Financial advisors face multifaceted challenges these days, including a looming recession and a talent shortage. But an existential threat has arrived—a proposed rule by the Department of Labor which could force independent advisors to give up their independent contractor status and become employees of their broker-dealers, warned executives at the Financial Service Institute’s annual conference this week in Palm Desert, Calif.
The proposed DOL rule could disrupt more than 400,000 industry advisors and staff, who contribute $45.7 billion to the GDP each year, according to an Oxford University survey FSI commissioned.
Just as troubling is that only 10% of the industry wants to become employees, while nearly 20% of advisors said they’d retire almost immediately if the proposal came to fruition. That would leave a wide swath of American investors without financial advice, Oxford reported.
“The Department of Labor has once again deemed that every American should be an employee,” Scott Spiker, chairman and CEO of First Command Financial Services and chair of FSI, FSI’s OneVoice 2023 conference, told some 300 attendees at FSI’s OneVoice 2023 conference.
“They disregard the importance of independent financial advice and the structures that support it. And they’re happy to lump us in with the gig economy that they are so anxious to control,” Spiker said.
In October, the DOL announced its rule, seeking to reverse the President Trump-era approved 2021 Independent Contractor Rule, which was favorable to independent advisors. The 2021 rule reduced the criteria for classifying a worker as an independent contractor to two metrics—control over work and opportunity for profit.
Almost all of the institute’s 85 member firms, including Raymond James, Advisor Group, Cetera, Atria and Wells Fargo Advisors, as well as more than 160,000 independent financial advisors, depend on FSI to lobby regulators like the DOL and Congress for fair oversight and policies that allow the industry to flourish, he added.
In the 1990s, a predecessor organization of FSI was able to convince the IRS that independent brokers and hybrid advisors affiliated with independent broker-dealers (IBDs) were indeed independent contractors as they paid the majority of their own expenses and enjoyed wide latitude in the products and services they recommended and sold to their clients.
It's not clear that the DOL has the authority to determine a worker's independent contractor status. In the past, the Internal Revenue Service (IRS) has maintained jurisdiction over independent contractor status.
“Who is going to stand up to the regulators who want to impose their will and penalties, often without the benefit of published policy? FSI, once again. This advocacy is something that we know and expect that FSI does so well,” Spiker said.
“Last year we ramped up our fight to protect advisors’ independent contractor status in the face of an ill-advised, counterproductive Department of Labor rule proposal,” FSI President and CEO Dale Brown said at the conference’s opening session.
“As we look over 2023, our constructive engagement continues, and I want to put a marker down today,” Brown said. “We will need your support more than ever as we work to modify or stop the DOL’s independent contractor rule.” Brown noted that last year FSI members sent tens of thousands of comment letters to regulatory agencies and lawmakers and helped deliver the trade group’s advocacy plans to lawmakers through numerous in-person and virtual meetings.
“We also continue to push back and push back hard on the SEC’s unfair rulemaking by enforcement efforts,” Brown said. “And on a positive note, we helped push across the finish line the important retirement security legislation Secure 2.0. These are only highlights of our robust member engagement effort in support of our advocacy priorities.”
Spiker said the economy and markets continue to present challenging headwinds for the independent advice industry, but that the threats and opportunities don’t stop there.
“I’m not sure I have ever seen things more complex or more difficult to navigate, including global military aggressions and threats from authoritarian military regimes, broken supply chains, rampant inflation and a tepid Fed response,” Spiker said.
Other big topics at the conference have included changing worker expectations and the need to recruit younger advisors to replace the aging advisor population.
At the same time, America and the industry are confronted by a polarized political landscape both here and abroad, as well as the steady beat of technology disrupting existing business models.
“If we were to pick one movie to represent how we’re feeling it would be Everything Everywhere All at Once,” Spiker said, referring to the 2022 comedy-drama about a female Chinese immigrant who has to find different versions of herself in a parallel universe while dealing with a multiverse foe and an IRS audit. The movie garnered 11 Oscar nominations this morning.