June 6, 2011

Fidelity's Durbin Asks: Need Another Reason to Leave Wirehouses? Taxes?

Fidelity white paper explores the taxation issues that arise when advisors switch business models from captive wirehouse to independent RIA.

Many of the arguments presented for why a wirehouse broker might want to become a ‘breakaway’ broker and adopt the independent RIA model focus on the softer issues: you have more control over your brand, you can exercise your entrepreneurial spirit, and you get to pick which products to use on behalf of your clients.

Of course, there are also admitted benefits on the harder side of the equation. You won’t have to share your revenue with an employer and you’re building equity in a business that can not only provide you with a living now but may well build in value for when you decide to exit the business.

The latest in a series of Fidelity research reports on the benefits of RIA independence considers another important issue: taxes. Polling five different experts on the topic, Fidelity addresses the tax and succession planning issues that prospective breakaways should consider in its latest "Options for Independence" white paper, released June 6. 

(Fidelity says it will provide the paper to advisors who register at this Fidelity site.)

While careful to point out that the opinions in the paper are the experts’, not Fidelity’s, the conclusion is clear: including relatively favorable tax treatment, advisors in fact can make more money as an RIA while operating the company and also upon and after selling their companies.

The impetus for the white paper, said Fidelity IWS President Mike Durbin (left) in a Monday interview, came from talking to clients and prospective clients in the “breakaway pool,” who are “all trying to maximize the after-tax, intergenerational value of their book of business.” Durbin says that when those wirehouse brokers start to think about how to accomplish that goal, “they immediately find attractive the notion of being independent, and converting the value [in their book of business] from an income stream from an employer to long-term equity” in their own business.

The five experts quoted in the white paper--Mindy Diamond of Diamond Consultants; Brian Hamburger of MarketCounsel; Mark Hurley of Fiduciary Network, Robert Kester of Goodwin Procter, and Corey Kupfer of Market Counsel—weigh in on three major areas to consider: self-employment income, succession strategies and the different entity structures of RIA firms..

Durbin admits that there are “attractive sunset provisions in place at some of the wirehouses” that may be appealing to brokers looking to exit the business, but he notes they’re also “heavy on income when it comes to taxation. Eventually you have to retire and leave your book of business. As an RIA, you choose how you want to handle that; there are more degrees of freedom.”

As for whether the breakaway broker trend is continuing, Durbin argues that it definitely is, but in a different way than during the 2008-2009 crisis, when there were more such breakaways. The discreet number of brokers leaving the Wall Street firms may have reverted to pre-crisis levels, though growth is still on an upward trajectory, but Durbin stresses that it’s the increase in assets coming with those brokers that’s important, rather than the number of breakaway brokers.

The average size of the breakaway broker has been going up,” he says, which is partly responsible for Fidelity IWS growing its assets under custody to its current level of more than $500 billion. “Our business model is to capture assets,” Durbin says forthrightly. “I’m delighted at the pace of asset flows that’s come in over the past three years; that will be the metric that will prevail—the trend line is still flowing to the more broadly defined independent channel.”

There’s one other point he makes about the breakaway broker-argument. “I can’t think of an RIA who isn’t experiencing growth,” he says, and those assets “are coming from somewhere. We’re interested in the breakaway investor as much as the breakaway broker.”

With the paper, Fidelity is saying “if you’re thinking of going independent, consider these, and then call us. We’ll put you in touch with the right experts that can offer you” information on the “upside of independence. What we do is help clients navigate these complicated decisions," according to Durbin.

Reprints Discuss this story
This is where the comments go.