If Ric Edelman gets his way, the next economic stimulus package Congress passes to help the United States weather the coronavirus pandemic would put some relief in RIA clients’ wallets.
The Edelman Financial Engines founder is urging Congress to make investment advisory fees tax-deductible again. The tax break, which grouped investment advisory fees as a ‘miscellaneous itemized deduction,’ disappeared in 2018 after President Trump signed the Tax Cuts and Jobs Act of 2017 (TCJA) into law.
‘We believe very strongly that financial advice is as core a function of investing as buying the investments themselves, and you’re allowed to take tax deductions for brokerage commissions that you incur, said Edelman, whose firm manages around $220bn in assets. ‘If you pay fees and expenses and commissions to buy and sell securities, you get to deduct those from your taxes.
‘Well, if getting financial advice is a core element of helping you choose what those investments are that you’re buying and selling, why isn’t the advice equally deductible? We believe it was incorrect for Congress to eliminate that deduction.’
Given the changes to the tax code brought on by the TCJA, commissions are (inadvertently) treated favorably, according to Michael Kitces, head of planning strategy at Buckingham Wealth Partners. In a 2018 blog post, Kitces explained that commission payments to brokers who sell mutual funds are treated as distribution charges, which is paid pre-tax as part of the fund’s net expense ratio.
‘Hopefully, Congress will eventually intervene and restore the tax parity between financial advisors who are paid via commission, versus those who are paid advisory fees,’ Kitces wrote.
The second round of stimulus could be the federal government’s opportunity to do just that, Edelman indicated.
‘This is an unlevel playing field and it is inconsistent and just a flat out mistake by Congress,’ he said. ‘That is why we strongly believe that the tax-deductibility of financial, tax and legal advice is entirely appropriate.’
Restoring the deductibility of investment advice fees is just one point on a 36-point list of recommendations he has made to Congress, which also proposes that that investors be allowed to make penalty-free withdrawals from their individual retirement accounts (IRAs) and that the US Treasury sell war bond-like ‘Corona Bonds’ to American citizens to raise relief funds
‘We are fighting a war,’ Edelman said. ‘This time the war is [with] a pathogen and not Nazis, but there’s no doubt that there is a massive amount of money that is required to fight this war just as there was in World War II.’
This article originally appeared on Citywire.
