Before becoming independent, a lot of advisors had a taste of working as an employee of a large firm and decided they didn't like it.
Some of those same RIAs believed they saw a threat to their business model in a
According to the agency, "This final rule recognizes that independent contractors serve an important role in our economy and provides a consistent approach for those businesses that engage (or wish to engage) independent contractors as well as for those who wish to work as independent contractors."
Some in the industry
"Independent financial advisors are entrepreneurs who have built a strong presence in their communities, own their own businesses, pay business taxes and hire their own staff," Dale Brown, the president and CEO of the group representing more than 80 financial firms and 130,000 affiliated advisors, said in a statement.
Gig economy
The DOL's new rule on independent contractors is largely aimed at industries like construction and trucking in which worries have long raged that workers who really should be deemed direct employees are being abused by being treated as independent contractors. Concerns have also grown in recent years that "gig workers" at Uber, Lyft and similar companies are being taken advantage of.
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Employers have various incentives to misclassify their direct employees. By labeling workers as independent contractors, they can avoid offering benefits like minimum wages and overtime pay. Companies also don't have to pay benefits or payroll taxes for independent contractors.
The new rule, first proposed in October 2022, will replace guidelines adopted during the Trump administration. Those criteria had defined "independent contractors" mainly by looking at two key considerations: how much control workers exercise over their work and how much they stand to profit or lose from their own activities and decisions.
Those will now be replaced by a six-point test that attempts to look at the "totality of the circumstances" of a person's employment. When trying to decide someone's status, regulators will be considering factors such as the amount of skill required for a certain type of work, the permanence of a given working relationship and whether the work being performed is just one part of providing a particular product or service.
Litigation ahead?
The Trump administration's employment status rules were in part a result of FSI's efforts. The lobbying organization was among various business groups that sued the DOL in 2021 to prevent stricter standards adopted under President Barack Obama from taking effect.
At the very least, Kim said, the new rule threatens to complicate life for the independent advisors and broker-dealers AssetMark works with, primarily through offering a turnkey asset management program enabling wealth managers to provide clients with tailored portfolios.
"It actually adds ambiguity and complexity to this important debate," Kim said. "And so I think that, when we fast-forward this conversation, I would not be surprised if there's another sort of lawsuit from the lobbying organizations like FSI to really bring clarity to this interpretation."
Jim Coleman, the co-chair of the wage and hour compliance and litigation practice at employment law firm Constangy, Brooks, Smith & Prophete, noted the new rule isn't scheduled to take effect until March 11. He said he wouldn't be the least bit surprised if court or congressional challenges were used to derail it before then.
"I tend to think it's going to promote more, not less, litigation over the issue," he said. "And the unfortunate part is, you know, there's no clarity at all. And that normally means, when there's a lack of clarity, that you're going to end up with more litigation."
Matter of control
In the financial services industry, anxiety was provoked by a provision that seemed to suggest an employer-direct employee relationship would exist anytime a business was exercising any sort of control over workers. Representatives of independent broker-dealers like LPL Financial and Cetera Financial Group worried that their firms could meet the criteria by doing nothing more than reminding their independent advisors of their duty to abide by state and federal laws.
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One change the DOL made to its original proposal appears to have come directly in response to this concern. In a frequently-asked-questions post released the same day as the rule, the agency states that an amendment was added to clarify that any "actions taken by the potential employer for the sole purpose of complying with specific, applicable federal, state, tribal or local law or regulation" would not indicate "control."
In the rule itself, the DOL noted that it received more than 1,000 letters from financial advisors in support of the new rule. LPL commented that it believes the proposal "will not result in the reclassification of independent financial professionals as employees."
In expressing confidence that long-standing business practices won't be disrupted, the DOL wrote that its impending rule reflects court interpretations that have been in use for decades. The agency wrote that there is no evidence to suggest that "the status quo prior" to the adoption of the Trump administration's employment status distinctions "was hindering the use of independent contractors."
Survey says
Separately,
FSI argued that retail investors benefit by being able to work with brokerage-affiliated advisors who can arrange one-off transactions or provide single products in return for commissions. According to the group, pure RIAs who collect only fees tend to favor wealthy clients with hefty amounts of assets that can be brought under management to generate income.
"If they are forced to be employees, this could adversely harm Main Street Americans' access to their local trusted financial advisor," Brown wrote in FSI's statement.
