Independent broker-dealer firms are making a run for the registered investment adviser custody business.
With the risk of losing some of their most productive financial advisers to the independent-RIA channel, it is a step that they have been forced to take.
“They need to stop the defections,” said Mike Partnow, who runs Pershing LLC's RIA Complete service, which helps broker-dealers develop advisory platforms.
Brokerage firms are finding new ways to serve independent advisers who run their own registered advisory shops, in addition to those who work as investment adviser representatives and have an affiliation with a broker-dealer's corporate RIA.
“The independent-contractor segment is really reshaping its entire infrastructure,” Mr. Partnow said.
Firms are adopting a “custodian agent model under the B-D [so] they can service advisers through the broker-dealer chassis at their primary clearing entity,” he said.
Among the latest developments, a number of independent broker-dealers have rolled out new service models for fee-based advisers.
At the end of May, Commonwealth Financial Network announced a new “RIA-only” option and a pure fee-based model for investment adviser representatives.
The RIA-only plan lets pure advisory firms that hold $50 million or more at the clearing firm used by Commonwealth, National Financial Services LLC, get a 100% payout on advisory revenue.
Under the plan, RIAs pay a fee of up to 15 basis points on assets, depending on product mix, according to chief executive Wayne Bloom.
RIA firms using the RIA-only option can use other custodians, as well, he said.
Commonwealth's investment adviser representative option will allow fee-based advisers with at least $25 million under management to use the firm's corporate RIA without having a securities license at the broker-dealer.
Previously, the company supported only traditional registered reps and hybrid advisers who used Commonwealth's corporate RIA or had their own RIA firm and who still did some securities business through Commonwealth.
With the new plans, Commonwealth has platforms to allow advisers to do business the way they want, Mr. Bloom said.
“We're in the infrastructure business,” he said.
Last month, NorthStar Financial Services Group LLC and Securities America Inc. rolled out a jointly owned RIA firm for hybrid advisers.
The new firm, Arbor Point Advisors LLC, is structured as a corporate RIA for advisers who may do some securities business at Securities America but who also want a choice of custodians for their advisory assets.
In the past, hybrid advisers at Securities America could use only the firm's two main clearing providers —National Financial and Pershing. Securities America has also supported RIAs who use other custodians, but those advisers had to have their own RIA firm.
“With this solution, advisers can now use outside custodians, but they don't have to form their own RIA,” said Jim Nagengast, chief executive of Securities America.
Many fee-based advisers prefer using an established corporate RIA for simplicity, observers said.
That desire has grown since the Dodd-Frank financial reform law raised the asset threshold for Securities and Exchange Commission registration, making smaller RIAs potentially need to register in multiple states.
In March, Raymond James Financial Services Inc. announced a new pricing plan for advisers who have at least $100 million in discretionary assets under management. These advisers, some with their own RIA, can retain 100% of their advisory fees if they pay a quarterly fee.
Separately, last month, Raymond James Financial Inc. named four new regional directors for its Investment Advisors Division, the firm's RIA custody unit. That move follows pricing cuts made last fall to make the unit more competitive with the major custodians and is part of a push to build its pure-RIA business.
In 2008, LPL Financial LLC began supporting independent RIAs. Five years later, in June, the firm marked its $50 billion milestone in total RIA assets under custody.
LPL's RIA unit caters to hybrids who want everything under one roof.
“A lot of [broker-dealers] say they're in the RIA hybrid space, but in fact, they're either under a corporate RIA, or if they have their own ADV, [custodians] force them to use a separate broker-dealer for commission-based business,” said Matt Enyedi, senior vice president of RIA services for LPL. “A telling statistic is that, of the [RIA] firms that work with LPL, 85% use us as sole custodian.”
Cambridge Investment Research Inc. has always offered services for RIAs and hybrids, said Jeff Vivacqua, first vice president of business strategy.
Of those doing fee business at the firm, it is split about 50-50 be-tween advisers using the Cambridge corporate RIA, versus their own.
“We can offer the same level of service under each” setup, with pricing dictated by business mix, Mr. Vivacqua said.
But the independent broker-dealers have tough competition for independent RIAs. For one thing, they must go up against custody behemoths such as Fidelity Investments and The Charles Schwab Corp., which have been offering a growing list of value-added services to RIA firms.
Second, they are at a pricing disadvantage to traditional custodians, who generally don't charge RIAs directly, and offer rock-bottom trading costs for the clients of RIAs.
“We can't compete, and don't intend to, with discount firms,” said Bill Van Law, head of Raymond James' custody unit. “But we think we can compete on service and total value.”
Other broker-dealers make the same argument, saying their platforms offer enough compliance, technology, practice management and networking opportunities to make them attractive to RIAs who want a high level of support.
“Some advisers want peer-to-peer networking” beyond an annual conference at their custodian, Mr. Vivacqua said.