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David Bellaire

Regulation and Compliance > Federal Regulation > DOL

How DOL’s New Independent Contractor Rule Could Cause Major Headaches for Advisors

By Jeff Berman

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The proposed rule the Labor Department released Oct. 11 that would determine worker classification as either an independent contractor or an employee stands to create a major headache for financial advisors, according to David Bellaire, executive vice president and general counsel for the Financial Services Institute, an advocacy group.

The new Labor rule would replace the 2021 rule that went into effect as a result of a ruling in March by the U.S. District Court for the Eastern District of Texas that Labor’s delay and withdrawal of its independent contractor rule violated the Administrative Procedure Act.

With the court’s decision, the independent contractor rule became effective March 8, 2021.

Labor’s new rule could threaten independent advisors’ ability to work as independent contractors and stands to be “very challenging for our members because of all those regulatory requirements” it creates, Bellaire told ThinkAdvisor.

Labor’s new plan, an FSI spokesperson said Oct. 11, “would result in a return to the confusing and conflicting interpretations by the courts similar to before the 2021 rule, causing independent financial advisors and firms to divert time and resources to defending their independent contractor classification.”

During a phone interview on Thursday, we asked Bellaire five questions about the Labor Department’s proposed independent contractor rule change and what it would mean for financial advisors if it takes effect.

1. What would this change mean for financial advisors exactly?

David Bellaire: There are regulatory requirements saying that our members have to provide training to financial advisors or that the financial advisors have to keep certain books and records in particular ways. Or their business entity can’t get paid commission revenue. It has to go to the financial advisor directly. And there are all kinds of regulations and oversight obligations for the firms.

2. What was it that advisors liked about the 2021 rule?

The 2021 rule said you don’t pay any attention to those things and you determine whether the employer has control over the worker.

3. What other kinds of challenges does the proposed change create?

Well, it’s certainly going to increase their costs. The reason for that is that under the Fair Labor Standards [Act], an employer of employees has to keep detailed records related to the hours worked [and] the wages earned by their employees. Currently our member firms are not doing any of that.

So, there’s a significant new recordkeeping obligation that the firms have to perform and that is no doubt going to increase their costs and those costs will be passed down to the financial advisors and to the clients that they serve.

The second [challenge] is that many of our financial advisor members have worked very hard to build a business. And that’s a business that many of them intend one day to sell as a way to fund their retirement.

Anything that calls into question whether or not the financial advisor is an employee or an independent contractor creates uncertainty about the future viability of the business because they’re going to have to keep these detailed records.

They’re going to have to collect from their various branch offices details about all the people that worked there, what hours they worked, ensuring that they know what they were paid.

So that’s recordkeeping, not just of the financial advisor, but also potentially the … non-producing staff in the office and others. And that’s a big undertaking. Remember, firms have never had to do that before.

4. Are there any other major issues around the proposed change we didn’t touch on yet?

I’d also say that this rule proposal has been part of a sort of a whole-of-government approach that the Biden administration has taken to make it more and more difficult to classify workers as independent contractors.

I see that the greatest threat to our business model is this multi-front approach to limiting people’s ability to work as independent contractors.

At some point, you know, you have to be concerned about … financial advisors [deciding] that working as an independent contractor is too costly.

[They may] take on bigger clients and leave smaller clients behind, or they need to find some other arrangement under which they can operate their business.

5. What do most advisors think?

We haven’t done polling but I can tell you this: That no issue on our list of priorities generates more interest and response from financial advisors than threats to their independent contractor status.

They’re independent for a reason and they don’t appreciate government bureaucrats making it more difficult for them to operate independently.

Jeff Berman

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