Making way for breakaways

Accommodating their securities business is key for custodians seeking fee assets

Jul 15, 2012 @ 12:01 am

By Dan Jamieson

One of the challenges breakaway brokers face is maintaining the commission-based business they keep when they move to a fee-based model.

That's why accommodating the securities business of breakaway brokers is critical for custodial firms that want to capture fee-based assets. And it's why so-called RIA-friendly broker-dealers, which work with independent RIA firms, have enjoyed solid growth.

Cambridge Investment Research Inc., perhaps the granddaddy of the RIA-friendly niche, went from around $2 million in revenue with little fee business 20 years ago to $21 million in revenue today, 55% of it derived from a share of advisory fees. The firm's advisers handle $44 billion in total, $23 billion of which is fee-based.

“We rode that [hybrid] wave,” said Cambridge chief executive Eric Schwartz. “We supported any business model the advisers wanted.”

“[RIA] clients are continually asking us for solutions” to keep their securities business, said Tim Oden, head of business development at Schwab Advisor Services. Schwab has a list of about two dozen broker-dealers to whom it can refer registered investment advisers.


The most attractive recruits for a custodial firm, big wirehouse teams that go independent, have significant legacy commissioned business, said Peter Dorsey, head of sales for TD Ameritrade Institutional, which has relationships with about a dozen outside broker-dealers.

Fidelity and Pershing LLC both clear for broker-dealers who will accommodate independent RIAs and will try to find a good match for an RIA with a correspondent firm.

Fidelity's Options for Independence program coordinates with broker-dealers to help streamline a hybrid adviser's transition.

Pershing has its RIA Complete program, which works with correspondent firms to beef up their own corporate RIAs, or refers breakaway prospects to Pershing's own RIA custody firm, Pershing Advisor Solutions.

RIA-friendly broker-dealers expect even more growth if the Financial Industry Regulatory Authority Inc. takes over regulation of the adviser space. That's because more hybrid advisers might seek the shelter of a broker-dealer's more profitable corporate RIA if faced with growing regulatory pressures.

Regardless of regulatory changes, RIA-friendly firms should continue benefiting from the breakaway trend. But running a B-D that caters to independent RIAs has some challenges.

For one, many RIA firms don't see the need to share advisory revenue with a broker-dealer, despite Finra rules that require brokerage firms to supervise the outside advisory businesses of their brokers.

Broker-dealers see that differently, of course.

“You have to be paid on the fee side, as well” as the B-D side, said Mark Mettelman, chief executive of Triad Advisors Inc. “That piece can't be given away.”


Many of the B-Ds also rely on referrals from custody firms, so they don't dare compete for advisory business.

“We all recognize we share clients, and understand we're not having a tug of war” for advisers, Mr. Dorsey said.

To justify charging fees to their independent RIAs, broker-dealer firms are offering a long list of value-added services, including access to practice management consulting, account aggregation, performance reporting, educational services, and compliance and legal help.

Mr. Mettelman said his fees vary by the size and volume of business from his RIA clients. But an adviser's revenue payout would be less than that of a typical independent registered representative.

The normal grid for an independent registered rep usually is 80% to 90%, depending on production.

About 80% of Triad's 525 advisers have their own RIA. A bit over half of the firm's revenue comes from advisory services. In total, the firm's advisers oversee about $15 billion.

American Portfolios Holdings Inc. charges a $50,000 annual fee on the first $1 million of outside advisory revenue, and then an override of 1.5% beyond that, chief executive Lon Dolber said.

Mr. Dolber's firm has 818 advisers, including 60 with their own RIAs. They handle $16 billion in total, about 30% of which is under advisory accounts.

Independent RIAs affiliated with Spire Investment Partners LLC pay 3 percentage points less than they would if they ran their advisory business through Spire's corporate RIA, chief executive David Blisk said. Individual deals vary.

Fewer than 25% of the firm's 40 investment teams run their own RIA firm, Mr. Blisk said.

At Cambridge, “we give the same payouts [of almost 90%] whether you use our RIA or your own,” Mr. Schwartz said.

“We add the same value regardless of what you do,” he said. About two-thirds of the 1,350 Cambridge advisers use the firm's corporate RIA.

Purshe Kaplan Sterling Investments is an example of a broker-dealer that does not charge outside RIAs a fee on their advisory assets.

“We make money through the broker-dealer” and an insurance agency, said PKS partner Brian Staff.

“My margins are much lower,” he said. The firm doesn't market much or pay recruiters, he said, relying instead on referrals from the major RIA custodians. That keeps costs low, Mr. Staff said.

Nearly all the 680 advisers at PKS run their own RIA firm.

With regard to supervision, PKS gets data downloads from custodians, and the company can supervise outside RIAs efficiently with the help of technology, Mr. Staff said.

Aside from how they get paid, some RIA-friendly firms also have to deal with a naturally eroding market.


For example, about 40% to 50% of new breakaways coming into Schwab Advisor Services initially maintain an affiliation with a broker-dealer. Typically, however, less than a quarter of them end up keeping a securities license, Mr. Oden said.

As clients are transitioned out of legacy brokerage products, many advisers “will walk away from their broker-dealer affiliation because it's a nuisance,” Mr. Oden said.

“With Dodd-Frank, I'd say there's going to be a lot more backpedaling” toward using a corporate RIA at the broker-dealer, said Jon Henschen, president of Jon Henschen & Associates LLC, a recruiting firm.

And state regulators will be knocking on more doors as well, which will drive hybrids with state-registered RIAs to consider consolidating assets at their broker-dealer, he said. Twitter: @dvjamieson


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