New Jersey has finalized one of the nation's strictest tests for classifying workers as independent contractors – setting off alarm bells across the independent financial advice industry and raising fresh questions about the future of a business model that tens of thousands of advisors have built their careers around.
The New Jersey Department of Labor and Workforce Development announced Tuesday that it has adopted a final rule implementing the ABC test to determine worker classification in the state.
The rule, set to take effect Oct. 1, requires that all three prongs of the test must be satisfied to prove independent status:
The burden falls on the firm, not the worker, to prove the case. Meeting all three simultaneously is a considerably higher threshold than most broker-dealers and advisory firms have historically been asked to clear.
The timing is not exactly a surprise, as New Jersey regulators had floated the proposal as early as last year. It drew immediate opposition from the financial services industry, including from the Financial Services Institute, which warned the rule would significantly narrow the definition of independent contractor and effectively make many advisors employees of their firms.
FSI, which holds itself out as the leading trade group for independent broker-dealers and affiliated financial advisors, responded to the final rule's adoption with a statement from President and CEO Dale Brown.
"Independent financial advisors have chosen the independent contractor model, many switching from an employee-advisor model, for the freedom and flexibility to build their own business and provide affordable, high-quality financial advice to their clients," Brown said in the statement Tuesday. "It is imperative that advisors' choice to operate as independent contractors is secure."
FSI's concern has been building for more than a year. In a study conducted with Oxford Economics, the organization surveyed 367 New Jersey-based independent financial advisors and found 65% would consider relocating their businesses out of New Jersey if the rule were to go into effect. A larger 91% majority expected their clients to be impacted through a reduction in services, fewer investment options, or increased fees.
The same research found that 94% of respondents said they were very satisfied with their independent contractor status, and over three-quarters valued owning their own business. Some 62% said it was their independent contractor classification that allowed them to better serve their clients.
During legislative hearings last year, FSI Executive Vice President and General Counsel David Bellaire argued the rule's framework was too blunt to distinguish between workers who are legitimately independent and those who are not.
"These are not gig workers," Bellaire said in his oral testimony. "They are licensed professionals who own and operate small businesses, employ staff, lease office space, select the products and services they provide, and serve their communities with deep personal investment."
Bellaire also warned that compliance with securities supervision requirements – requirements that advisors are legally obligated to follow – could be misconstrued as evidence of employer control under the ABC test's first prong, a flaw FSI argued made the rule unworkable in its original form.
He testified that nine in 10 independent financial advisors surveyed by FSI said they would exit their current business model rather than be forcibly reclassified.
According to a recent analysis of SEC Form ADV filings by SmartAsset, New Jersey is home to 494 federally registered investment advisory firms. While LLCs are the dominant structure nationally – accounting for roughly 67% of RIAs – New Jersey stands apart for its unusually high concentration of limited partnerships, with 22.47 % of state firms organized as LPs, more than double the national average of 11.11%.
It's not just advisors who are concerned. Reacting to the rule, the New Jersey Business and Industry Association called the final rule a disappointment and said its work on the issue was not finished.
"We will continue to work alongside the legislature and administration toward a further revised rule that recognizes the need to preserve the exact jobs and opportunities that remain in jeopardy," NJBIA President and CEO Michele Siekerka said in a statement.
Brown said FSI is "reviewing the details of the rule and clarifying language to determine the exact impact it will have on our members."
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