With a big rise in the number of advisers breaking away from wirehouses, we're receiving more calls from those interested in forming a registered investment adviser firm or joining an independent broker-dealer.
Many of these wirehouse advisers are unaware they might have a better option: joining an independent broker-dealer as a hybrid adviser, benefiting from multiple offerings and revenue streams, as well as from support and economies of scale.
The term “hybrid advisers” has a few definitions. We define them as those who maintain their securities license and transact commission-based business through their brokerage firm (governed by the Financial Industry Regulatory Authority Inc.), while operating under a fee-based model as their own RIA (governed by the Securities and Exchange Commission or state, depending on the amount of assets under management).
For transitioning wirehouse advisers, maintaining commission-based activities while expanding fee-based business can make for a more comfortable and financially feasible shift.
As more broker-dealers develop such platforms, advisers are presented with some attractive possibilities. Among the pros of becoming a hybrid adviser:
Built-in technology. Hybrid situations typically include technology platforms that can comprise data aggregation account management, trading systems and reporting. Having systems in place, as opposed to having to outsource, provides for cost savings and easier operations.
Lower costs. Hybrid advisers can take advantage of economies of scale in other areas, including compliance and errors-and-omissions insurance.
Wider range of offerings. Maintaining a license means that hybrid advisers' practices are not limited to advisory business, and that they have access to a broader universe of products to provide clients. Many products, including alternative investments, 529 plans and some variable annuities, are sold only through commission accounts.
Multiple revenue sources. Because they can sell many types of products, hybrid advisers have a number of income streams, which can make the transition to an advisory business much smoother.
Support. While having an RIA means more freedom for them, hybrid advisers receive support from their broker-dealer in areas such as compliance, practice management and marketing.
Compliance oversight. Broker-dealer compliance oversight can translate into decreased regulatory burdens. Compliance departments can offer help on state and SEC audits, website reviews, branch audits, and updates on regulatory changes and issues.
Freedom and flexibility. Hybrid advisers enjoy greater autonomy yet have the flexibility to offer access to more products and a larger firm's services and backing.
Some advisers think that the negatives involved with oversight outweigh the pros of becoming a hybrid. The cons include:
Fees. Hybrid advisers trade a piece of revenue for compliance oversight.
Finra and SEC or state oversight. Conducting commission and advisory businesses means being overseen by Finra as well as by the SEC or state. However, many believe that regulation may evolve so that Finra eventually oversees both commission and advisory businesses.
Broker-dealer oversight. Some advisers view regulation by the SEC or state as less cumbersome than supervision by their broker-dealer's compliance department. But those departments can help protect advisers navigating complex regulatory territory.
While broker-dealers traditionally have charged their independent RIAs a percentage of gross dealer concession or basis points on assets, competition has spurred them to offer ramped-up services, including practice management, education, compliance and legal help. Many firms also have pushed payouts higher on hybrid advisers' fee-based business. In fact, broker-dealers and clearing firms are aware of the many opportunities and benefits in providing hybrid platforms, and are stacking their offerings in favor of the adviser.
The bottom line is that broker-dealers with hybrid platforms are competing for wirehouse advisers who may benefit from this model.
Jodie Papike is executive vice president of Cross-Search, a third-party broker-dealer recruiting firm. Visit cross-search.com for more information.