The Impact of the 2017 Tax Cuts & Jobs Act on the Investment Management Industry

Current Events

The Tax Cuts and Jobs Act (TCJA) that was signed into law in December 2017 has already had, and will continue to have, a tremendous impact on the investment management community that warrants considerable attention from partners at RIAs. We won’t mince words – this tax bill is a blockbuster for the investment management industry.

Taken as a whole, TCJA has already been especially beneficial to the RIA sector, as lower corporate tax rates have had a positive impact on equity markets, boosting AUM and earnings, which are now taxed at lower rates. Although most firms are still assessing the full impact of tax reform, the TCJA will likely impact capital management, M&A activity, and investments in technology.

This whitepaper is a compilation of thoughts we have gathered at Mercer Capital in the early days of this new tax regime. We expect to learn more as the year rolls on, as the compliance and tax planning opportunities presented by the TCJA materialize and work through the system. We don’t suggest that this text is an exhaustive list of all of the implications of the tax bill on the investment management industry, but herein, we present what we think are the major issues that RIA partners should consider. Specifically:

  • The tax bill has made investment management firms worth more by:
    • Driving up AUM
    • Improving RIA economics
    • Making RIA pre-tax cash flows worth more
  • However, the tax bill has less of an impact on tax pass-through entities because:
    • The tax advantage of S-corps and LLCs, relative to C corporation, is now muted
    • Many RIAs will not benefit from the QBI deduction
  • Your RIA’s shareholder agreement probably needs to be revised because:
    • Most buy-sell agreements value the business via formula
    • TCJA renders many RIA valuation rules of thumb obsolete
    • The change in RIA valuations is potentially so significant that it calls into question the use of formula agreements entirely
  • The tax bill may have a mixed impact on asset manager M&A because:
    • Higher valuations will bring more sellers to the table, and buyers will feel more pressure to complete transactions
    • Internal succession, however, may be more difficult because individuals won’t enjoy the same increase in after-tax cash flows as corporate buyers

Download your copy of the whitepaper below and let us know if you have any questions on how these implications affect your firm.



The Impact of the 2017 Tax Cuts & Jobs Act on the Investment Management Community

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