Are transformations in the financial industry inevitable amid changing client habits and rising cost pressures?
(Picture: Sean Pollock, Unsplash)
Does coming back to the office boost innovation and collaboration?
Citi, JPMorgan, Goldman Sachs and other financial groups are ramping up demands for five days in the office. Initially, they justified this by claiming that returning to the office drives company culture, innovation and collaboration. However, studies show mixed results regarding the impact of remote work on these areas. Some research indicates that remote work can hinder innovation due to the lack of spontaneous interactions and difficulties in team bonding. In contrast, other studies highlight that remote work can increase productivity and employee satisfaction, indirectly supporting innovative thinking by reducing stress and burnout. Furthermore, virtual collaboration through tools like Zoom and Microsoft Teams has mitigated most of the barriers to innovation posed by remote work.
Conclusion: Only partially. Returning to the office can foster innovation through face-to-face interactions and spontaneous collaborations, but hybrid work models and effective use of technology can also support innovation while offering flexibility.
Does coming back to the office boost regulatory compliance?
Recently, many firms have received support from the Financial Industry Regulatory Authority (FINRA) — the US brokerage industry’s main watchdog — which is set to reinstate pre-pandemic rules for monitoring workplaces in the coming weeks. This suggests a belief that in-person supervision and monitoring are more effective at ensuring compliance with regulatory standards. While compliance might be more challenging in a remote environment, the pandemic has shown that remote work can be effective. Modern technology supports compliance through encrypted communication, data analytics and secure access protocols. Studies and real-world applications have demonstrated that these advancements are effective in preventing breaches and ensuring data integrity.
Conclusion: Only partially and not necessarily. Returning to the office can bolster compliance through direct oversight, but technological tools can effectively support regulatory compliance in a remote work setting.
Can improved company culture and compliance from office returns boost profits?
On one hand, studies indicate that better company culture and robust regulatory compliance can enhance company profits:
A Gallup study found that companies with highly engaged workforces and strong cultures outperform their peers by 147% in earnings per share.
Deloitte research shows that firms with strong cultures experience 30% less turnover, reducing recruitment and training costs.
The University of Maryland's Robert H. Smith School of Business found that firms with robust compliance programs tend to outperform those with weaker programs in terms of profitability.
McKinsey reports that companies with advanced compliance capabilities have fewer regulatory breaches and related costs.
On the other hand, numerous financial companies have thrived with remote setups, suggesting that remote work does not inherently reduce profitability:
A Stanford University study indicated that remote workers can be more productive due to fewer distractions and flexible working hours.
Global Workplace Analytics reports potential savings of approximately USD 11k per year per employee in overhead costs.
Owl Labs found that remote workers tend to be happier and have longer tenures with their employers.
Conclusion: Not necessarily. Improving company culture and regulatory compliance can enhance financial outcomes, but remote work can also maintain or increase profitability. The economic impacts of culture, collaboration and compliance are indirect, making their assessment complex.
What is the main economic reason companies want employees back in the office?
The primary economic reason, with a direct impact, is that large companies are reluctant to bear high rent and maintenance costs for vacant premises, which represent unnecessary and underutilized fixed expenses. Coincidentally, many major corporations completed significant office moves or launched large construction projects shortly before or during the pandemic:
Goldman Sachs: European headquarters in Frankfurt completed in 2019.
JPMorgan: New building at 270 Park Avenue in New York announced in 2018.
EY: New office at One Manhattan West completed in 2019, with the move in 2021.
The initial investments in setting up these new offices (furniture, infrastructure, technology) might appear wasted if the space is not fully utilized. From an opportunity cost perspective, the capital tied up in office space could have been invested more productively elsewhere. Moreover, even if a company leases rather than owns its office space, it still incurs significant fixed costs like rent, regardless of office utilization. Regular maintenance costs, such as cleaning services, security, and building upkeep, continue to accrue even if the office is not fully occupied, not to mention property taxes.
Conclusion: Use of office space. Companies have long-term leases or own office spaces that are currently underutilized. Bringing employees back ensures that these investments are not wasted. This is the most tangible economic reason, directly impacting financial results rather than abstract considerations.
Do physical premises project a professional image to clients and stakeholders?
Some argue that financial companies need office space to host clients and conduct meetings in a professional setting. A large, well-designed office can enhance a company’s image and instill confidence in clients and partners. However, meetings can also be conducted at the client’s site, in the city or via video calls. During the pandemic, billion-dollar M&A deals were executed without parties meeting in person. Clients might appreciate avoiding physical meetings if it reduces project fees.
In the 1990s, certain activities were perceived as higher status acts and conveyed a sense of affluence and professionalism. Nowadays, these activities seem like utter nonsense.
Travel agencies provided personalized travel plans and exclusive deals, which were considered premium. Travel was less accessible to the average person compared to today. The act of going to a travel agency often implied that you could afford discretionary spending on vacations or business trips. However, the rise of online booking platforms has reduced the need for physical office spaces and intermediaries, leading to lower costs for customers who can now book accommodations and flights directly online.
Similarly, online platforms have transformed the education sector, reducing the reliance on physical classrooms. In the past, attending a physical learning academy signified prestige and bolstered one's social status. While traditional prestige associated with physical academies remains significant in many sectors and cultures, the landscape has evolved significantly as people increasingly prioritize speed and flexibility.
Conclusion: Physical office spaces still hold some value, especially for older generations. However, historical examples like the travel and education industries show that clients prioritize cost benefits and adapt to technological advancements that offer greater speed and flexibility.
Can any business switch to a fully remote setup?
Switching to a remote setup can be challenging if physical premises are central to your operations, like a barber shop or a car wash. However, many industries offering non-physical services have successfully embraced remote work. Examples include:
Software Development and IT: Automattic (WordPress) operates fully remotely.
Writing and Editing: Buffer is a fully remote company.
Design and Creative Work: InVision has a fully remote workforce.
Marketing and Communications: HubSpot allows most employees to work remotely.
Customer Service and Support: Zapier has a fully remote team.
Education and Training: Khan Academy has most employees working remotely.
Conclusion: Not every business can operate fully remotely, especially those requiring direct client interaction, such as a barber shop. However, for businesses offering intangible or online services, such as IT and marketing companies, a fully remote setup is generally feasible. The same can apply to the financial services industry.
How pivotal are physical offices to the finance industry?
Financial firms offer non-physical services, making it possible for the financial industry to transform into a fully remote setup. As discussed above, being present in the office can foster company culture and regulatory compliance, but hybrid work models and technological tools can effectively support these aspects and potentially improve profitability. Furthermore, client meetings can take place elsewhere, and clients tend to prioritize cost and time savings over the prestige of physical offices. This trend is especially relevant for service industries, unlike physical Veblen goods where higher prices might enhance desirability as status symbols (e.g., Swiss watches).
Some physical premises, like on-site data centers or server rooms, are necessary but can be outsourced to cloud services. Examples include Capital One and Goldman Sachs transitioning significant portions of their infrastructure to AWS.
Conclusion: Physical offices are not pivotal to the financial industry. With the right technological tools and hybrid work models, financial firms can maintain or improve their culture, compliance and profitability. The shift to remote work, supported by cloud services, demonstrates that the industry can operate efficiently without traditional office spaces.
How significant are office expenses at large financial companies?
The percentage of total revenue that large financial companies spend on rent and maintenance costs varies based on company size, office location and operational needs. Financial services firms typically allocate around 2% to 5% of their total revenue towards office expenses, including rent and maintenance:
These figures show that while office expenses are a small percentage of total revenues, they are significant in absolute terms. Optimizing these expenses through remote work or transitioning infrastructure to the cloud can enhance profitability.
Conclusion: Although office expenses represent a relatively small percentage of total revenues, they are significant in absolute terms. Large companies may explore ways to reduce these expenses, especially during economic downturns or if profitability decreases due to regulatory changes (e.g., increased capital and liquidity requirements) or upcoming interest rate cuts.
How much do clients pay for the office rent of their financial advisors?
According to our analysis of the office real estate market in Zurich, based on 100 vacant office premises, the median area of an office is 260 sq.m., and the median rent per sq.m. per year is CHF 315. This results in a monthly rent of approximately CHF 7,100 for an average office.
If a typical mid-sized consulting firm executes 5-15 projects a month with a targeted margin of 50% and an average project fee of CHF 20k, then the client pays up to 15% of the project fee just to cover the advisor’s rental costs. This figure might be even higher as we did not account for utilities and maintenance, office supplies like paper, etc. Larger consulting firms execute more projects, so a lower portion of rental costs is allocated to fees. However, they also rent larger premises than 260 sq.m., balancing the cost distribution.
Conclusion: Clients may be paying up to 15% of the total project fee to cover the rental costs of their financial advisors, depending on the size of the firm and the office area.
Why choose Nesterovs Advisory?
At Nesterovs Advisory, we adapt to the trend of avoiding unnecessary fixed costs like office rent and other overheads typical of traditional consulting firms. We operate fully remotely with a community of professionals spread across the globe, benefiting from the most cost-effective solutions. This approach allows us to maintain excellent quality while offering the best possible pricing and fees in the market.
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