professionals started much later, in the 19th century.

 

According to Harrington the training process for wealth managers is part information and part socialization. Those born into some level of wealth and its trappings (the “manor born”) have the easiest time breaking into the profession. They must look and speak the part. Have gone to the right schools. And they must be comfortable with the social activities of the wealthy: golfing, riding, sailing, shooting, etc. Accounting and law backgrounds are typical for those entering the field, though college degrees are not required. A closeness to HNWIs has allowed some with unconventional backgrounds to enter the profession. One of Harrington’s interviewees started as a bank clerk; another was a boat builder who became comfortable with rich individuals after joining the yacht crew of an America’s Cup team.

 

Harrington spends a great portion of the book outlining how wealth management works and continually stresses that its chief aim is to protect wealth. The general approach is to apply legal tactics selectively to individual components of wealth, placing each into a jurisdiction that will have the most lucrative outcome. These components are then dispersed as widely as possible in a structure made as complex as possible to mask ownership.  Trusts may be spread across countries to reduce holdings in one country in order to avoid obligations due to creditors in other countries. Charitable foundations are used to avoid inheritance tax by paying heirs a salary for serving as board members. Wealth can be put into an Offshore Financial Center (OFC) trust to reduce taxes and provide other protections.

London and Switzerland are big hubs of wealth management, as are offshore jurisdictions like the British Virgin Islands and the Cayman Islands, which have unique trust systems in place that afford freedom from taxation and other legislative difficulties. The Cook Islands, a small country in the South Pacific, features prominently in Harrington’s work. Through a ruling the island nation adopted in 1989, assets held in Cook Island trusts are not subject to judgment by foreign courts and cannot be accessed by creditors. Notable cases include disgraced trader Marc Rich, who created $100 million in Cook Island trusts in his ex-wife Denise’s name with assets including a 157-foot yacht, a Learjet, and Swiss bank account. Ponzi-scheme fraudster Allen Stanford opened what he called the “Baby Mama Trust” there with part of the proceeds from a $7 billion illegal investment scheme, listing his mistress and their two children as beneficiaries. Baroness Carmen Thyssen-Bornemizsa of Spain has a private art collection (including works by Manet and Van Gogh) worth billions that she owns through trusts in the Cook Islands and other jurisdictions.

 

This is not entirely new information for those of us in prospect research, but insight into the mind-set of HNWIs and their money wranglers is eye opening. Wealth managers, Harrington states, liken themselves to financial architects, creating complex structures of organizations, corporations, trusts, and foundations—finding loopholes and regulatory gaps between the laws of different countries. Such complexity is intentional, meant to cause a “My Eyes Glaze Over” reaction from government enforcers. Her sociological opinion of this is clear throughout as she refers to these efforts as “professional subversion, “creative compliance,” and “regulatory arbitrage.” She says that "much of what wealth managers do...occurs in an 'ethical gray area' - a realm of activity that is formally legal but socially illegitimate.”

The motives of the one percent, as outlined in the book, are often surprising. Any claim to their wealth is seen as an injustice. Many of Harrington’s interviewees ardently believe they have a moral obligation to safeguard the wealth of their clients from government expropriation. She states that roughly 25% of those she interviewed endorse a philosophy of “libertarian anarchy” in which they view “unethical state taxation” as theft. Indeed, taxes are especially unconscionable because they function as a form of wealth redistribution, depriving the poor of opportunities to learn initiative.

 

The latter part of Capital without Borders is devoted to what Harrington sees as the downside of wealth management – money laundering, corruption and financial strategies that though legal are socially devastating. She writes: “For ultra-high net worth clients, it seems, being obliged to honor their debts, pay the costs of government, and otherwise obey the laws of the land are offenses to liberty.” She equates tax avoidance with theft and, though done obliquely, refers to wealth managers as “parasites.” Echoing the concerns of French economist Thomas Piketty, author of the 2013 book Capital in the Twenty-First Century—she warns us that wealth inequality is growing faster than income inequality.

 

Harrington is forthright in her assertion that the “cat and mouse” strategies utilized by wealth managers can be socially destructive. Take the nation of Jersey, one of the Channel Islands between the UK and France. Wealth managers jockeyed to bid down Jersey’s marginal tax rate for their clients, despite the island’s modest official tax rate of 20%. Due to the “economic and political dominance of wealth management, it is no longer really a sovereign state in any meaningful sense” as roughly half its population has fled. The brightest and most able citizen are gone, and those “left behind are ripe to be tempted by nationalist solutions, ethnic divisions, and the politics of hatred. Thus tax avoidance and rising inequality create a threat to democracy itself.” The phenomenon or “hollowing out of civil society” in offshore financial centers as Harrington puts it, is not unique to Jersey and has been dubbed “the finance curse.” Harrington does not think there is much to be done to curb the destructive influence of wealth managers, as they are “largely ungoverned and ungovernable” but notes that there are ever-increasing constraints to which managers must adapt.

Besides the sobering social implications Harrington highlights, to me the most profound question posed by her book is whether the industry in its current form is, in the end, sustainable. Ultimately, she sees the endeavors of wealth management professionals as economically damaging on a macro level. The fear and distrust this profession and its stakeholders have for governments and taxes make the business of wealth management one of safeguarding through “defensive orientation,” rather than seeking growth. The business is then, at best, unproductive. At worst, it is destructive as freezing wealth on the HNWI scale means that economic growth for all is diminished. When the focus is on the preservation of wealth alone, there will not be enough capital to stimulate innovation, entrepreneurship and growth.

Would I agree with Valerie’s recommendation of Capital without Borders? Definitely. It is easy to read and understand with great insight into different types of trusts and trust regulations. Her comparison of the merits of trusts, foundations, corporations and offshore corporations alone make it a valuable addition to one’s prospect research library.

 

It is also timely in light of incidents like the Panama Papers, the 2015 leak of 11.5 million confidential documents from the Panama-based law firm and corporate service provider Mossack Fonseca. The extensive reporting published the year following this massive leak revealed much about the legal, and sometimes illegal, methods used by the 1% to shelter their wealth. Harrington’s work is helpful in understanding not only the methodologies used, but also the worldview of the elites and their wealth managers.