Independent financial advisors prize their independence. A lot.
It’s more than just a business model. It’s a philosophy grounded in the belief that investors are best served when advisors have the freedom to make decisions about how to run their business and serve clients.
Independent advisors don’t like corporate mandates, sales quotas or product pushes.
Nor do their clients.
Yet, the independence so many freely choose has been under constant threat. The latest big challenge is coming from New Jersey.
Policymakers in the state are advancing a proposal that would significantly narrow the definition of who qualifies as an independent contractor. If adopted, the rule would almost certainly force thousands of financial advisors to be reclassified as employees of their broker-dealers and RIA firms, stripping them of the independence they deliberately built their careers around.
Advocacy in Action
At a recent public hearing held by the New Jersey Department of Labor & Workforce Development, the Financial Services Institute (FSI) testified against the rule, voicing industry concerns.
Specifically, we took issue with the state’s application of the so-called “ABC test,” the three-part standard often used to determine whether a worker is an employee or an independent contractor. The test examines a worker’s relationship with the possible employer, and a worker must satisfy three conditions to be classified as an independent contractor:
- The worker is free from the control and direction of the possible employer.
- The worker performs work that is outside the usual course of business of the possible employer.
- The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.
Applied rigidly, the test fails to reflect the regulatory realities of financial advice. Specifically, the supervision requirements under securities law may conflict with ABC Test conditions, opening the possibility of a slew of unintended consequences. Among them: forced reclassification of independent advisors as employees; the disruption of long-standing client relationships; and the erosion of business models that keep advice accessible and affordable.
If enacted, the rule could cause many advisors to take drastic measures.
In fact, if enacted, the rule could cause many advisors to take drastic measures rather than deal with the complexity of revamping their business. According to a recent joint study we conducted with Oxford Economics, 65% of New Jersey-based advisors say they would consider relocating out of the state, and 4% would retire. Only 8% would consider becoming employees.
The same study found that 91% believe clients would be negatively impacted by the proposal, with three in four expecting to raise fees and nearly 70% anticipating they would need to increase account minimums. That’s why, ultimately, it’s investors who would suffer the most if efforts like this were to succeed. Higher costs for financial services will inevitably lead to an untold number of Main Street Americans losing access to the personalized advice they rely on to make sound financial decisions.
What Happens In New Jersey Won’t Stay In New Jersey
Should the state move forward with this proposal, it could set a precedent for others across the country. Beyond that, their proposal comes at a time when federal rules around independent contractor status remain unresolved, further raising the stakes of state-level action. That’s why it’s imperative that the industry join our effort to engage proactively with state policymakers to highlight the potential consequences of their actions.
Independence Is A Choice
It’s no coincidence that advisors have deliberately chosen independence over traditional employment models. Many have worked as employee advisors and made a conscious decision to leave to serve their clients better. Their success, and the success of the clients they serve, depends on their ability to remain independent.
Policymakers need to recognize the real-world impact of sweeping reclassification rules.
At this critical juncture, policymakers need to recognize the real-world impact of sweeping reclassification rules. The livelihoods of thousands of advisors and the financial well-being of millions of investors hang in the balance.
Dale Brown is the President and CEO of the Financial Services Institute.
