Once considered a niche strategy, 351 conversions are gaining traction as registered investment advisors (RIAs) look for ways to scale operations, streamline portfolio management, and improve firm valuations without launching a fund from scratch.
In a recent webcast, Modernization Without Reinvention: How to Use 351 ETF Conversions, Brittany Christensen, head of business development at Tidal Financial Group, and Cinthia Murphy, director of research at TMX VettaFi, discussed the growing use of Section 351 ETF conversions among advisors.
Why RIAs Are Turning to 351 ETF Conversions
As RIAs grow, managing hundreds of separately managed accounts becomes more complex. Trading, rebalancing, and compliance can strain resources and slow down growth.
A Section 351 exchange allows advisors to transfer appreciated securities into an ETF structure without triggering immediate capital gains taxes. This creates a path to launch an ETF using existing client assets instead of raising outside capital. For many firms, this solves a key challenge around fund seeding while maintaining continuity in their investment strategy.
Key Benefits of 351 ETF Conversions
The webcast highlighted several advantages that are driving adoption.
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Tax efficiency: The ETF inherits the original cost basis of contributed securities. Taxes are deferred until investors sell their ETF shares.
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Operational scale: Combining multiple SMAs into a single ETF simplifies trading, rebalancing, and compliance workflows.
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Higher valuation potential: Independent RIAs often trade at three to five times revenue, while ETF businesses are currently seeing valuations closer to eight to 10 times revenue.
IRS Rules and ETF Conversion Requirements
Christensen emphasized that 351 conversions are not a shortcut. At the core of Tidal’s approach is the non-syndicated 351, which focuses on a single firm porting its own consistent strategy into a new technology. This differs from "syndicated" versions where an issuer might matchmake unrelated advisors to reach scale. Generally speaking, the 351 process requires adhering to strict regulatory guardrails.
Key rules include:
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Intent to sell requirement: Securities cannot be contributed with the primary purpose of immediate sale for diversification. Regulators are increasingly focused on this standard.
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80% ownership rule: Contributors must collectively own at least 80% of the ETF at the time of the exchange.
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RIC diversification standards: The portfolio must meet regulated investment company requirements, including minimum holdings and concentration limits.
Timeline and Process for a 351 ETF Conversion
Launching a 351 conversion typically takes four to nine months. The process begins with a feasibility analysis to confirm the strategy can function within an ETF structure.
While the transition can be operationally complex, it allows advisors to retain their investment approach while reducing administrative burdens.
Murphy described the structure as a dual benefit, improving both business efficiency and client tax outcomes.
What Size RIAs Should Consider 351 Conversions
Many webcast participants were new to the concept, but awareness is growing as the RIA industry continues to consolidate.
For firms with more than $1.5 billion in assets, 351 conversions are becoming a more practical option. At that scale, the benefits of efficiency, distribution, and valuation may outweigh the costs of maintaining a ’40 Act fund structure. By converting SMA strategies into ETFs, RIAs can modernize their business model without changing their core investment philosophy.
As competition increases, having a scalable and tax-efficient product structure may become a key differentiator for growth-focused firms.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
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