Broker, retirement groups make last-minute pleas to change tax legislation

Pass-through provisions are target of groups representing employee-model brokerage firms, as well as retirement plan advisers.

Interest groups representing financial advisers are making last-minute pleas to lawmakers to try to shape sweeping tax reform legislation hurtling through Congress.

Republican and Democratic lawmakers were scheduled to convene a public session of the conference committee Wednesday afternoon to reconcile the House and Senate versions of the tax bills.

Published reports said that GOP lawmakers had already reached a tentative compromise on the tax package. The conference report is expected as soon as Friday, and final House and Senate votes could come next week.

But the conference committee may not yet have nailed down all the details. While the talks go on, adviser groups are trying to tweak what they call “unintended consequences” of the bills.

For instance, the Equity Dealers of America, which represents mid-size broker dealers, sent a letter to the conferees earlier this week warning that the Senate’s provision on taxation of pass-through businesses — such as partnerships, S corporations and limited liability corporations — would give independent-contractor brokers an advantage over brokerages where registered representatives are employees.

Under the Senate plan, pass-through owners would get a 23% deduction on income up to $500,000 before the income is taxed at individual rates.

“If the disparate tax treatment between the two models finds its way into the final legislation, then [financial advisers] could be motivated to leave employee FA model firms or re-classify as independent contractors solely [to] take advantage of the 23% deduction…and receive a lower tax rate on their income,” wrote Christopher A. Iacovella, EDA chief executive. “We request a change in the final language to prevent any tax arbitrage that could threaten the employee FA business model.”

The trade association that represents independent broker-dealers, the Financial Services Institute, on the other hand, supports the tax break. FSI executive vice president and general counsel David Bellaire said in a statement. “We support reduction in taxes for small businesses, especially our financial advisor members.”

The American Retirement Association also is raising concerns about the pass-through provisions. The group asserts that while the tax rates on business income would go down, owners would be “penalized financially” for making contributions to retirement plans and setting up savings programs for their employees.

“They’re working on it,” Brian Graff, ARA chief executive, said of lawmakers. “Part of the problem is that they’re doing this very fast. The challenge is getting this to be a priority when there are so many outstanding issues/problems with the tax bill overall.”

Another contested policy is a Senate provision that force investors who sell part of their position in a stock to unload the shares they bought first — so-called first in, first out, or FIFO.

An advocate who is trying to keep the FIFO language out of the final bill is optimistic. Last week, more than three dozen House members sent a letter to conferees criticizing FIFO for hurting retail investors and adding complexity to the tax code.

“I’ve been encouraged by the reception we’ve had,” said Joe Ziemer, vice president of communications and policy at Betterment. “It feels like the momentum is increasing for FIFO to be pulled off the table.”

For everyone lobbying on the tax bill, the bugaboo is “unintended consequences” embedded in the massive legislation, which is being completed in less than two months.

“We fully support tax reform,” Mr. Iacovella said. “What we’re trying to do is point out the unintended consequences of the pass-through language on the wealth-management business models.”