Active management giant moves HQ to Nashville, saves $85 million a year
Alliance Bernstein relocated from New York to Nashville, saving roughly $85 million a year, without forcing a single portfolio manager to move — the savings come from real estate and personnel, and the bet is on hiring people New York can't reach.
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When passive squeezes active, cut costs before talking growth
The Alliance Bernstein Bernstein took over was hitting the biggest industry headwind since the financial crisis: money moving from active to passive, fees compressing across the board, institutional sales commissions sliding from 20 to 25 cents a share all the way down to a few cents or less than a cent. The firm itself had just been through a collapse — post-merger AUM had touched nearly $900 billion intra-quarter, and by 2012 only $380 billion remained; in 2006 roughly 70% was equity assets, and by 2012 only 30%. His predecessor, brought in from Goldman Sachs, restructured, replaced parts of the teams, and equity performance began to recover, which is what got the firm back to net inflows. Bernstein says what he brought was not firefighting but a more global perspective and an emphasis on distribution.
— Seth BernsteinMoving to Nashville saves $85 million a year, and nobody is forced to move
The firm was debating whether it could still afford a New York headquarters, and ultimately chose Nashville from five candidate cities — the reason being ‘wanting to be a big fish in a small pond’, which Charlotte or Dallas couldn't deliver. The move saves roughly $85 million a year, part real estate and part personnel. The key design: no portfolio manager is forced to relocate, because the firm is a ‘price taker’ for that kind of talent. As a result, nearly 100 portfolio managers chose to move. The challenges are concrete too: Nashville is the capital of healthcare services, and locally it is hard to find international tax accountants and technology and operations people with traditional Wall Street training; but the firm received a flood of résumés from Atlanta, Chicago, New York, Boston and the West Coast.
— Seth BernsteinSell-side research with no cross-subsidy can only be a joint venture
Bernstein says a buy-side firm owning a sell-side research business is a historical accident. Nearly every peer cross-subsidises its research department with equity capital markets or prime brokerage, and Alliance Bernstein had none of those businesses to subsidise with. So they put the research business into a joint venture with Société Générale, and made clear it would eventually transition entirely to SocGen. He specifically mentions the other side's concern was culture — a large French institution facing a group of Americans and Brits — so it had to be done step by step, very carefully. The transition period runs five years from the JV's anniversary, and they are still midway through it.
— Seth BernsteinBanks are structurally unsuited to holding long-dated fixed-rate assets
Bernstein uses his leveraged finance experience at JPMorgan to explain the structural opportunity in private credit: banks are highly leveraged players running short money, structurally unsuited to holding long-duration, especially fixed-rate, assets. JPMorgan at the time spent a great deal of time and money trying to securitise its loan book, and credit derivatives started from there. Insurance companies and funds are a better home for these assets, because funds don't offer a genuine liquidity option and therefore have no run risk. He states plainly that there is no maturity transformation in credit, and apart from interest and principal there should never have been any liquidity at all.
— Seth BernsteinPrivate credit's problem isn't defaults, it's insufficient disclosure
Asked how the industry gets past the first-half troubles this year, Bernstein's answer is education and transparency: tell clients how many names are on the watch list, how many have stopped accruing interest. He says there is currently no mandatory disclosure obligation, but regular updates to clients make them more comfortable, and one should ‘over-communicate in periods like this’. He also frames the problem as structural rather than systemic: defaults are simply the normal state of lending, and models typically already build in 2%, 3%, 4% default expectations; what went wrong was a handful of companies, plus fraud which has always existed; what genuinely went wrong was structure and pricing getting out of balance for a while. His conclusion is that after going through this, now is actually a better entry point.
— Seth BernsteinPrivate credit in 401ks: fees are not the obstacle
Bernstein thinks target-date funds and 401ks may be exactly the right place for private credit: demand is highly predictable, professional managers make the decisions, and plan sponsors are themselves sophisticated investors. Alliance Bernstein worked with Brookfield and Carlisle to develop a vehicle that can sit alongside target-date funds, building diversified exposure to private credit, private equity and private real estate. He concedes the industry has been too optimistic about the pace of adoption, that plan sponsors are conservative, and that this will take many years — but in ten years it will most likely be part of large plans. On the fee objection, his response: these are institutional buyers who will drive a hard bargain; and private assets are only a small slice of a target-date portfolio, so the impact on total fees is limited.
— Seth BernsteinRetirement planning should go through retirement, not stop at it
Bernstein points to Australia's superannuation funds as an example, saying they are thought leaders on how to think about retirement, and that one key practice is designing the glide path to go through retirement rather than stop at it. His reasoning: what most people need least at 65 is to hold mainly short-term fixed income and cash, because they may have another 20 to 25 years to live. More practically, many people haven't saved enough to retire, and will delay retirement and look for supplemental income. He also proposes a specific mechanism: rather than buying an annuity in one lump at retirement, design the target-date fund to leave a pool of liquidity at 75 to buy an annuity, which can significantly lower the cost of the annuity while extending income protection over a longer lifespan.
— Seth BernsteinAB is the last publicly traded partnership
Bernstein says AB is probably the last publicly traded partnership, a structure rare outside energy MLPs. It means issuing K-1 tax forms, and institutions have an allergic reaction to K-1s, which limits institutional willingness to hold. He describes the stock as ‘a bond with an equity option’ — essentially high-yield debt plus an equity kicker. Asked why not change the structure and make the stock pop, his answer is direct: if they changed the structure and the stock didn't pop, a lot of people would be unhappy; and most shareholders would be negatively affected on taxes, so the board has to consider it, but the honest answer is that it's not a sure thing.
— Seth BernsteinIn their own words · checked verbatim
you can have the smartest people in the world with the most impressive process deliver appalling returns. It's serendipitous why it works when it does work. So be careful mucking around in it.
Seth Bernstein11:30
Your whole revenue stream is structured on ad valorem pricing. So even when you destroy value and markets go up, you make more money, kind of a wonderful thing.
Seth Bernstein13:30
Look, either it's a fiduciary standard or it's not. It is that black and white.
Seth Bernstein15:32
But ultimately, there is no maturity transformation in credit. You got what you got. And frankly, I think there shouldn't be any liquidity other than the payment of interest and credit. repayment of the debt itself.
Seth Bernstein38:11
The last thing you need most people at age 65 is to be predominantly in short-term fixed income and cash. You need to be invested. On the assumption you have another 20, 25 years to go.
Seth Bernstein48:19
My advice to them is never act like you know the answer if you don't because you don't People aren't going to trust you because of your experience. So if you lose that trust early, it's really hard to regain.
Seth Bernstein56:29
People who think they can time the market and actually can prove out that they really do it well, you can count on one hand. Diversification, no one diversifies to get rich. You diversify to stay rich.
Seth Bernstein57:30
Figures
| Alliance Bernstein client assets | Over $905 billion | 0:02 |
| Alliance Bernstein post-merger AUM intra-quarter peak | Nearly $900 billion | 9:18 |
| Alliance Bernstein 2012 AUM | $380 billion | 9:18 |
| Change in equity asset share | From about 70% in 2006 to 30% in 2012 | 9:18 |
| Annual savings from Nashville move | About $85 million | 21:39 |
| Portfolio managers who moved to Nashville | Nearly 100 | 22:40 |
| Nashville headcount | More than 1,100 | 19:37 |
| AB dividend yield | About 9% to 10% | 51:26 |
Glossary
- ad valorem pricing
- Management fees charged as a percentage of the market value of assets under management, so revenue rises when markets rise.
- K-1
- A tax form partnerships issue to their partners; institutional investors often avoid it because of the paperwork.
- glide path
- The designed path by which a target-date fund shifts its stock/bond mix as retirement approaches.
- SMA
- A separately managed account for a single client, allowing tax management and avoidance of wash sales.
- superannuation
- Australia's mandatory retirement savings system, regarded as a thought leader in retirement planning.
How to listen
Suited to asset management professionals, investors watching the active-to-passive shift and private credit moving into retirement accounts, and founders currently weighing headquarters location or cost structure.
The first ten minutes or so on the JPMorgan career history and M&A history — fast-forward to 09:18.