Fidelity Panel Brings Taxes Into The Breakaway Equation

Tuesday, June 07, 2011 05:47
Fidelity Panel Brings Taxes Into The Breakaway Equation

Tags: breakaway brokers | Fidelity

The tax implications of going independent in the advisory industry are relatively subtle until you sell the business, a hand-picked team of experts recently told Fidelity.

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In a new white paper, Mark Hurley, Mindy Diamond and other gurus lay out the fine details of the breakaway proposition and ultimately conclude that from a day-to-day tax perspective it's kind of a wash.


RIAs can buy health insurance with pre-tax dollars and can push more money into SEP IRAs and other self-employed retirement vehicles. But wirehouse employees don't have to pay self-employment tax.


The real benefit, they say, is when you sell your practice. Employees have to report the transition package as ordinary income and pay income tax on it.


Independent operators can treat the money as a long-term capital gain, recovering a full 20% more money from the sale on an after-tax basis.


It's a unique argument that really only applies over the long haul. When Fidelity crunched the numbers for when breaking away pays off once taxes are taken into account, they came up with the same conclusion everyone always comes up with: three to four years.

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