The new U.S. tax law will benefit money managers by not only cutting their effective tax rates but also by increasing the demand for investment services from individuals and institutions looking to put their tax savings to work, said a new report by Moody's Investors Service.
The report states that the new tax law "will provide significant cash tax savings and financial flexibility." With public asset managers' median tax rate dropping to 24.5% from 30.1%, managers will benefit from increased cash flow, which will in turn lead to a greater ability to reinvest in the business, Moody's said.
"No one has made any commitments publicly or privately, so we're keeping an eye on how asset managers will use their tax savings," said Rokhaya Cisse, an analyst at Moody's, in a phone interview.
Robert M. "Rory" Callagy, senior vice president and manager at Moody's, added in the same phone interview that the ratings agency views companies reinvesting in the business as a net positive. However, "if they were to use the savings to (solely or predominantly) distribute to equity shareholders, that would be negative to the credit profiles of these companies."
The tax law will also benefit money managers in that it will benefit investors, who will have additional capital to invest.
"What's interesting to us is to see how investors will take advantage of this new tax law in making their investment decisions," Ms. Cisse said.
Moody's notes that the accessibility of overseas cash may also enable global firms to make voluntary contributions to pension plans. For example, corporate plan sponsors with defined benefit plans are likely to take advantage of a provision within the tax code that allows them to make contributions that count toward the prior tax year for up to 8.5 months after the calendar year-end.
Since the applicable tax rate for 2017 was 35%, any contributions made for that plan year would result in a higher deduction for the sponsor. Voluntary contributions could continue through to the fall of 2018 and still count as a deduction for the previous tax year, according to Moody's.
"The contributions may take on several forms ... but if they add to assets managed, asset managers will come out as winners," the report said.