At this point, you and your employees are probably well-adapted to working from home and communicating with clients via Zoom or related platforms. The ease and convenience of work-from-home solutions may have also triggered a closer look at your rent costs and other overhead expenses, especially if you’re in a high tax, high cost of living state like New York or California (which many of you probably are). You may have even taken this a step a bit farther and considered relocating to a more tax-friendly state with lower operating costs.
You’re not alone. Goldman Sachs, AllianceBernstein, Deutsche Bank AG, Blackstone, and several leading hedge funds have already relocated or have announced plans to move substantial operations out of New York and into more business-friendly environments like Tennessee, Texas, and Florida.
Moving to a lower tax and cost of living state can accomplish many financial objectives in one fell swoop.
Financially, it’s easy to understand why. Many investment management firms have been battling rising costs, fee pressure, and tightening margins for years. If the pandemic has proven that we can truly work from anywhere, then a substantial reduction in rent payments, overhead costs, and state income taxes is one way to buck the tide of thinning margins and take-home pay. Moving to a lower tax and cost of living state can accomplish all of these objectives in one fell swoop.
These financial incentives are why we expect to see more of this to come, especially on the asset management side, which has been particularly susceptible to fee pressure, client losses, and margin compression in recent years. Most of these firms still operate in New York or California because they always have, and many firms used to enjoy 40%+ margins despite higher operating costs. Now that margins continue to skid and most asset managers can pick stocks and serve institutional clients from anywhere, there’s not much financial incentive to continue operating in midtown Manhattan or San Francisco’s financial district.
Such a move may not be so simple as a matter of practicality. Asking all or substantially all of your staff to relocate is quite the ask no matter the operating environment. A more practical maneuver may involve keeping a much smaller New York or California office with satellite offices in more economical or tax-friendly states. The days of face time and having to physically supervise large portions of your staff are (thankfully) over. Gauging employee interest in new locales and business development opportunities across different markets is likely top of mind for many RIA execs in the coming year.
Relocating may be a riskier proposition for wealth management firms whose clientele are usually located in the same market. Client interactions during the pandemic have likely been reduced to Zoom meetings, emails, and phone calls, but this may not always be the case. If a vaccine is widely distributed next year and/or herd immunity is achieved, then many clients may go back to feeling more comfortable with in-person interactions. Serving these clients remotely could cause them to look elsewhere if they feel their needs are being neglected.
What makes sense for Goldman and AB might not be very practical for your firm.
On balance, there’s a lot to consider before pulling the trigger on an office relocation or addition. What makes sense for Goldman and AB might not be very practical for your firm. Thinking back to your microeconomics courses, you have to weigh the marginal benefits with the marginal costs before making an informed decision. Consulting key employees and clients is a great way to accomplish this since you may have to get their consent regardless.
Since there are nearly 4,000 RIAs in New York, we don’t think the Empire State will lose its RIA hub status any time soon, but we do expect a decline in the coming years. The real question is by how much and for how long. We could easily see a new hub in 2030 if the current trends persist over the next several years. If that’s the case, then maybe Manhattan office rents will be affordable again.