Advisors worry about losing independence under DOL contractor rule

Mary Beth Hofmeister of Sage Financial Associates and Vance Barse of Your Dedicated Fiduciary

'We're small business owners; we’re entrepreneurs,' advisor says. 'I don't know what that would look like if we're suddenly employees of a broker-dealer.'

A Department of Labor regulation designed to ensure that companies do not inappropriately deem employees as independent contractors has independent financial advisors worried the measure may jeopardize their business model.

The DOL released a final rule Tuesday that establishes a six-part analysis – called “economic reality factors” – for determining whether a worker is an employee under the Fair Labor Standards Act. The agency is targeting situations where workers are misclassified as independent contractors and deprived of certain rights and protections – such as a minimum wage and overtime – that employers must grant to employees. The problem often is associated with so-called “gig workers.”

The DOL regulation replaces a 2021 rule that the agency said was inconsistent with judicial precedent. The final rule provides guidance on how the economic reality factors should be considered. They include whether a worker has an opportunity for profit or loss, the permanence of the work relationship, investments by the worker and potential employer, and the degree of control over the work, among other criteria.

While the rule was being drafted, independent investment advisors, brokers and insurance agents expressed concerns that it would change their status as independent contractors. A DOL official said the rule does not provide a carve-out or accommodation for financial advisors or any other profession. Decisions on employment status are made on a case-by-case basis.

“This rule provides broad guidance across many industries and is not focused on one sector of the economy or one type of worker,” Jessica Looman, administrator of the DOL Wage and Hour Division, told reporters Monday before the rule was released. “We don’t make any specific determinations related to the specific type of worker or anyone that is legitimately [in] independent contracting arrangements sometimes identified as freelancers or other types of work.”

Independent advisors are leery of how the rule may be applied in practice.

“We’re small-business owners; we’re entrepreneurs,” said Mary Beth Hofmeister, owner and branch manager of Sage Financial Associates. “I don’t know what that would look like if we’re suddenly employees of a broker-dealer. It would potentially be a very dramatic shift – one that we don’t want. I think the client would suffer.”

Vance Barse, founder of Your Dedicated Fiduciary, said independent financial advisors aren’t employees because they have control over the registered advisory firms or brokerages with whom they affiliate for some services.

“It seems to be an overreach by regulators lumping independent financial advisors into the broader gig economy,” Barse said. “At the core of our business model, we have the ability to choose which intermediary we partner with. We could easily pick up our business and move to another intermediary.”

The Financial Services Institute, which represents independent broker-dealers and financial advisors, said it is reviewing the rule but vowed to protect the independent-contractor status of its members.

“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,” FSI CEO Dale Brown said in a statement. “If they are forced to be employees, this could adversely harm Main Street Americans’ access to their local trusted financial advisor.”

Independent advisors said they want to retain that designation because it allows them leeway to develop financial plans and choose investment products without being constrained by a brokerage or RIA employer’s approach.

Paul Long, a partner at Capital Wealth Management, said his independent status allows him to work with clients across a range of needs – from insurance to retirement investing.

“We need to keep our independence [for] flexibility, so we can provide good, sound financial advice to our clients,” Long said. “It’s my clients who are my boss.”

The ability to scan the whole marketplace for the best investment products – rather than being limited to one brokerage’s menu – is a selling point for Hofmeister.

“A lot of us pride ourselves on being independent and having a huge variety of solutions to choose from, without pressure to use proprietary products, in terms of what might best fit a client’s situation,” she said.

Independent advisors are ready to push back against the rule.

The model “is not going down without a fight,” Barse said. “Independent financial advisors don’t want to lose their independent contractor status.”