A new DOL rule that makes it tougher to classify workers as independent contractors rather than employees could disproportionately impact Black and African American advisors and the investors who seek to work with them, the Association of African American Financial Advisors (AAAA) said in a new blog.

The AAAA’s data reveals that about 26% of its members who operate independently or as registered investment advisor reps will be impacted by the new rule, which in turn will impact the financial well-being of 3% to 6% of Black investors, the trade group estimated.

“Many advisors, currently independent contractors, could be reclassified as employees, setting off a chain reaction of increased operational costs, reduced flexibility, and potentially declining professional availability. This revision bears implications for financial advisors and their ability to serve their communities efficiently,” AAAA said.

The trade group said the transition from independent contractor to employee status for financial advisors has several drawbacks, including the following:

• Increased Costs: The transition to employee entails business expenses, potentially causing higher client fees.
• Decreased Flexibility: Mandatory adherence to employer policies can hinder the ability to meet the unique needs of low-income clients.
• Reduced Availability: Stricter regulations may force some Black and African-American (B/AA) financial advisors out of the industry, the group said.

“Without adequate financial advisory services, B/AA households face heightened risks of making uninformed financial decisions, hindering wealth accumulation and, consequently, stifling economic growth within the community,” the trade group said.

There are 46 million individuals identifying as Black/African American in the U.S., holding average investable assets of $12,000, the group said, citing Pew Research data.

The DOL did not immediately respond to a request for comment on the fallout of the rule on Black advisors or investors.

“The absence of tailored financial advice may expose B/AA households to the dangers of uninformed financial decision-making, curtailing opportunities for wealth generation and economic progress,” the AAAA said.

In some states, such as Texas, there is as low a ratio of one Black advisor for every 12,000 Black individuals, the AAAA said.

“Given that B/AA households often have incomes below the national median, the potential reclassification of financial advisors from independent contractors to employees under the proposed DOL rule could escalate service costs, diminish bespoke advisory capacities, and possibly reduce the number of professionals in the field,” the trade group added.

Currently, there are just 1,961 B/AA certified financial planners out of 100,538-fewer than 2% of all CFPs, the CFP Board reported earlier this month. The Bureau of Labor and Statistics recognizes an estimated 55,000 licensed B/AA personal financial advisors and securities, commodities and financial services sales agents, underscoring the shortage in advisors, the AAAA said

The Financial Services Institute, a trade group representing the independent broker=dealer industry, and its coalition partners filed an amended complaint March 5 to vacate the DOL independent contractor rule. The lawsuit asks the court to declare the 2024 rule invalid, prohibit its implementation and allow the 2021 independent contractor rule to remain in effect.

“Our members should not have to risk losing their independent contractor status because, for example, they are complying with federal and state securities rules,” said Dale Brown, president and CEO of FSI, in a statement.

Brown said the 2021 rule offered “much-needed certainty and clarity regarding our financial advisor members’ classification as independent contractors.” The 2024 version, he said, again throws advisors’ status into doubt, “creating burdens for advisors and firms which ultimately increases costs and limits Main Street Americans’ access to professional financial advice, products and services.”

FSI and other plaintiffs sued the DOL and were successful in getting the 2021 rule reinstated, but the DOL appealed to the Fifth Circuit in 2022. The appeals court agreed to a stay so that the DOL could hammer out a new version of the rule.