If it seems we’ve been talking about the Department of Labor’s Independent Contractor Rule for years, it’s because we have. It was January of 2021 when the DOL first considered revising the standard for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). On January 10, 2024, the DOL released its final rule. The legal wrangling began immediately. Well, technically, it resumed.

The DOL’s intent (which includes protecting workers’ rights when it comes to minimum wage and overtime pay) is reasonable. However, as with many legislative actions, unintended and far-reaching consequences make the rule untenable for constituencies that include independent financial advisors and broker-dealers.

What are the consequences for the financial services industry?

The rule’s negative impacts have been covered in depth elsewhere: potentially increasing the cost of advice for Main Street investors and compromising a financial advisor’s ability to control how they affiliate with firms, being among the most discussed.

In an ever-evolving industry the DOL independent contractor rule is the latest marketplace force poised to alter the landscape. Players in the current ecosystem, one where both M&A activity and private equity are more prominent than ever, should be asking themselves: what happens at the intersection of the DOL rule and M&A?

Under the new rule, the road to independence for financial professionals begins and ends at the RIA model. The alternative is for formerly independent professionals to become employees of their broker-dealers. That’s a hard stop for many. The new rule will incentivize independent advisors to establish their own RIAs. However, is this even feasible for smaller firms? The barriers to entry are high. Often, such firms do not have the scale or resources to address the regulatory, product diligence and operational complexities. Due to the cost (in terms of money, time and resources) of running an RIA business, they will be forced to either seek expensive capital to drive scale or sell to a larger RIA … thereby removing their independence.

This is where M&A may play out outsized role in a post-DOL environment.

M&A has become an increasingly important part of the recruitment process over the past few years, with financial advisors selling a portion of their business as part of the transition. And smaller firms that can’t compete in the new landscape, but still crave independence, will drive this type of dealmaking going forward in an effort to retain control and potentially participate in a larger liquidity event down the road.

Fast on the heels of the final rule being issued by the DOL, a group of disparate businesses filed a motion to block the rule. How this will play out – and how long it will take – are yet to be seen. However, we do know that resistance to the new DOL rule is strong, opponents have deep pockets and, importantly, there are allies in Washington who support a carve-out to exclude financial advisors from the rule.

As consultants to financial advisors, the team at Bridgemark Strategies continuously monitors the industry ecosystem on our clients’ behalf to help them stay informed on issues that may impact them, such as the DOL Independent Contractor Rule. If you’d like to learn more about our services, contact us for a confidential conversation.