Private Chats

In my life I meet a lot of wealth managers.  I suppose it’s because many of them are intrigued with the startup space.  Generally they want to learn more about it.  Their clients ask them about it.  I am happy to chat with them about it.   I have chatted with wealth managers about startups, crypto and lots of other nuances in the venture world.  I see that as one part of my role in building an ecosystem since the more people understand, the more comfortable they will be with it.  It also helps them when adverse news on something comes out.

To be clear, if you are thinking of raising a VC or PE fund, the wealth manager pond is not the one to fish in.  They are there to manage their clients money, not make a huge pile of it.

In chatting with a bunch of wealth managers over the past two years, one thing is becoming super clear.  If they have clients in high tax states those clients are leaving to go to low tax states.  We see it in the data.  It’s not that they are advising them to go.  That decision is being made by the person, or that person’s accountant shows them the numbers.  The wealth manager reacts.

There is some stratification among wealthy clients that I am hearing about across all wealth managers.  Ironically, the more money you have the tougher the decision to leave.  You’d think it would be the opposite since the rhetoric and policies are aimed at the most wealthy.

Remember, this is a synthesis of lots and lots of conversations with lots and lots of people that are in the business of managing money.  Individual cases are just that, individual.  I had a friend move to a low tax state but they moved back to their high tax state.  The reason was their children.  I have friends that aren’t moving and the number one reason is family.

However, what I am hearing is that if you have more than $25MM in net worth, the odds are pretty good that you are staying in the high tax states.  You have the resources to organize your life to insulate yourself from the bad public policy or the tax policies designed to grab more of your wealth.  Perhaps you redomicile but keep your home.  If you are in a city like Chicago where crime is on the increase in neighborhoods where it didn’t really exist before, you buy a co-op or condo in a building that has a doorman and is very secure.  You frequent places that are low probability crime targets.  Your residence is probably not an integral part of your net worth so it just doesn’t matter.  It might even be paid off.  The money you earn might be mostly taxed at capital gains.  You might own a business that can’t move its physical location. You might have a business that gives you a chance to schedule when income comes in, or you might have a few write offs.

If the client has $10MM-$25MM, the decision is tough.  It all depends on how you earn your money.  If you are fully retired it becomes a tricky decision.   You have fewer resources to “design your life”.   See above.

If the client has less than $10MM they are moving.  There is no decision.  You don’t have the money to design your life in such away you can avoid the high taxes and fees.

Just an FYI the typical model a wealth manager will use is take your liquid net worth and multiply it by 4%   Take into account probabilistic losses using a program like Riskalyze because gains are gravy.  Hence a net worth of $10MM gives you an income of $400k.  Sounds like a lot until you run through the tax gauntlet plus the lifestyle a person who makes that wants to live.

Given the corruption and just simple outright theft and the constant populist drumbeat  against wealth and high earners you might be able to understand why behavior is what it is.

It bears repeating but many of the high tax states also have death taxes.  Most people don’t want to leave their hard earned capital they took a lot of risk to make to the government.  They’d rather donate it or leave it to their family.