The National Association of Personal Financial Advisors

Transcription

1 November 8, 2007 Senator Nancy Cassis, Chair Senate Finance Committee Michigan State Senate P.O. Box Lansing, MI Representative Steve Bieda, Chair House Tax Policy Committee S0789 House Office Building Michigan House of Representatives P.O. Box Lansing, MI RE: Repeal of the Sales Tax on Savings Dear Senator Cassis and Representative Bieda: The National Association of Personal Financial Advisors (NAPFA) expresses its strong opposition to certain sections of HB 5198 The Michigan Sales Tax on Services and believes the implementation of this law will negatively impact the lives of many financial advisors as well as residents of the state. We urge you to repeal the portion of P.A. 93 or specifically subsection 3d.(1)(e) that will impose a tax on investment advice services, as described in NAICS industry code We believe this tax would discourage residents of Michigan from seeking financial advice from objective, trusted advisors, and will have a long-term negative impact on residents of the State of Michigan. NAPFA is an organization dedicated to the advancement of comprehensive, Fee-Only financial advice for consumers. Members of NAPFA, in order to maintain independent and objective professional judgment, do not accept commissions for any sale of a product, and they receive fees directly from the clients which they serve. Of the nearly 1,700 members NAPFA possesses nationally, 47 are from the State of Michigan. Those 47 members can be found in every corner of the state from Traverse City and Adrian to Wyoming and Grand Rapids. NAPFA s members are leaders in their respective communities, and they are among the most respected financial advisors in the country. 1 NAPFA Comment Letter Re: State of Michigan Public Act 93 of 2007

2 This tax on professional investment services implies that the leaders in the Michigan Senate and the House believe that the sale of investment products for a commission is preferable to paying for objective investment advice. We believe this sends the wrong message to consumers. More and more consumers today recognize the need for objective financial and investment advice and seek out professional advisors. This tax could very well cause them to rethink independent, objective advice. Investment advice services are not discretionary, they are necessary for middle class Americans who recognize that it is up to them to make the right choices in saving for their family s financial future. We are also very concerned that Public Law 93 will place financial and investment advisors that are doing business in the State of Michigan at a severe disadvantage to those who are based in neighboring states. This could mean relocation of individuals and their associated businesses to other states, which would have a negative economic impact on the state of Michigan. There are many examples of states such as Florida that have tried to tax professional services. Most of these attempts have failed to accomplish the objective of increasing revenues in a cost effective way and have been repealed after a very short period of time. We understand the need to increase revenue in the state and believe that you want to make decisions that are in the best interest of the citizens of your state. In summary, we strongly recommend that P.A. 93 s sales tax on certain investment advice services be repealed, and that the sales tax not be extended to any professional services within the financial services industry. The four primary reasons for our recommendation are: The sales tax, because it excludes non-fiduciary investment product sales services (including 12b-1 fees) while only taxing fiduciary investment advisory services, is discriminatory and devalues the importance of objective advice; Increased costs will occur for Michigan residents, who are desperately trying to save and invest for their long-term needs by hiring professional, trusted advisors to assist them, and discourages them from seeking assistance, leading to increased long-term financial burdens upon the State of Michigan; NAPFA members and other financial advisors value their home in Michigan, but they could find themselves at a serious competitive disadvantage vs. advisors in other bordering states; and It will be extremely difficult to further define and administer the assessment and collection of these taxes efficiently and fairly (further discussion of these points is provided in Appendix A). NAPFA urges you to listen carefully to the concerns of those business owners who provide professional services to individuals in the state of Michigan and to repeal the tax on investment advisory services. 2 NAPFA Comment Letter Re: State of Michigan Public Act 93 of 2007

3 Again, the National Association of Personal Financial Advisors thanks you for the opportunity to submit these comments. As the nation s leading organization of fiduciary financial advisors, we are available to respond to questions or to lend further assistance should you require it. Sincerely, Ellen Turf Thomas A. Orecchio, CFP Diahann W. Lassus, CFP CEO Chairman Chair, Industry Issues NAPFA NAPFA NAPFA cc: Senator Michael Bishop Senator Cameron Brown Senator Bruce Patterson Representative Andy Dillon Representative Dan Acciavatti attached 3 NAPFA Comment Letter Re: State of Michigan Public Act 93 of 2007

4 APPENDIX A The anti-consumer provisions and discrimination found In the 2007 Act. The Act imposes taxation upon fiduciary investment advisory services, but not upon the provision of investment product sales undertaken in arms-length, non-fiduciary transactions. We believe this is both discriminatory and contrary to the interests of consumers. Specifically, we note that Public Act 93 of 2007 does not impose a sales tax on the following services: NAICS Code Service Description Bond brokerages Brokerages, securities Securities brokerages Stock options brokerages Mutual fund agents (i.e., brokers) offices Michigan consumers may seek assistance with their investments from stockbrokers (known as registered representatives of broker-dealer firms). Since stockbrokers cannot receive special compensation nor provide advice unless it is solely incidental to the sale of a security, stockbrokers are compensated by various means, such as front-end sales, deferred contingent sales charges, and brokerage commissions, as well as 12b-1 fees (which are often 1% on Class C shares of mutual fund companies). Moreover, in most instances stockbrokers are not subject to broad fiduciary duties of due care, loyalty, and utmost good faith the highest standards under the law. Rather, they are subject to the much lesser standard that the product sold be suitable for a client. Michigan consumers could also choose to consult with Fee-Only financial planners on their investments, such as NAPFA members. NAPFA members and many other investment advisers are compensated on the basis of hourly fees, a fixed fee, and/or by a percentage of the assets managed (such as 1% of the assets managed). Because Fee-Only NAPFA members eschew fees from product providers, and have adopted a fiduciary oath to always act in the best interests of the client, NAPFA members are free to recommend the very best products for their clients, not the ones which may pay them a higher commission. In addition, NAPFA members have passed a rigorous review process to become members of NAPFA, and have demonstrated the core competencies necessary to design investment portfolios with substantially lower costs and greater tax efficiencies than those portfolios put together by the vast majority of broker-dealer firms and their registered representatives. We further note that the percentage fee arrangement used by many investment advisers, which is subject to the sales tax, is very similar to the receipt by broker-dealers (stockbrokers) of compensation under a Class C mutual fund, which often also pays the broker-dealer firm 1%, but which is not taxed. Given that there is very little distinction in the amount paid by the consumer or paid to the person 4 NAPFA Comment Letter Re: State of Michigan Public Act 93 of 2007

5 rendering advice about investments, the tax on investment advisory services, while excluding product sales (and therefore not taxing 12b-1 fees) lacks rationality and is discriminatory. As noted previously, the often-conflicted product sales advice which is provided in connection with the sales of securities by stockbrokers to their customers is not subject to the sales tax. In contrast, the objective, fee-only financial planning and investment advisory advice provided by NAPFA members to their clients is subjected to the sales tax. Unfortunately, this implies that the leaders in the Michigan Senate and the House believe that the sale of investment products on a commission basis is preferable to paying fees directly for truly objective, trusted investment advisory services. We believe this sends the wrong message to consumers. More and more consumers today recognize the need for objective financial and investment advice and seek out professional advisors who adhere to broad fiduciary duties of due care, loyalty, and utmost good faith. The Michigan Legislature should not discourage this global trend, in which consumers are provided greater protections under the law and, as a consequence, better investment advisory and financial planning recommendations. The essential nature of investment advisory services. Investment advisory services are not discretionary in nature. The receipt of objective financial planning and investment advisory services are essential for Americans in this complex financial world. As stated by Professor Jonathan R. Macey s seminal 2002 white paper, Regulation of Financial Planners : [E]ffective financial planning is important to the success of a free-market economy. If people do not make careful, rational decisions about how to self-regulate the patterns of consumption and savings and investment over their life cycles, government will have to step in to save people from the consequences of their poor planning. Indeed the entire concept of government-sponsored, forced withholding for retirement (Social Security) is based on the assumption that people lack the foresight or the discipline, or the expertise to plan for themselves. The weaknesses in government-sponsored social security and retirement systems places increased importance on the ability of people to secure for themselves adequate financial planning. [Macey at p.4]. It is a far more complicated financial world today than it was even 20 or 30 years ago. Due to the decline of defined benefit plans and the rise of 401(k) and other forms of defined contribution plans, individual consumers now face the daunting job of saving and investing for retirement, and managing their nest egg during retirement. The receipt of objective, trusted advice in a world full of a multitude of complex investment products and a multitude of risks is essential for every American. The taxation of such services not only sends the wrong message to consumers, but also discourages the use of such services, likely leading to increased burdens upon Michigan state government and local governments in future years as they attempt to care for those who failed to receive trusted financial planning and investment advice. Public Law 93 in its present form will send a message to investors that leaders in the state of Michigan do not believe that saving for their future is a high level priority. Please consider the impact this tax will 5 NAPFA Comment Letter Re: State of Michigan Public Act 93 of 2007

6 have on consumers who depend on trusted financial advisors. If these advisors pass the tax burden on to Michigan residents by increasing service fees, you will impact the ability of your constituents to save for retirement. You will bring in revenue to balance the state budget, a short-term effect, but you will impact negatively the future fiscal health of the State of Michigan. NAPFA encourages Michigan legislators to utilize foresight to avoid such a result. Disadvantage of Michigan financial planners and investment advisers, relative to those located in other states. We are also very concerned that Public Law 93 will place financial and investment advisors that are doing business in the State of Michigan at a severe disadvantage to those who are based in neighboring states. This could mean relocation of individuals and their associated businesses to other states, which would have a negative economic impact on the state of Michigan. A repetition of history: failed attempts to tax services. There are many examples of states such as Florida that have tried to tax professional services. Most of these attempts have failed to accomplish the objective of increasing revenues in a cost effective way and have been repealed after a very short period of time. We understand the need to increase revenue in the state and believe that you want to make decisions that are in the best interest of the citizens of your state. 6 NAPFA Comment Letter Re: State of Michigan Public Act 93 of 2007