Advisers as Hybrid W-2 and 1099 Employees

Questions about compensation lie at the heart of advisers’ decisions about independence, practice ownership and opportunities for affiliation.

Art by Sarah Mazzetti

The term “unique” is used often by retirement plan advisory practices.

Sometimes the term is used to talk about the culture of a firm, or to describe the circumstances that led to the advisory shop’s founding.

In the case of GCG Wealth Management and Woodbury Financial, the affiliated firms speak proudly about their unique compensation model and their shared interest in encouraging entrepreneurial thinking among advisers.

As explained by the firms’ leadership, GCG offers an affiliation model whereby advisers have the option to join up as W-2 employees while also remaining independent in their 1099 affiliation with Woodbury Financial, which in turn is part of Advisor Group.

In conversation with PLANADVISER, GCG President and Managing Partner Joel Burris, and Woodbury President and CEO Rick Fergesen, pointed to recent successful recruiting activity as evidence that their “unique” compensation model positions their firms well for the future.

“In short, GCG offers an affiliation model whereby advisers have the option to join GCG as W-2 employees while remaining independent in their affiliation with Woodbury and Advisor Group,” Burris explains. “This enables GCG to provide a more comprehensive level of support to its advisers without compromising their independence.”

Independence and Affiliation  

“The power of our partnership with Woodbury is that we are two independent entities,” Burris explains. “This is to say, GCG is independently owned and operated, as is Woodbury and Advisor Group. Compare this with most places where an adviser goes to work, say Morgan Stanley. Typically, the adviser is going to be an employee of Morgan Stanley and with the in-house broker/dealer. Legally, under IRS rules, an adviser in this situation can only be paid one way, as the W-2 employee.”

GCG’s situation is different. Advisers coming on board have two choices. They can be compensated purely as 1099 workers from the broker/dealer, in which case they don’t get any of the employment benefits. The second and more popular approach is more of a hybrid model, whereby they have a relationship with the broker/dealer (Woodbury) and the broker/dealer gives them 1099 income, but at the same time, a portion their compensation is paid through GCG’s W-2 channel as well.

“Having this W-2 income, they gain things like health insurance, access to a 401(k), and all the other group benefits we have for our employees,” Burris says. “This hybrid model allows them to take advantage of the entrepreneurial part of being an adviser, but when it’s all said and done, our advisers still get a lot of employment benefits. They also get a match on their FICA taxes—all the things that are associated with having W-2 income.”

Critically, Burris says, the advisers “can still go out and pull all the levers and get paid directly from the broker/dealer.” By drawing this 1099 income, this means they can write off business expenses and implement other tax mitigation strategies.

“That’s also part of the value proposition,” Burris says. “We can give you a higher payout than a wirehouse career shop will give you, but we can also give you this additional tax support. Not only are you grossing more, but if you do your taxes right, you’re netting more also.”

Perspective from Woodbury

Explaining more about how this business model works, Fergesen says a key part of the equation is the way Advisor Group is organized and operated.

“At Advisor Group, we have four separate independent broker/dealers, one of which is Woodbury, and we keep the relationship management functions separate for each firm,” Fergesen explains. “Each entity has a broker/dealer president, a distinct business development team, etc. We purposely keep those high-touch relationships separate, and then we pool our resources for things like technology and cybersecurity.”

Other centralized areas include financial planning solutions, product management, investment advisory platforms, specialized lending services and client experience technology.

“We use the resources of Advisor Group to create an industry-leading platform, and then, by running the four firms separately, we can still create a higher touch support environment,” Fergesen says. “Advisers very selectively choose GCG as the organization they want to affiliate with. Our role is to stand behind GCG and provide the firm with everything it needs to support its advisers and help them grow.”

According to Fergesen, it’s very hard for many entrepreneurial-minded advisers to become independent, even when they want to. Even if they have been successful, they need significant liquid resources to hire staff, secure office space, establish a profitable revenue stream, etc.

“What GCG does is allow this to be a smoother transition,” Fergesen says.