Why one US state could face a mass exodus of financial advisors

A proposed change in how financial advisors operate in New Jersey could see many leaving the state, reducing the availability of in person advice for the state’s investors, according to new research.

The state’s Department of Labor wants to make a change to the rule that determines whether a worker is an employee or an independent contractor – a move that has been criticized by three industry bodies.

Now a joint study by the Financial Services Institute and Oxford Economics warns that the change could trigger a seismic shift in the state’s financial advisory landscape including a potential exodus of advisors.

Almost two thirds (65%) of New Jersey based advisors say they would consider relocating their business out of the state if the rule goes into effect and another 4% would simply retire rather than operate under the new framework. Only 8% would even consider becoming employees.

Nearly all (94%) say they’re highly satisfied with their independent contractor status, with 62% citing it as the reason they can better serve their clients. More than three-quarters say it allows them to own and run their own business, free from the constraints of a corporate employer.

“This study makes clear what we’ve long known: independent financial advisors do not want to be employees, and New Jersey’s proposed rule would have a devastating impact on the independent financial services industry and the Main Street investors who rely on it,” says FSI President & CEO Dale Brown. “Independent financial advisors are entrepreneurs and business owners who are dedicated to helping the members of their community plan for their financial future. Their independent contractor status affords them the freedom and flexibility to provide affordable, high-quality financial advice to their clients.”

The consequences if the rule change goes ahead would also impact clients, the study says, with 91% of advisors believing clients will be negatively affected.  Two-thirds expect service quality to drop, and 62% foresee a decline in available investment options.

Three-quarters of respondents anticipate client fees will rise, and 69% expect higher account minimums, while advisors also warned of reduced efficiency and diminished personal service as increased operating costs and advisor relocations disrupt client relationships.

“This proposed rule threatens not only the businesses advisors have built, but also New Jersey families’ access to the advice they rely on to navigate life transitions and achieve financial security,” adds Brown.

Based on projected relocations and retirements, the study estimates the state could lose 4,670 workers tied to independent financial advising. It’s a group that currently contributes around $470 million to New Jersey’s GDP and supports 3,500 jobs.

State level rules such as New Jersey’s remain a potential challenge for independent financial advisors. A federal proposal by the US Department of Labor resulted in a lawsuit from the FSI and was due to be implemented in March 2024. However, it was paused by the Trump administration and the DOL is expected to formally rescind it.