Personal investment firms that scour markets looking for opportunities are a relatively new feature in global finance. Referred to as ‘family offices’ these businesses are different to wealth management companies as they advise and help select fund managers rather than manage the wealth by themselves. Echelon sat down for a chat with Rob Ioannau, who founded Heritage Partners, a multi-family office, as a joint-venture with the Capital Alliance (CAL) Group in 2020. He explains why multi-family offices are essential for Sri Lanka.
Could you tell us your story so far?
I am a 23-year veteran in private wealth management. I have worked in the UK and Singapore during my career, working for big banks in senior wealth management roles from JP Morgan to HSBC and DBS. For some years, I have wanted to set up my own business and independent wealth advisory firm, so I decided to create Heritage Partners in Sri Lanka. I have always been involved with family businesses, whether I was working in Europe, America or Asia.
What is a multi-family office?
While a single-family office manages the affairs of a single family, a multi-family office advises for multiple families. The concept of a family office may be very new in Sri Lanka, but it is not in the West. Most of the wealthy business families here may have something like a family office, but they may not call it that. It might be their business’ chief financial officer who manages some of their money on the side. Family offices have existed since the days of Rockefeller and even before then. Essentially, A family office helps guide the family and the management of family affairs; its wealth, succession planning, estate planning, and the general administration of the wealth that is being created. At Heritage Partners, we see ourselves as partners of family businesses, which are the default economic unit in Sri Lanka.
There are broadly four pillars to the Heritage Partners offering. The first element is wealth management investment advisory services for both domestic and international assets. This includes manager selection and strategic asset allocation. The second component is what I call family advisory and estate planning services. That has everything to do with how assets are structured and held. Imagine you are wealthy, have a business and liquid wealth and hold it in your personal name, a trust, company or some combination of them. Then visualize if you have it not just locally but internationally, how are they held?
More importantly, if you are thinking about the next generation, how does that transition process work? A lot of what I do is around the advisory process on transmission of assets from one generation to the next, succession planning and coaching families. In particular, a very common issue in a family business today is where the owner, perhaps the patriarch or matriarch, is also the manager. The question, then, is ‘okay, if my son or daughter comes in to take over, are they both owners and managers, or are they just going to be owners? And, if so, should we hire a professional non-family chief executive officer? What does that look like?’ So a lot of the work I am doing is helping families through that process, helping them with family governance issues, business planning and succession issues.
The third element is philanthropy, community and giving back. I read that Sri Lankans are amongst the most generous donors globally. Of course, when you are a successful family, you have often given money to many causes, but, sometimes, it is not enough to do only charity. Families want to formalise and create a legacy. Families care about moving from charity to philanthropy, so that the issues they care most about endure for generations to come. A lot of the work we do is also helping families to formalise that legacy, perhaps through a charitable trust. The fourth and final element of the service is a catch-all: general supportive administration services, which could comprise everything from helping families to making sure they get the right reporting on what they have and where they have it.
You would be amazed that there are wealthy families that have business assets and personal assets, domestically and overseas. And, if you ask them if they have an asset liability statement, they will look at you and they will look at their chief financial officer and they will say, ‘well, actually no, we don’t’. Even an average person has multiple accounts and does not remember where anything exactly is, and the wealthier you are the bigger the problem, with personal and corporate accountsand money overseas. A lot of people that invest overseas do not do it with much thought to structure.
A lot of families have ended up with various relationships in managing their wealth and they are now thinking ‘wait a minute, how did I end up with all these relationships?’ Organising that structure of spread out wealth has become more important than ever. So, in the administrative part that we do weekly, we call it helping families get organised, whether it is with this structure or helping them set up their own family office. They outsource some of those functions to us, and we help them hire people, whether or not they are looking to recruit for their own efforts; basically we help their lives run more smoothly. Another issue is risk management, generally.
Helping families think about security is a real issue, whether you are talking about personal security or data security in the era of cyber security fraud where your financial data is being hijacked. Controlling the data that is out there about you as a wealthy family is increasingly important. So those are the four buckets: investment and wealth management advisory for both domestic and international assets; family advisory and estate planning; philanthropy, community and giving back; and general supportive administration services.
What were some of the most impactful events for you in family wealth management?
I will tell you two stories. I particularly remember one family that sold their company and they received shares in the acquiring company as part of the consideration. We had a discussion around what to do, because they had swapped privately-held shares for publicly-owned ones. They wanted to keep the shares, in hopes that the value would continue to rise, but I said, you have swapped one concentration for another, so you have to sell at least a significant portion of that. They ended up agreeing to sell 90% of the shares they received.
This was just before the dot com bubble burst in early 2001. I remember, at the time, the shares of the company that they received, were worth about 53-54 US dollars a share, and we sold out.
Six months later, they were down to less than 10 US dollars a share. It could have gone the other way as well: the shares could have risen, but the point I want to make is you might make your wealth through concentration, but you retain it through diversification. At the end of the day, that is critical. The second is a very personal story. My whole family made and lost a fortune. So for me, this is a very personal business. My paternal family is Greek, who were born in Alexandria, Egypt.
At the time, in the 20th century, there was a small, but significant, community of Greeks trading and doing business in that part of the world, and my paternal grandparents set up a very successful business. In the 1950s, there were challenges in Egypt and there was a nationalisation of foreign investments and assets. They lost everything and returned to Greece, pretty much penniless. My father, as the oldest in the family, had to do what many Greeks of his generation did — he went to sea. He started off as a deck boy, became a ship’s captain and ended up managing a fleet of ships for a wealthy Greek owner.
So, I saw how wealth creation and destruction can happen through big political events. It also happens when economies are challenged. In the 1980s, growing up in Greece, we had huge issues with regards to the economy. We saw rapid inflation and devaluation of what was then the Greek Drachma, and I saw my parents lose a lot of money as well. When I look at my family history, wealth preservation has a very personal meaning. So, what I hope to do with Heritage Partners is to help bring best practices around wealth preservation across generations for clients because I have seen that happen personally.
Why should families choose a multi-family office over its own single-family office?
A lot of the work we do is to help families understand what the costs are of running a family office. We use international benchmarks to see if you should set up a family office. We take them through financial models to see what is cost effective or not, and then how a multi-family office can add expertise without adding a lot of costs. If you have to recruit for a single family office directly, I think it will be a big issue for a lot of families. Very quickly, you have four or five senior people on your payroll. The minimum cost for running a single family office is typically 1-1.5 million US dollars.
That is the basic entry level for running a sophisticated family office. The average single family office costs 6-8 million US dollars a year to run according to an annual global benchmark study by UBS and Camden. The average cost is about 1-1.25% of a family’s active, non-business assets per year. So, the costs can very quickly escalate.
A multi-family office can give you both independence from the family, which can also be a good thing and access to expertise at a fraction of the cost. If you look at some of the biggest multifamily offices in the world, they started as single family offices: for example, Rockefeller.
How is a family office different from an asset manager?
Local asset managers are needed to do what they do, but that is not what we do. Our positioning is a little different, and deliberately so. We will not be managing assets, not directly, because that can also be a conflict of interest. If you are managing money directly, your incentive is to manage a bigger share of your client’s wealth.
That is a conflict of interest because if we are managing money globally, we want to help our clients get access to the best managers that are out there.
No one firm can say they are the best manager or specialist of asset classes in reality. Instead, we help families with frameworks for asset allocation and management selection, so we position ourselves as a manager of managers. That is a crucial distinction compared to a local asset manager.
What is your process for advising on wealth management?
We put the asset allocation together for clients and we will help them map out an investment strategy based on the risk-return profile and we will then give them a recommendation in terms of what we think makes sense. Then, we will arrange beauty parades for them to meet the managers and allocate money accordingly.
What we will not be doing is managing portfolios at the security level; whether to buy a bond or sell a stock, because that is what asset managers do. We look at the investments from a holistic perspective.
Why did you decide to set up your business in Sri Lanka?
Generally speaking, both wealth management and private banking are not new concepts in Asia, and have been well-established in Singapore and Hong Kong for a number of years, but what is a new industry is the independent wealth management or wealth advisory industry. The reason we have set up is because families are increasingly looking for holistic advice rather than practical advice. If you are a consumer in Asia, you typically buy a product.
You do not get advice, or the advice is linked to a product. What we are doing at Heritage Partners is essentially offering independent advice for a fee without any product attached to it, and this is a new concept in Asia. I decided to set up the multi-family office in Sri Lanka because I felt that the big centres of Singapore and Hong Kong were saturated. Everyone has set up private banks, wealth management firms, investment firms, asset management groups and even multi-family offices. In Europe and the Americas, this is a very established sector.
Generally, if you look at the independent wealth management sector, of which multifamily offices like ours are a part of, you would typically expect these kinds of firms to have a 15 to 20% market share of the private wealth market in Europe and the Americas, and the other players would be private banks, investment management companies, brokerage firms and asset managers. In Asia, that market penetration rate is actually slightly below 5% and most of those firms, unsurprisingly, sit in Singapore and Hong Kong.
There are roughly 150 independent wealth management firms in Asia today with assets under advice of approximately 100 billion US dollars, according to research that we have done, and about 55% of those firms sit in Singapore and the other 40% or so in Hong Kong. Outside, you get a few in countries like China and India.
However, we are going to see the penetration rate of independent advisory firms explode in the next five years. According to research by Asian Private Banker, we think that the penetration rate for independent wealth firms will double from 5% market share to 10% by 2023.
Why set up in Sri Lanka? Clients in markets like this are underserved. They do not have that level of expertise available locally. I do not need to be in Singapore. If my client needs something out of Singapore, I just plug into a solution in Singapore. Sitting in Sri Lanka, I can be close to families. I can be jurisdictionally neutral. In Sri Lanka, there are a few big things that are going to dominate, in my view, local family thinking in the next ten years or so. One is the transition and the transmission of wealth from one generation to the next, whether you are talking about business or private wealth, and if you think about it in your context, post1977, in the Jayawardena era, when market reforms started, a lot of Sri Lanka family businesses began then or even earlier, and now that generation is getting ready to pass the baton to the next.
The questions are: will the next generation take over? Do they want to take over? Or do they want to do something different? Questions around ownership and management of family businesses are really significant in Sri Lanka today. The second theme is what I call the internationalisation of Sri Lankan families and businesses. Take your local business champions here. Many of them have a commanding market share of a local economy here, but then are looking at opportunities to grow and expand either within Asia or even globally.
So internationalisation is taking place. That links into, not just business wealth, but also private wealth. The Central Bank of Sri Lanka has liberalised exchange controls and, in our view, it will continue to do that, as it allows capital to flow in and flow out increasingly. So, Sri Lankan families and investors today are looking to not just invest in Sri Lanka, but also overseas.
And, the third element of internationalisation is families moving overseas. You have a family member who moved overseas, got a residency or citizenship. So putting this together, you have the transition and transmission of wealth, and the internationalisation of businesses wealth and families. And, these themes are going to intersect over the next five to ten years and really dominate the way that families think about investing now and for the future.
With that in mind, Heritage Partners was set up as a holistic and independent advisory business in order to guide families through these big themes that they are thinking about. Wealth is being created in Asia and this industry will develop over time just as it did in Europe and the Americas, so we may be considered to be pioneers, by setting up a multi-family office in Sri Lanka today. Ten years from now, I guarantee, you will have probably 10 or 20 firms that are doing it.
Are you also thinking of tapping into families in the region, like in the Maldives and India?
This is my own personal dream in a way, so I came here to start this business. Initially, we wanted to be the pre-eminent multifamily office in Sri Lanka, advising business families on all their needs. However, at the same time, I have a view that Sri Lanka, as it develops, is going to become increasingly international. Look at the Port City that is being built and talks about the International Financial Centre.
As we look at Sri Lanka’s position on the New Silk Road, and the Belt and Road, I would like to think we could become the go-to family office for families in emerging and frontier markets.
How much of a barrier are exchange controls?
For my business, it is not a barrier because we charge advisory fees, so we are not depending on managing money locally. We can operate as a multi-family office from any jurisdiction. I could sit in Singapore or London, so for Heritage Partners, exchange controls are not a barrier. Having said that, obviously, for wealthy families that have assets they are looking to deploy, whether business assets overseas or personal assets, they have to deal with the realities of exchange controls.
The Central Bank of Sri Lanka has already taken steps to liberalise, although there are still annual personal and corporate thresholds. But, as far as I am aware, there are no limits in terms of the number of corporate entities that can be set up. So, if you want to expand overseas, there are ways to do it. Of course, it is limited today, and that will probably increase in years to come. Many Asian countries are in that environment now. Singapore and Hong Kong are the outliers. They are not the norm. Families that are looking to expand their businesses have to face those realities.
What are the improvements needed to internationalise Sri Lanka, given your experience in Singapore?
One thing is modern company legislation. One of the things that Singapore has done brilliantly is it has encouraged companies to set up their regional headquarters in Singapore, for their regional or even global businesses. They have a modern company legislation and framework, and they have a very simple tax system.
They make it easy for companies to set up in terms of incorporation and foreign shareholders. If you want to internationalise, you need your local champions to internationalise in the next five to ten years. I think the challenge for a number of Sri Lankan businesses today is if they internationalise, do they need to remain headquartered in Sri Lanka or do they need to move overseas?
If I am a policy maker today, I would make Sri Lanka as attractive as possible for regional companies to set up headquarters here, through a modern company legislative framework, a simplified tax system, the ease of incorporation, and the ability to hire anybody with visas. If you look at Singapore, they have a world-class system of short-term and long-term visas with a path to permanent residency and even citizenship for people who go there. So whether you have a short-term hiring need, or a longterm business need, there are many schemes available in Singapore that are not available in Sri Lanka today.
If I was an investor in Sri Lanka for a decade with a business and capital here, I have no end date in mind. Why would you not consider me becoming a citizen of Sri Lanka in the future if I show my economic commitment? Of course, the Sri Lankan government wants to ensure that employment opportunities are created locally for people, because there is a big talent base, but there may be some skill gaps, and Singapore has systems in place to attract those skills that they want.
So I want to see improved visa schemes and residency schemes to attract needed talent to Sri Lanka to induce regional businesses to move to Sri Lanka. If a company sets up in Dubai, Singapore, Hong Kong, Thailand or Malaysia, they have very simplified territorial tax systems in place. In Sri Lanka, I am taxed on my global profits, and it is a little bit cumbersome.
I know the government has taken steps to try to simplify it, but, if you are positioning yourself as a hub, you have to look at what countries around the world are doing. If you are a businessman, you think about the ease of doing business and where you get the least headaches. In Singapore, you are only taxed for your earnings generated there, and if you have money in a bank generating dividends and capital gains, they are not taxed or liable to estate duties.
Sri Lanka has a natural endowment in terms of country landscape and geography, which are far richer than Singapore and Dubai. You have wonderful talent, time zones and location between the East and the West, pristine landscapes that could attract longterm wealth creators and you have landmass: you may think Sri Lanka is a small island, but compared to Singapore it is huge. So a lot of the natural ingredients are there, you just have to modernise.
If you want world-class wealth creators to come to Sri Lanka, you will also need world class schools, universities and healthcare facilities if families are going to move here. Countries like Malaysia and Singapore have encouraged international schools to set up campuses. You could have that in the Port City.
Finally, you need to have money, so you need to have an open capital account. Sri Lanka has liberalised exchange controls. For Sri Lanka to thrive as an open market economy, you have to open the capital account. China or India can restrict foreign exchange controls, but for small countries that want to grow and need capital to grow, it would be very difficult if you maintain extreme levels of control. It is worth looking at what other successful central banks have done.
The Monetary Authority Singapore is the lead regulator but it also has a business development programme that is very pragmatic.
How big is your market in Sri Lanka?
Wealth is being generated across the country. You have a country with a population the size of Australia in an island the size of Tasmania. It is a small place, but a lot of concentrated wealth that is underserved. Even if we looked after 20 families at Heritage Partners, we are good. We have done a rough map, and we think there are over 150 families in Colombo that have assets, including a business in excess of $50 million, and that is probably a conservative estimate.
You may be surprised, because oftentimes, you may look at the business and not look at the people behind it. There are some outside Colombo as well. This will change over time. As Sri Lanka continues to grow and internationalise you will have more wealthy people coming in. So, you will see the mix of wealth change. Sri Lanka is looking to attract high net worth people from China, India and Europe and they will have advanced needs as well.
How independent are you from CAL?
It is very simple. The ultimate expression of independence is that you can be a client of Heritage Partners without having to be associated with CAL in any way if you do not want to be. We are legally and practically separate from the CAL Group with a different office,a different entity, and we do not share information. CAL wants to develop this business because CAL has a significant client base of business families that work with it in different perspectives.
CAL wants to have a resource available to service their clients, but run independently. CAL has a certain expertise in capital markets, but it does not have the expertise as a family office. On the other hand, with foreign families coming to Sri Lanka, we may have a need for a strong local partner like CAL, which, obviously, has a strong local expertise that might interest some families.
What will the Heritage Partners structure look like?
Aside from myself, the team will include a wealth partner that understands estate planning and structuring. I had that background as well. I have worked in several jurisdictions so I understand tax issues. We will also have a due diligence expert to look at different third party managers and help analyse that. Additionally, we will have a few client servicing team members who can provide day-to-day support to clients.
Have you signed your first client?
Yes, we have signed more than one.
Should families have a minimum wealth for you to be interested in them?
I know it is traditional for private banks to measure clients by size, and I think that is really unfair to local clients. I think the issues are complex, based on each client and their circumstances. So, let me rephrase the question: who might want to get our advice at Heritage Partners? As we do not manage money directly, so we are not measuring in terms of a family giving us ‘x’ amount of money.
We will charge a fee for the advice, but that would be totally unrelated to investments. The fee could be about advice on setting up a family office or based on some succession planning. We work off a minimum fee schedule, not a minimum asset size. As long as the clients are comfortable to pay for those minimum fees, then we are happy.
Our typical client will probably be a family which has an operating business of a certain size. It has to have a certain prominence, and perhaps planning a transition between generations.
Since this is a new service to Sri Lanka, what challenges do you anticipate in on-boarding clients?
This is not a mass market service, so the best way we would get new clients is through word-of-mouth. At the end of the day, our business comes down to trust and honesty. We are not looking for 300 clients. If someone is happy with the service they got and they are willing to recommend us, we have done a good job.