Over the past half dozen years, surveys of investment professionals at brokerage firms and larger registered investment advisors at independent broker-dealers and private banks have found that about 60 percent of them have considered creating their own businesses. Yet no more than 10 percent to 15 percent are likely to take the plunge in the foreseeable future.
Entrepreneurship, despite holding the potential for increased profits and control, is simply something many investment professionals are not comfortable with. They recognize there is an awful lot that goes into running an RIA firm and they see their limitations in this regard.
But for advisors who do want to start their own business, there are ways to make the transition smoother and more efficacious.
A primary driver for many of investment professionals looking to strike out on their own is the ability to become wealthier. Analyses of newly established RIAs, however, repeatedly show that investment professionals are not recognizing ways to leverage wealth planning to their long-term personal financial benefit.
There are opportunities for professionals to use a combination of retirement structures to make all the appreciation in the business tax-free to themselves and any other equity holders. It is important to note that the longer-term strategy is to sell the RIA to another firm for these benefits to accrue. Still, setting up the RIA in this way can be somewhat complicated, but if the firm is successful, the tax and economic savings are enormous.
When the intent is to one day transition the RIA to junior partners or to sell it to a third party, various common wealth planning strategies can be employed. From using trusts to freezing the value of the firm for estate tax purposes to leveraging offshore structures to addressing asset protection issues and legal tax considerations, it is possible to generate significant personal wealth for owners.
Another approach would be to use captive insurance companies to not only mitigate taxes but also address a variety of risks. Some sophisticated investment professionals are incorporating captives into their firms’ equity structure, setting the stage for tax savings down the line.
For newly established RIAs working in multiple jurisdictions, such as the U.S. and other tax-advantaged locations, the opportunities to legally minimize taxes and increase the personal wealth of owners expands considerably. For example, an RIA might be able to leverage cross-border arbitrage opportunities.
While many of these wealth planning strategies can be adopted at any point in the lifecycle of a business, some of them produce the greatest impact when utilized as RIAs are first created. What is clear is that there are some very smart tax mitigation wealth planning strategies investment professional can use to their advantage when they first set up their RIA. Unfortunately, very few of these new entrepreneurs are taking advantage of them.
Russ Alan Prince, president of R.A. Prince & Associates, is a consultant to family offices, the ultra-wealthy and select professionals.