The New Jersey Department of Labor and Workforce Development has finalized one of the nation's most rigorous tests for determining whether workers can be classified as independent contractors, a move that threatens to upend the business model of tens of thousands of financial advisors in the state. The rule, announced Tuesday and set to take effect Oct. 1, requires firms to satisfy all three prongs of the ABC test to prove a worker is independent: the worker must be free from the company's direction and control; the work must fall outside the normal course of the company's business; and the worker must be independently established in a trade or profession. The burden of proof rests on the firm, not the worker.
The Financial Services Institute, a trade group representing independent broker-dealers and their affiliated advisors, has been vocal in its opposition. FSI President and CEO Dale Brown said in a statement Tuesday that independent advisors have deliberately chosen this model for the freedom to build their own businesses and serve clients affordably. He emphasized that it is crucial to protect advisors' ability to operate as independent contractors.
FSI's concerns are backed by a study conducted with Oxford Economics, which surveyed 367 New Jersey-based independent financial advisors. The study found that 65% would consider relocating their businesses out of New Jersey if the rule were enacted. Additionally, 91% expected their clients to be affected through reduced services, fewer investment options, or higher fees. The research also revealed that 94% of respondents were very satisfied with their independent contractor status, and 62% said that classification enabled them to better serve clients.
During legislative hearings last year, FSI Executive Vice President and General Counsel David Bellaire argued that the ABC test is too blunt to distinguish between legitimate independent contractors and those who are not. He noted that these advisors are licensed professionals who own small businesses, employ staff, lease office space, and select the products they offer. Bellaire warned that compliance with securities supervision requirements could be misinterpreted as evidence of employer control under the first prong of the test, making the rule unworkable. He testified that nine in 10 independent advisors surveyed would exit their current business model rather than be forcibly reclassified.
According to a SmartAsset analysis of SEC Form ADV filings, New Jersey is home to 494 federally registered investment advisory firms. Notably, the state has an unusually high concentration of limited partnerships, with 22.47% of firms organized as LPs—more than double the national average of 11.11%. This structure may be particularly vulnerable under the new rule.
The New Jersey Business and Industry Association also expressed disappointment with the final rule, stating that its work on the issue is not finished. The rule's impact could extend beyond advisors to the broader business community, as firms grapple with the potential reclassification of independent contractors across industries.
For advisors considering their options, the landscape is shifting. Some may explore how an independent RIA can grow beyond AUM in 2026 as a way to adapt. Others might look at why insurance is creeping back into independent practices to diversify revenue streams. Meanwhile, the regulatory environment continues to evolve, with the SEC proposing semi-annual reporting and other changes that could further reshape the industry.
