The Financial Services Institute announced the findings of a study analyzing the potential impact of the Department of Labor’s recent proposal regarding independent contractor classification rules.
As The DI Wire previously reported in October 2022, FSI submitted a request to extend the comment period to Jan. 12, 2023. The new rule would replace a Trump administration regulation that allowed workers who own their own businesses or have the ability to work for competing companies to be treated as contractors.
The study was conducted with Oxford Economics, a global economic forecasting and econometric analysis leader.
Overall, the study found that the DOL’s proposal would result in “significant disruption if implemented, with scores of investors across the country likely losing access to affordable and professional financial advice and services.” Moreover, independent firms that have developed business models based on current and longstanding rules would face higher costs, as would their affiliated advisors, who choose their independence.
“This study confirms our worst fears about the Department of Labor’s independent contractor rule proposal, which would harm millions of Main Street investors across the country who rely on independent financial advisors and firms to save, invest and plan for the future,” said Dale Brown, FSI president and chief executive officer. “While our industry may not be the target of the DOL’s recent rulemaking, it’s clear that the potential fallout would be enormous. That’s especially the case for our financial advisor members, many of whom were once employees of wirehouse firms but willingly opted to go the independent route, believing that the model allowed them a better opportunity to provide clients with a great service experience. Based on the findings of this study, and consistent with our comment letter late last year regarding this issue, we urge the department to rescind this proposal.”
Below are findings from the study:
- Advisors value their independence so much that up to 20% of them would retire rather than be reclassified as employees.
- 78% of advisors expect account minimums to increase, restricting their ability to serve smaller accounts.
- 77% of advisors expect commissions and management fees to increase.
- Almost half (47%) of financial advisors reported that they believed the number and kind of investment products they could offer investors would decline.
- When financial advisors were asked to pinpoint what percentage of existing clients could no longer be served because of increased account minimums or fees, the average answer was 31%.
- Financial advisors who remain in the business will face higher costs for legal expenses and recordkeeping. If they choose to start or scale up their RIA business, they will encounter significant startup costs. Many independent financial advisors who perform pro bono work in their communities report that these increased costs would mean they would either do less or stop doing such volunteer work.