By Anthony Ortale
By all accounts, 2009 was a tumultuous and challenging year throughout the financial services community. With competition for clients and assets increasing among advisers, those who were able to offer a broader array of products and services may have been better positioned to weather the storm.
It has often been burdensome for advisers to offer both fee-based products and commission-based investment vehicles on the same platform. However, recent technological advances, coupled with clarity from regulators, have eased these burdens, paving the way for a new breed of adviser.
The dually registered or hybrid adviser is able to offer fee-based products to some customers and brokerage-based solutions to others while remaining within the confines of a seamless and consolidated environment. A hybrid adviser is registered with FINRA through an affiliated broker-dealer and with the Securities and Exchange Commission or state as a registered investment adviser.
As clients become more financially savvy and sophisticated, advisers may want the flexibility to offer both fee and commission types of products and vehicles. Recognizing the significance of this opportunity, some progressive wirehouse firms, independent broker-dealers and registered investment adviser (RIA) service firms have been enhancing their offerings in an effort to attract and retain dually registered advisers.
An adviser has many options to consider when contemplating the move to a fee-based approach. According to Cerrulli Associates, the most significant business model growth has occurred in the RIA channel where advisers are faced with the decision to transition to a pure fee-only RIA, or become a hybrid adviser.
When deciding which course is best for you, conduct an assessment of your current business, understand what type of products and services you want to offer clients and determine what type of firm you ultimately want to create.
Many factors enter into the decision-making process. If you're entering the RIA space, here are few things about a hybrid model to keep in mind:
Do You Seek Flexibility?
Flexibility is often the driving force behind a move to a hybrid model. The most likely candidates to consider this change are advisers currently operating in an environment that is restricting their independence, or those who are entrepreneurial by nature and want to become business owners. Many of those contemplating the hybrid model come from a traditional wirehouse where a large portion of their clients' assets may be in fee-based products. Or, they may be current independent advisers who find themselves at a broker-dealer that is unfriendly to the hybrid model or will only allow them to operate as an investment advisory representative (IAR) under the corporate RIA.
Some advisers may feel that the investment selection restrictions and the proprietary products commonly promoted at traditional wirehouses no longer serve their, or their clients', best interests. They believe they can create a better offering by having the flexibility to select products and investments from a broader universe of choices.
The hybrid approach may be extremely appealing to advisers who want to offer a holistic investment profile, which includes traditional securities but also incorporates alternative, non-correlated assets and insurance needs. A hybrid model also gives the adviser the ability to work with the client to decide the best products, service and fee structure for the relationship.
While a typical hybrid blend might be 70 percent fee and 30 percent commission, an adviser is free to determine the appropriate channel at the individual client level.
The Challenges of Shared Resources
When operating under the hybrid model, an adviser will usually establish two relationships; one with the custodian for RIA accounts and the second with the affiliated broker-dealer where the commission-based accounts reside. This could create a challenge to implementing an effective hybrid solution. In order to be successful and create scale at a firm, an adviser must have the ability to manage both the client's commission and fee accounts efficiently.
When performing due diligence on potential broker-dealers, assess the collaboration between the broker-dealer and RIA custodian. Historically, there has been little communication between the two, and each operated independently. The introducing custodian or broker-dealer would simply provide the adviser with a preferred counterpart that was "hybrid-friendly," and it was left up to the adviser to work with each firm independently. With the growing appeal of the dually registered model over the past few years, RIA service firms and broker-dealers have taken a renewed interest in developing a collaborative environment for the hybrid adviser.
Technology is the key component in solving many of the challenges with integration. A technology platform that provides the adviser access to all accounts under management is crucial to realizing a high level of efficiency. A good solution will allow a firm to manage day-to-day client account needs, including trading, cash management, asset allocation and reporting.
The most successful platforms offer a high level of integration between the commission and fee business, and a robust technology platform that allows the adviser to leverage the products and services of both to retain the look and feel of a single business.
Carefully Consider Compliance Support
One of the greatest areas of concern for an adviser when contemplating forming an independent RIA is compliance. Hybrid firms affiliated with a broker-dealer may be able to incorporate various B-D systems into their policies and procedures, easing some of the cash outlay for technology. The B-D may also provide supervision and compliance review systems that, while designed to adhere to FINRA's rules and regulations, may assist the hybrid firm with meeting regulatory requirements imposed by the states or the SEC. Many times, advisers can ask questions and leverage compliance resources within their B-D. This may be appealing to advisers, especially those who have been in a wirehouse environment and simply are not familiar with regulatory requirements.
An adviser should carefully evaluate each B-D to assess the breadth of the offering and determine if the partner they choose will provide the support they need.
Increased Product and Service Selection
A benefit of the hybrid model is the added value of products and services a broker-dealer can provide. Many advisers look to their B-D for support and guidance in areas of practice management, business development and education. B-Ds successful in the hybrid niche have also given advisers full access to their menu of services and helped them create strategies that clearly exhibit the strengths of their individual advisory firms and underscore their core differentiators.
Advisers who tend to focus primarily on the financials and the payout a broker-dealer offers may be missing the opportunity that a well-rounded product/service offering presents. By taking into consideration the value of the overall platform, they may find the cost is warranted by the additional benefits they will derive from the affiliation.
As advisers continue their migration toward independence and the industry transitions to a fee-based approach, advisers are finding a receptive audience in many broker-dealers who will accommodate them as dually registered advisers. What once was a model granted by exception from the independent broker-dealer has become the fastest-growing segment among all of the business channels available today.
Anthony Ortale is vice president of hybrid solution at First Allied Securities Inc. He oversees the solution that enables advisers to efficiently manage commission- and fee-based business. He can be reached at email@example.com.