The Labor Department's decision to withdraw its Independent Contractor Rule stands to increase costs for independent financial advisors and their firms and even threatens their entire business model, according to David Bellaire, executive vice president and general counsel at the Financial Services Institute.
The rule had "brought to this area some much-needed clarity and certainty" on advisors' status as independent contractors, who are not covered by the Fair Labor Standards Act, Bellaire said. Before the rule, "the definition of independent contractor employee under the Fair Labor Standards Act had been subject to interpretation by a bunch of different courts," he said.
The department's decision is intended to maintain workers' rights to the minimum wage and overtime compensation protections of the Fair Labor Standards Act. But Bellaire and independent advisors who want to be classified as independent contractors, like Allen Taylor, founder and president of Lion Street-affiliated firm Wealth Strategies, warned that the department's decision stands to hurt at least some of the workers it is intending to help and also hurts advisors' clients, they told ThinkAdvisor.
The rule, created by the Trump administration, reaffirmed an "economic reality" test to determine whether an individual is in business for him or herself (an independent contractor) or is economically dependent on a potential employer for work (an FLSA employee).
But the rule also made it harder for gig and contract workers to be paid minimum wage or higher.
Democrats' Push
What we are seeing is a "very aggressive push from the Biden administration and Democrats on Capitol Hill to restrict the availability of independent contractor status for America's workers," Bellaire said in a phone interview Monday.
That push started with the Protecting the Right to Organize (PRO) Act, which was passed by the House in March but has been stalled in the Senate, he noted.
"That bill would expand the reach of the National Labor Relations Act to cover independent contractor financial advisors and that, of course, is a concern for our members because it would open the door to unionizing financial advisors, which could create some challenges," he said.
For example, it could lead to unionized advisors wanting to negotiate over the "frequency of surprise examinations or the review of client correspondence," he said. That would be "challenging" and make it "more complicated" for firms to put in place risk management practices, he said.
On top of the federal moves, similar moves in the states stand to create a challenge for advisors and their firms, he noted, pointing to California's effort to change its definition of an independent contractor.
Costs to Advisors
Although "none of these developments immediately threatens the independent contractor status of financial advisors … what they do is they raise the cost for firms and advisors and they make it less and less attractive to operate an independent financial services firm," he explained.
Advisory firms will have to step up their record-keeping and other compliance initiatives, and there is increased risk of litigation and its accompanying costs as enforcement activity increases, he said.
"I think that impacts, unfortunately, the long-term viability of the business model. And that's why the FSI and our members are so focused on this issue and working hard to push back on the changes, at least as they relate to independent financial advisors," he said.
The increased costs will also "unfortunately get passed on to the investor, innovation gets stifled, and there are other impacts which would be unfortunate," he added.
Talks Have Gone Nowhere
A carve-out for the financial services sector wouldn't be realistic at this point, according to Bellaire.
"When it comes to the PRO Act, we've had frequent conversations with supporters of the bill about a carve-out of our members from the legislation," he said. "We were successful in getting a carve-out like that in California and so we pointed to that as a model."
