Why this flourishing sector of the freelance economy can be a source of new long-term clients.
The term “gig workers” might provoke thoughts of young people busily crisscrossing the landscape to deliver packages and bundles of take-out food to homes and businesses. And while this image is accurate, there’s a lot more to the gig economy than that.
Gig workers include freelance and independent contractors who are not formally employed by a business, but rather are paid to perform specific tasks. Today’s gig workers aren’t just Uber, Lyft and DoorDash drivers, but web designers, dog walkers, housekeepers, tutors, fitness instructors, social media influencers, software developers and just about anyone else who might technically be self-employed, including some advisors.
A growing workforce
The gig economy differs from the traditional economy’s standard of salaried, full-time employees with general access to group benefits. In fact, the most defining aspect of gig work today is that it’s the opposite of what many people might consider to be a normal job. But gig work is becoming more normal by the day.
Here in Canada, a 2019 Angus Reid poll found that 43 per cent of survey participants aged 18 to 34 had worked on a contract basis in the past five years. Another study discovered that gig workers represent about 10 per cent of the Canadian workforce, a figure that’s nearly doubled since 2005. It’s also estimated that these numbers will continue to grow: in the United States, where the number of gig workers is expected to rise to 86 million by 2027 from 57 million today.
While their work varies in purpose, duration and complexity, gig workers do have something in common with every other type of worker: they earn a wage for their services and pay taxes on those earnings. This is where advisors may see an opportunity.
For advisors with a keen interest in expanding their clientele, it’s encouraging to know that nearly half of all gig workers are just entering their prime earning years. They may be beginning to accumulate wealth that could be directed towards various long-term investments, insurance policies, business opportunities and retirement plans – and their need for financial guidance is likely to escalate as they age, and as their income increases and stabilizes.
While there are gig workers of all ages, the younger cohort may tend to rely more heavily on technology to aid their do-it-yourself lifestyle. This can include receiving and banking their earnings electronically, and possibly handling their investments through convenient wealth and robo-advisor apps. When it comes to managing money, they may rarely communicate with human financial professionals at all. But just because the technology exists to assist them with transactions doesn’t mean it can fulfill the same role or provide the same value as an attentive advisor.
The ebb-and-flow nature of their work means many gig and self-employed workers earn their income at irregular intervals and, as a result, may be less inclined to follow a monthly budget or maintain firm financial routines. They might also be reluctant to look beyond their next pay cycle or windfall and dismiss the idea of building a plan for a more secure financial future. A lack of experience or a low comfort level with their perceived financial planning skills could be standing in the way of building a more complete financial portfolio.
Advice helps define the client’s financial goals and set their course for achieving them. Advisors have an opportunity to introduce gig workers to various strategies that they may be unaware of, and that can be tailored to their individual circumstances. For example, such clients may benefit from “all-in-one” banking, which can flexibly accommodate the ups and downs of income and debt. It may be the perfect solution for keeping long-term plans on track through challenging times by helping clients better manage their debt and continue to save and invest when they can.
Tax planning, too, is where many gig workers might welcome some in-depth information and advice (see sidebar). Starting in one area to alleviate anxieties about a particular issue, such as debt reduction, improving their credit score or building an investment portfolio, can lead to expanding in others. Although the relationship might require a different approach, the ultimate aim of helping clients build and protect their wealth is the same.
In any event, establishing relationships with flourishing gig economy workers could develop into a range of opportunities and referrals to begin providing wealth, tax and estate management services to workers at all levels and ages. By the end of 2023, the global gig economy is expected to rise to $455 billion in gross transaction volume. There’s little reason to expect that the value of advice won’t rise along with it.
Pay attention to taxes
When gig workers are paid for work that has been performed on an hourly, daily, weekly or longer periodic basis, employers do not always deduct income tax and other mandatory payments, such as contributions to the Canada (or Quebec) Pension Plan. Gig workers are also less likely to have access to any traditional pension or defined contribution plans. Instead, it often becomes the worker’s responsibility to look after their own tax payment obligations, as well as their retirement savings. (This also applies to any additional income that regularly employed people make from side gigs or contract work.) The absence of deductions means that significant taxes may be owing when the individual files a return.
One challenge for advisors may be staying on top of the tax rules that apply to gig work, since they change slightly from year to year. Even if providing tax advice is not your strongest suit or is outside the scope of services that you are permitted to offer, your advice on other relevant financial matters remains valuable. Recognizing when serious tax planning is warranted and suggesting the client engage the services of an accountant or tax specialist shows your commitment to monitoring the client’s overall financial picture, since taxes play a prominent role in wealth creation year-round.
Most importantly, gig and self-employed workers should be encouraged to commit to keeping records of everything related to their earnings and expenses, both to avoid running into potential trouble by understating their income and to avoid being overly taxed. They should also be aware of how this type of work can qualify them for various deductions and tax credits. The best strategy is to have a plan in place beforehand to mitigate potential shocks when tax time rolls around and so the client is comfortable that they aren’t running afoul of any laws, regardless of the type of work they are performing. Helping clients attend to their taxes responsibly can itself be a good gig for an advisor.