The recent passage of The PRO Act by the U.S. House of Representatives has brought the issue of whether financial advisors are employees or independent contractors into the spotlight. The Senate will consider this legislation as part of President Biden’s broader infrastructure bill. 

The issue with the PRO Act is the three-pronged test to determine whether a worker is an independent contractor or an employee. One part is whether or not the worker is engaged in the same business as the company for which they are working in an independent contractor capacity. There has been criticism of this provision by many in the financial services industry. 

Here are some considerations regarding financial advisors being categorized as employees:

An Advisor’s Relationship to Your Firm.

If you are a small RIA firm with a just a small number of advisors on staff, it may make sense for your advisors to be classified as employees. This is especially true if you, as the owner of the firm, are looking to bring on younger advisors as partners as part of your succession plan. 

In instances like this, these advisors are part of your firm, and the control that comes with having them as employees makes sense. 

In other situations, an independent advisor may run their own firm, but have relationships with one or more RIA firms. These RIA firms may provide an investment platform, FinTech, model portfolios or other services that independent advisors use in serving their clients. However, these independent advisors continue to run their own firms and serve their clients separately. Both the advisors and their clients like this arrangement.

Cost Considerations.

The cost of having an employee on your payroll can be steep. Some estimates have pegged the cost of providing benefits to an employee at 35% to 40% of their compensation. In addition, the whole compensation structure of your RIA firm could be upended by having to bring on a number of independent business owners as employees. 

What’s Best for the Client?

Many financial advisors break away and go independent to run their firm in a fashion that is in line with their view of the business and how they want to service their clients. Perhaps they want to focus on a particular niche group of clients, or provide a different level/type of service than what they might have been able to do in their former role as an employee of a large firm. 

If RIAs are forced to bring all of these independent advisors who have a relationship with their firm in-house as employees, this could be detrimental to clients whose choices of advisors and service levels could now be limited. 

The answer to the question as to whether advisors should be classified as employees is that it depends. It depends on the structure of the RIA firm, the level of control the firm has (or wants to have), how the advisor serves their client and a host of other factors. All of us in the wealth management industry will continue to watch The Pro Act as it moves to the U.S. Senate for consideration.

At AdvisorPeak, our goal is to help make advisors successful in managing their client’s portfolios. Find out how AdvisorPeak provides RIAs with the industry’s best trading and rebalancing software regardless of their employment classification.