History is rife with examples of adverse, un-intended consequences resulting from well-intentioned lawmaking acting in the face of a crisis. The astronomical costs and burdens of the Sarbanes-Oxley Act of 2002 on public corporations of all sizes come to mind as just one example of this. For those of us who advocate for the middle-class American investor, there are serious, unintended consequences in recently introduced legislation that would change worker classification rules in a manner that threatens the ability of independent financial advisers to serve their retail clients.
For more than 30 years, the independent broker-dealer industry has provided the investing public with comprehensive and affordable fi-nancial solutions, delivered today through a network of more than 98,000 independent financial advisers — about 42.3% of all practicing registered representatives. These independent advisers aren't employees of broker-dealers, but self-employed business owners and entrepreneurs.
They manage their own financial advisory practices and, importantly, provide financial advice to retail investors without being burdened by the potentially conflicting agenda of a parent company.
It is a business model that has worked well for the country as a whole, in no small part because independent advisers are principally responsible for serving a segment of the U.S. population that has been substantially overlooked by the big Wall Street institutions: The millions of “Main Street” households with net investible assets of tens and hundreds of thousands, rather than millions, of dollars. This demographic segment represents the backbone of America, and needs access to sound financial advice, products and solutions more than ever before.
What threatens this model is the recently proposed scrapping of an important feature in Section 530 of the Revenue Act of 1978: The “safe harbor” in this area of tax law allows workers to be classified as “independent contractors” rather than “employees” in industries where such designations are part of “longstanding, recognized practice.”
Spurred on by labor unions targeting the misclassification of workers as independent contractors in certain industries — and embraced by a federal government eager to reap unpaid payroll taxes that such a tax code change would produce — Congress is seriously considering a blanket removal of this safe-harbor provision.
Although independent advisers aren't the intended target of this legislation, we think that they will be caught in the crossfire. This would be unjust and inappropriate for advisers who responsibly pay their taxes, operate in a heavily regulated and thoroughly documented industry in which cash payment for services is strictly prohibited, and aren't involved in the industries of concern to labor unions.
Under the envisioned changes, independent advisers would be exposed to unnecessary and onerous
Internal Revenue Service scrutiny of their worker classification status. Independent broker-dealers could be forced to reclassify the independent advisers they serve as employees.
Under such circumstances, additional costs and compliance burdens would cripple the ability of these broker-dealers to remain profitable while providing the vital services needed by the independent advisers to serve their clients.
Additionally, independent broker-dealers could be subject to hefty back taxes, penalties and interest. These payments could be so substantial as to threaten the very existence of small and midsize independent broker-dealers.
There is no doubt that independent advisers reclassified as employees of broker-dealers would lose much of the independence and entrepreneurial spirit that is so crucial to the advice, products and solutions they provide to their clients.
Ultimately, all this would result in a massive industry upheaval that significantly diminishes the access to financial services and options available to Main Street American investors.
Dale E. Brown is president and chief executive of the Atlanta-based Financial Services Institute, which represents the interests of independent broker-dealers and independent financial advisers.
