Corporations now have far more incentive to acquire a registered investment advisory firm than in previous years, according to a report by DeVoe & company cited by cited by WealthManagement.com. This is due to an increase in after-tax income, and the possibility to boost the cash flow of acquired RIAs using corporate structures, according to the publication.
How the New Tax Code Makes RIAs an Attractive Acquisition
The recent reforms have reduced the corporate tax rate to 21%, which was intended to generate more after-tax income for companies to invest in machinery, better pay for employees and more jobs, WealthManagement.com writes. However, many analysts expect the money to be used for acquisitions, according to David DeVoe, managing partner at DeVoe & Co., the publication writes.
DeVoe’s RIA Deal Book, which examined the effects of the tax reform on RIA merger and acquisition activity, showed that the new tax code will make RIAs more attractive to corporations, according to WealthManagement.com. Firstly, large financial institutions that are structured as corporations could acquire RIAs using the additional post-tax income, the publication writes. This includes banks, which more than doubled the rate at which they acquired RIAs from 3% historically to 8% in 2017, according to WealthManagement.com.
Secondly, there is an opportunity for arbitrage as corporations could fold acquired RIAs, which are still taxed at 37%, into their lower-tax structures, and thus increase the RIAs’ after-tax cash flow, DeVoe tells the publication.
While most RIAs are structured as S Corps and LLCs, many are nonetheless considered personal businesses by a carve-out in the tax code, WealthManagement.com writes. The carve-out is based on the idea that a RIA is a “CPA working by themselves,” DeVoe tells the publication.
However, some RIAs like Brent Brodeski, CEO of Savant Capital Management, argue against treating RIAs as small businesses, because with a revenue of $10 million or $20 million, it’s not a single income, he says, according to WealthManagement.com. Moreover, this high tax rate also affects any income from a sale, so RIAs have little incentive to sell, the publication writes.
There were a total of 153 RIA merger and acquisition transactions in 2017, which is a record high, according to WealthManagement.com. However, growth is slowing with an increase of just 6% between 2016 and 2017, compared with a jump of 42% from 2013 to 2014, the publication writes.
