Financial advisers making the transition from broker to registered investment adviser appear increasingly content to remain in the halfway house of dual registration.
So-called hybrid advisers, who are registered as RIAs with the Securities and Exchange Commission or a state regulator, and as brokers with the Financial Industry Regulatory Authority Inc., are growing at a faster clip than the rest of the industry, according to a Cerulli Associates Inc. report released Monday.
In 2011, head count in the pure RIA channel increased by nearly 3%, to 28,714, and assets grew by 13%, to more than $1.4 trillion.
The hybrid channel, however, saw a 6.9% increase in adviser head count and a 19.1% rise in assets, to $921 billion for the year. Overall, there were 2.3% fewer advisers in the industry as the number of individuals who retired or were fired significantly outpaced new hires.
“The dually registered channel has shown the largest growth rate across the industry in both assets and advisors,” said Tyler Cloherty, a senior analyst at Cerulli who worked on the report.
Mr. Cloherty attributes the popularity of the hybrid model to its flexibility — particularly for commissioned brokers making the move toward a fee-based RIA model.
“The pure RIA has no access to commission sales. If advisers want to sell one-off products, like annuities, in the future, the dually registered model allows them to keep a more diversified revenue stream,” he said. “It offers an easier transition into the RIA channel.”
More advisers, however, are apparently happy to stay in the hybrid space rather than go to a purely fee-based model.
The study found that hybrid advisors surveyed were 19% more likely to retain their dual registration on a permanent basis in 2012 than in 2011. Those advisers also don't seem to mind the administrative and operational challenges of having dual registration. Three percent fewer hybrid advisers this year said that dual reporting of trades was a major business challenge for them.
The trend isn't as favorable for brokerage firms offering the hybrid platform. Mr. Cloherty said as advisers approach the $100 million in assets under management threshold, the case for becoming an RIA increases, and rather than lose advisers and their assets entirely, firms such as LPL Financial, Raymond James Financial Inc, and the Advisor Group are offering dual registration as an alternative to keep advisers in house.
“It's a defense mechanism for these firms to retain talent,” said Mr. Cloherty.
The margins for the firms, however, are slimmer, as advisers typically put the bulk of their assets in their RIA. The brokerage firms also have to compete with custodians, such as Charles Schwab Advisor Services and Fidelity Institutional Wealth Services, who work with outside broker-dealers to help RIA custody clients who need brokerage services.
“The dually registered model began as a stopping point on the way to the RIA channel, but advisers have realized they can keep the flexibility,” said Mr. Cloherty.