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PRO Act Could Disrupt Independent FAs Who Want to Keep Their Freedom

By Ellen Sheng April 14, 2021

Uber drivers and financial advisors may not have much in common professionally, but both are wrapped up in the Protecting the Right to Organize Act.

The bill, which passed the House of Representatives on March 9 with a 225-206 vote, is now in the Senate.

Union leaders say the PRO Act would level a playing field that currently favors big business by making it easier for private employees to join unions. Among other things, the PRO Act would overturn the right to work laws in numerous states and force employers to turn over employees’ information to unions, including names, addresses, phone numbers and email addresses.

But the legislation would reclassify independent advisors and brokers as employees under the National Labor Relations Act, and that could impact their freedom to run their practices, according to industry executives.

Various industry associations are pushing back. The Securities Industry and Financial Markets Association, Financial Services Institute and the National Association of Insurance and Financial Advisors have spoken out against the PRO Act and are pushing for an exception.

"As proposed, the bill would change how independent contractor status is determined under the National Labor Relations Act by imposing an ’ABC’ test on all businesses and workers, which could adversely impact hundreds of thousands of independent financial advisors," Sifma said in a statement in March.

“If [PRO Act] were to [become law] and I had to become an employee [of] my broker-dealer, they would not allow me to also be a CPA. That wouldn't happen. I would lose 50% of my income.”
Tracy Jones, president of Ernest J. Jones Associates
The FSI, which embarked last month on a campaign to help preserve independence for those who want it, believes the Pro Act undermines certain advisors’ “choice to be independent.”

“These advisors, many of them leaving an employee advisor model, choose the independent model because it allows them to better meet the needs of their clients and operate their own business,” FSI president and CEO Dale Brown said in a statement in March. “Independent financial advisors are small business owners and entrepreneurs.”

To determine whether someone is an employee or independent contractor, the PRO Act uses the ABC test from the 1930s, according to the legal community.

The ABC test was adopted in the California Assembly Bill, or AB5 law, which took effect in 2020. That law — which held that most wage earners as employees — eventually came to include hundreds of exceptions, including for advisors and brokers.

A person must be classified as an employee under the ABC test unless (A) the individual is free from control and direction in connection with the performance of the service, (B) the service is performed outside the usual course of the business of the employer and (C) the individual is customarily engaged in an independently established trade, occupation, profession or business

PRO Act critics say the B prong of the ABC makes it nearly impossible for anyone to be considered an independent contractor. The B part states: "The worker performs work that is outside the usual course of the hiring entity’s business."

Wanting to maintain independence

“If all of a sudden, the PRO Act included us, I would have to become an employee. All those companies that I'm licensed with — that's 23 to 24 companies — that's crazy.”
David Malkin, principal at New Jersey Life & Casualty Associates
The financial advisory industry has been making a shift toward more independent contractors. Sifma estimates that there are now 150,000 registered brokers and investment advisors operating under the independent contractor model.

Around 94% of the 1,315 financial professionals surveyed by Naifa from February 21 to March 15 said they do not want to be treated as an employee for union organizing. Moreover, 95% are operating as an independent contractor and want to remain that way, the survey shows.

"The way it’s written amends the NLRA. It would make them essentially employees under the NLRA, says Diane Boyle, senior vice president of government relations at Naifa. “That’s the uncertainty. How do they retain independent contractor status if defined as employee under NLRA?"

Although it’s only modifying one component of the law, it’s still a concern to members, Boyle explains. "It puts [advisors] on the defensive of saying ’I’m not an employee,’" she says.

"There’s no way [advisors] can offer insurance products and pass that test. It just doesn’t mesh. Commission-based compensation has worked," says Boyle, adding that the legislation threatens to disrupt advisor-client relationships built over many years.

Raymond James sent a letter to its independently affiliated advisors letting them know about their efforts to get a carve-out for advisors.

"We strongly support independent advisors remaining free to affiliate in ways that fit their practices and preferences," says Raymond James spokesperson Steve Hollister.

Don’t want to be a ‘captive agent’ again

“We strongly support independent advisors remaining free to affiliate in ways that fit their practices and preferences.”
Steve Hollister, spokesperson for Raymond James
Some independent advisors are already alarmed by the pending legislation.

David Malkin, principal at New Jersey Life & Casualty Associates, says even though he started as a captive agent early in his career, he doesn’t intend to go back.

"The industry changed. Most of the companies that had full-time, captive agents, don’t. Almost all the companies out there now allow brokers independence," he says. "If all of a sudden, the PRO Act included us, I would have to become an employee. All those companies that I’m licensed with — that’s 23 to 24 companies — that’s crazy," he says.

Tracy Jones, president of Ernest J. Jones Associates, currently works as both an investment advisor and a certified public accountant.

"If [PRO Act] were to [become law] and I had to become an employee [of] my broker-dealer, they would not allow me to also be a CPA. That wouldn’t happen. I would lose 50% of my income," she says.

Jones, who took over the business that her father started after he was diagnosed with Parkinson’s disease, says she values her independence. She was previously affiliated with National Planning Corp., which sold to LPL Financial in 2016. When that happened, she says she gathered with 35 other representatives to look for another broker-dealer and settled on Woodbury Financial Services.

"If I don’t like what they do, if they put something together and I don’t agree with it, I can pick up and go someplace else. My clients are my clients, they are not their clients," Jones says.

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Tags:  Finding and winning new clients , Client retention , Fees and compensation , Staffing and recruiting , Regulatory/legal issues , LPL Financial , Raymond James , Uber , Financial Services Institute , Woodbury Financial Services

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Happy I left Apr. 14, 2021 at 06:09 PM EDT

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Sounds like another useless piece of legislation that helps the "friends" of our elected leaders and not the public that pays their salary....Of course this is pushed by the unions, they are slowly fading away and need new blood....
Jeffrey Harring EVP, SVP, Managing Director
Raymond James Financial, Inc. Apr. 15, 2021 at 07:55 AM EDT

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Congress should take up a a long standing recommendation to ADD a third type of employment (in addition to self-employed and employee) sometimes known as a "platform worker" which applies to Uber-type workers and ensures minimum standards (like minimum wage) I still believe ADVISORS should be consider self-employed, but the "platform worker" would ensure that some business models that DO EXPLOIT workers labor...would also get some protections. In the end Congress ...needs to get "into" the 21st century with UPDATED LAWS...not shoehorning people into 90 year old laws.