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. 

We'd like to take this opportunity to welcome and thank the volunteers who have joined the Programming Committee and the Conference Committee for this year!

Working with Lisa Foster and Renana Kehoe on the Programming Committee will be:
Elizabeth Donascimento, Northeastern University

Ruth Giles, Mount Holyoke College

Kate Hanson, Museum of Science, Boston

Elana Pierkowski, Dana-Farber Cancer Institute

Working with Susan Grivno and Erin DuPuis on the Conference Committee will be:

Anne Givens, Gordon College

David Owens, Boston Children's Hospital Trust

Amitha Vasant, University of Massachusetts Medical School/Memorial Hospital

Thanks so much for pitching in and helping out!

If you're interested in volunteering with NEDRA, you can contact our Volunteers Committee co-chairs, Suzy Campos and Pamela McCarthy.

Thanks to everyone who attended the lunchtime VINO in Maine, and to everyone all of the Apra attendees who showed up for the NEDRA networking reception there!

We have a Research Basics Bootcamp coming up at on August 30 at Bowdoin College in Brunswick, ME. If you are new to the profession or need a refresh on basic research skills and techniques, join Mary Taddia for this all-day intensive. More details are available on the Upcoming Programs page.

Keep an eye on that page and on your e-mail, because the Programming Committee has a lot of great ideas for educational programming and networking opportunities coming up, from VINOs to international research to analytics. As more information becomes available, you can read about it on the NEDRA site and in the NEDRA News Blog.

Since the next Research Basics Bootcamp is coming up at the end of next month, it seems like a great time to share this article by Anne Givens, Assistant Director of Advancement Research at Gordon College. Here, she guides us through some of the basic questions we should ask ourselves when researching a prospect.

Prospect Research Questions That Every Beginner Needs to Know

by Anne Givens

As researchers, our days are filled with questions: those being asked of us by others, and the ones we ask ourselves as we go through the process of researching a prospect. What do they do for work?  What assets do they own?  Does their philanthropic history indicate that they would be interested in supporting our organization?  These are the standard starting points for any donor profile. But there are more nuanced questions that need to be asked to gain a deeper understanding of a prospect. This list of questions will help you probe more deeply and accurately into a prospect’s potential. I wish someone had highlighted these for me when I first started out as a researcher!

Who is this prospect’s influencer or gatekeeper?

An influencer or gatekeeper is a person in the donor or prospect’s life who helps them make, or who consults on, financial decisions. This could be a spouse, parent, sibling or business partner. Some prospects will make philanthropic decisions entirely on their own. But for those who have an influencer, it’s very important to know who they are, how big a role they play, and how they might feel about your organization. 

Let’s say that CEO John Smith relies on the input of his father Ed Smith, company founder, for making financial decisions. Your organization is a university and John has a history of supporting higher education. However, his father Ed is a “self-made man” who never went to college and favors humanitarian efforts for his philanthropy. If your fundraiser is equipped with this information they can be ready with a plan for Ed to make the case for higher education as well as connecting Ed’s humanitarian interests with your organization.

What is the median home value in the area they live in?

This question is particularly important when considering a large list of prospects from different areas of the country, as in the case the new parent wealth screening that colleges and universities complete each year. If you’re screening a list of five hundred names and are looking to identify the top twenty-five prospects, a seemingly natural course might be to confirm assets and then sort from highest to lowest. The top asset totals rise to the top and this becomes your target group. The problem with this course is that a million-dollar home in San Jose, California does not point to the same capacity level as a million-dollar home in Oklahoma City, Oklahoma. Because the median home value in San Jose is about $900K, a $1M home would be about average there. However, the median home value in Oklahoma City is $138K, so owning a $1M home there is much more indicative of wealth. When reviewing a list as whole, be sure to scan it and see which geographical regions are covered. Median home values on the coasts and in and near metropolitan areas, tend to be higher, while those in the Midwest and rural southeast tend to be lower.  

What is their liquidity?

Liquidity refers to the amount of cash an individual has available. This question is less important for organizations that have the ability to receive asset-based giving such as real estate, stock, or art work. Many smaller nonprofits, however, are not set up to receive gifts this way, and rely on cash gifts. Real estate developers, whether commercial or residential, are a group that might be wealthy on paper but possibly have low liquidity. This is because their cash could be tied up in maintaining their current properties or being used to acquire new ones. Another group that could potentially have lower liquidity are corporate executives (particularly at new companies) who receive a significant portion of their compensation through stock options. If they have not yet exercised the options, then the stock is not owned by them and therefore not able to be liquidated or donated. Also, they might be on a vesting schedule that prevents them from accessing the full value of the stocks they have received. A third group that might have low liquidity is investors. Private equity and venture capital, both of which can be very lucrative, can create situations where an individual is “asset rich and cash poor.”  Similar to the real estate developer, they are wealthy on paper but their cash may be tied up in their investments. Note that for all three of these examples, there are many individuals who will have both extensive assets and liquidity. Additionally, the details of stock options and vesting schedules vary from company to company and even from employee to employee. This information is just to get you thinking critically about the issue of liquidity. 

What is the life stage of this prospect?

This question also ties into liquidity, but from a different angle. Educational institutions reviewing their alumni prospects will want give particular attention to this question. Let’s say you are comparing a twenty-eight-year-old doctor with a sixty-five-year-old accountant. Your first instinct may be to pursue the doctor knowing that on average their earnings are significantly higher than an accountant. This is where the life stage question comes in. A young doctor starting out is not yet earning top dollar or even likely the median for their specialty. Additionally, it’s very likely that they are paying off their medical school loans, which will impact their ability to give. However, a sixty-five-year-old accountant whose children are grown and out of the house and who has paid off their mortgage is in a much better financial position to make a gift.

What don’t I know?

One of the biggest benefits of prospect research is the impact it has on the frontline fundraiser’s face-to-face visits. It gives them the confidence and competence to successfully engage the donor and lay the groundwork for a solicitation. One thing we don’t want during these donor visits is for the fundraiser to be spending time going over information that they already know. Posing the “what don’t we know?” question in advance of a visit serves as a road map for the cultivation conversation. Sometimes a fundraiser will only get 30 minutes in front of a busy CEO, so every minute counts. If you already know that a venture capitalist has significant capacity but they don’t have a public giving history, then your fundraiser can guide the dialogue to what you don’t know, which in this case is what his philanthropic interests are. The conversation can go directly to what the VC is passionate about, and the fundraiser can begin to talk about how your organization connects to those passions.

The moral of the story is: Keep asking questions! The answers provide our fundraising road map, and they guide the process from “what?” to “so what?” to “therefore”. More on that next time. What are some of your favorite questions?

It's a term that's thrown around casually, but it's often misused. In this article from Spring 1998, Sandra Larkin talks about why it's generally problematic to claim you know a prospect's net worth.

The Illusion of Net Worth.pdf

The NEDRA Board met on June 15th and 16th for its annual retreat. This was the first in-person meeting for our newest board members. At the meeting, this year's officers and committee heads were announced. They are:

• Amy Begg (Harvard University): President
  
• Ian Wells (Ian T. Wells & Associates): Vice President and Co-Chair, Sponsorship
  
• Erin Ambrose DuPuis (Merrimack College), Secretary and Co-Chair, Conference
  
• Lisa Foster (Phillips Academy): Treasurer and Co-Chair, Programming
  
• Suzy Campos (Amherst College): Co-Chair, Volunteers and Co-Chair, Heather Reisz Memorial Scholarship
  
• James Cheng (Memorial Sloan-Kettering Cancer Center): Chair, Diversity & Inclusion and Chair, Social Media
  
• Bill Gotfredson (Boston Children's Hospital): Co-Chair, Sponsorship
  
• Jenn Grasso (Bowdoin College): Co-Chair, Heather Reisz Memorial Scholarship
  
• Susan Grivno (University of New Hampshire): Co-Chair, Conference
  
• Renana Kehoe (Harvard Art Museums): Co-Chair, Programming
  
• Pamela McCarthy (Northeastern University): Co-Chair, Marketing and Co-Chair, Volunteers
  
• Laura Parshall (MIT): Chair, NEDRA News & Industry Blog and Co-Chair, Marketing
  
• Ginny Santamaria (American Cancer Society): Chair, Membership
  
• Tim Wilson (Harvard Business School): Chair, Conference Scholarship and Co-Chair, Marketing
  

During the retreat, the Board discussed plans and goals for the upcoming year. Read on for more news from NEDRA!

It's going to be a quiet month up ahead, but don't worry, there's still an opportunity to connect with NEDRA members! On July 19th, there will be a lunchtime VINO at Bowdoin College in Brunswick, ME. If you need some networking and fun to liven up a long, slow summer day, register to attend the Lunch VINO: NEDRA Networking in Maine.

Sarah Richards is the Coordinator of Prospect Research for The Dynamic Catholic Institute. At our annual conference this year, she presented on the subject of "Exhilarating Email." If you missed her presentation, don't worry: this article covers much of the wonderful information she shared. Sarah is a Board Member of OPRN, and a member of AFP. If you would like to connect, you can contact her at: linkedin.com/in/sarah-richards-55735813

Exhilarating Email

by Sarah Richards

Most people do not associate the word "exhilarating" with the word "email," but I do. It is my goal that by the end of this article, you will feel as exhilarated by email as I do. For most non-profits, email is an affordable way to communicate with donors. But how can email be an affordable way to help the prospect researcher? All of the following tips and tools are free. Great start, right?

 

Email addresses are my personal favorite information piece to use to be able to begin researching a donor, board member or award nominee. Unlike names, addresses, and phone numbers, email addresses are unique. Multiple family members, even generational family members, may share a home address or phone number; however, most individuals have a personal email address.

Let’s start by assuming you have a donor’s personal email address. There is a great free Google Chrome extension called Rapportive. After you download the extension, put an email address into the "Recipients" or "To" section of a new email. Rapportive will look through LinkedIn and identify the profile of anyone who has that email address connected to their LinkedIn account. This is an accurate and efficient way to identify a prospect's professional and educational experience. It can also help identify their city and state, if you only had an email address and not a physical one. 

Now that we have found the prospect’s LinkedIn account using Rapportive and their personal email address, let’s find more information. Let’s download another free Google Chrome Extension called Email Hunter. Once you have downloaded the extension, refresh your prospect’s LinkedIn page. Now there should be an orange button on the profile that says "Hunter." When you click it, Email Hunter will look for the work email address of your prospect The extension will give you a confidence rating for the email address it finds. For example, it might inform you that it is 95% confident that the email address is correct. Or it may tell you it is only 67% confident that the email it provided it correct.  Either way, you can take that new email address and put it in Rapportive to find out if the same LinkedIn profile pops up. If it does, then it is an accurate match, and you'll know the email address is valid. If you do not get a match, it does not mean that the email is invalid. It could simply mean that the individual you are researching has not connected their work email to their LinkedIn profile.

 

If you don't get a match, how can you as a researcher test whether this new found email might be correct? Another way to check and to potentially find more information is to take the email address and put it in Google. Search for the email address within quotations. For example, “Me@mywork.com” By putting the email address in quotations, you are telling Google you only want results that contain those exact characters. Remember, email addresses are unique. If you find information about your prospect using this method for their work email or personal email, you can be reasonably sure the phone numbers, family information, and activities you find associated with emails using this search method are accurate--and as a researcher, I am all about accuracy. My team knows that I will not put anything in a profile unless I am 90% sure it is correct. If I'm 90-95% sure, I put a question mark next to the information. 

One reminder about using Email Hunter to obtain email addresses you did not already have: do not add them to your general e-mail list. In my company's database, we have what we call a secondary email location. Emails that are obtained from research or that a donor gives us but tells us they do not want generally used, we put in the secondary email space. It is also a good idea to inform your major gift officer or other team members that you found this email address through research, and that it is not one that the donor gave you. They can judge if and how  they want to use it to contact the prospect.

Email addresses are also a great way to learn more about your donor by simply looking at the information they provide you within the email address itself. For example, some people will put their birthday, middle initials or interests within their email address, such as “Paulrsmith@me.com” With this example, there is a high probability that your prospect Paul’s middle initial is “r”. What about “eyedrjones@me.com?” Dr. Jones is probably an optometrist. Now we can search for "Dr. Jones optometrist" within Google. If you know the state he lives in and his first name from other information in your database, you can use that to help narrow your results. Additionally, look at the domain name of the email address. Many states have a “rr” format. For example, “@wi.rr.com” If you did not already know, now you would know that your prospect lives in Wisconsin. There are also numerous company domains that you may not be able to find using the email in Rapportive or the entire email address in Google using the process mentioned above. However, you can still use the domain name to locate where your prospect works. If you find out where they work, you might be able to find a profile, work phone number or picture on the company website. 

Additionally, the beginning of an email address, often referred to as the “local-part” or the username, can be used to search social media to find out if that username is used in other places. For example, many people will use their email username as their Twitter handle or their Facebook username.

 

By now, my hope is that you have said "wow!" to at least one of these email research tips or add-ons. If you only learned one new way to use email addresses in your daily work, then I have done my job. Now take what you have learned and start researching using the email addresses in your database. Email addresses are a treasure trove of information. Happy hunting!

Thank you so much to everyone who filled out the recent NEDRA survey! The information you provided will be helpful to all of us in getting a better understanding of our industry as a whole and NEDRA in particular. Information on salary and on budgets for resources and professional development can be excellent support for anyone who wants to advocate for more investment in prospect development within their organization. Providing this information was important because of its value to YOU, the NEDRA membership, so thank you for sharing! We're currently working on creating a presentation for the data that will be available to NEDRA members soon. Stay tuned.

Ten years ago, MIT's Charlie Carr wrote this great article about different kinds of business organizations, and what they mean in the context of prospect equity ownership. Charlie may be retired now, but NEDRA members can still benefit from his insights!

Beyond Public and Private - Types of Business Organizations.pdf