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Regulation and Compliance > Federal Regulation

DOL Withdrawal of Independent Contractor Rule Threatens Indie Advisor Business Model: FSI

By Jeff Berman

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What You Need to Know

  • The rule clarified which workers are independent contractors and which are employees.
  • That lack of clarity will create compliance headaches and possible litigation costs for advisors, FSI's Bellaire says.
  • The indie-advisor advocacy group is exploring its options and encourages advisors to get active.

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.”

However, “supporters of the bill aren’t at this point interested in considering carve-outs because I think they’re concerned there would be a parade of groups asking for their industry to be carved out and that makes it more and more challenging to move the bill,” he said.

When it comes to the Labor Department, meanwhile, “there really hasn’t been a lot of conversation,” he said. The Labor Department under the Biden administration has “moved quickly to withdraw the rule and, while they have requested comment, the time period in which the window was open to provide comment was very narrow and it seemed that the decision was predetermined,” he said.

As a result, he went on to say, “there hasn’t been really any opportunity to engage” with the department and “to understand what exactly they think has changed in the last couple of months to cause them to totally reverse course” on the Independent Contractor Rule.

What Advisors Are Saying

What advisors who are FSI members have “communicated most clearly is that their independent contractor status is an essential component of their business model and that independent contractor status allows them to provide the best quality service and support to their clients,” Bellaire said.

Advisors are stressing that they “chose to be independent because they wanted to own their own business and they’re frustrated that members of Congress or folks at the Department of Labor — parts of our government — would interfere with their personal choice to operate their business in this fashion,” he said.

Agreeing, Taylor of Lion Street-affiliated firm Wealth Strategies, told ThinkAdvisor: “To me, having independence as a financial advisor is paramount” and “being an independent contractor gives me the control and flexibility to build my firm and team in the manner best suited to meet the unique needs of each of our clients.”

The Labor Department’s decision to withdraw the Independent Contractor Rule “feels like a knee-jerk reaction to legislation that was put in motion from the prior administration” and it “creates many unintentional consequences,” Taylor said, adding: “The Labor Department is muddying the waters and acting too quickly” in withdrawing the rule.

“The economic reality test to determine business structure for independence vs. FLSA employee creates a barrier between those who build a business without multiple layers of oversight and the nature of larger companies that are burdened by the layers built within,” he said. “It feels like the assumption is that we cannot act in the best interest of our clients and in the best interest of our employees as well.”

However, the reality is that, as an independent advisor, “I have full benefits and a higher compensation level for similar job roles than you would find in the ‘corporate’ world,” he said. “We are a business: We pay salaries, provide benefits in terms of health and retirement plans, give raises, vacation schedules, and pay our share of taxes. To look at us and all financial advisory firms in light of the DOL’s stance that a reduction in other benefits such as health, retirement plans, unemployment and workers compensation feels short-sighted on their part.”

Taylor’s prediction is that the withdrawal of the rule, “along with the impact of future legislation, will ultimately” hurt those the Labor Department is most interested in protecting. “Costs will increase, flexibility will decrease, and motivation to build a sound firm will get diminished with the removal of the rule,” he predicted.

What Advisors Can Do

Bellaire recommended that advisors who are FSI members “pay close attention to the information we’re putting out about developments and we call our members to take action at the appropriate time by letter-writing, participating in meetings, phone calls and other activity.”

If advisors “have opportunities to talk to their members of Congress and express to them the importance of their independent contractor status to the clients they serve and to the small businesses that they operate, they should take advantage of those opportunities,” he also suggested.

FSI’s political engagement team is creating those opportunities and is inviting FSI members to participate, he said, noting such roundtables have been a “very successful tool for us.”

FSI, meanwhile, is exploring all “avenues available to us to push back against” Labor’s decision, he said, but declined to provide specifics.

The Labor Department did not immediately respond to a request for comment Tuesday.

Pictured: David Bellaire, executive vice president and general counsel at the Financial Services Institute

Jeff Berman

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