After working for more than 25 years in the securities industry, first as a broker and then as a hybrid adviser, Nathan Bachrach dropped his Financial Industry Regulatory Authority Inc. registration in 2012 and became a fee-only adviser.
Mr. Bachrach is now the CEO of Simply Money Advisors, an $800 million branch of Hanson McClain Advisors. As such, he is one of thousands of brokers who have made the switch to the RIA channel, giving up the security of working for an independent broker-dealer or wirehouse for the freedom — and possibly added income — of working for themselves.
The independent and hybrid RIA channel has increased its adviser head count to 63,000, up 21% in the past five years, according to industry research firm Cerulli Associates.
During the same time frame, the number of RIA firms grew from approximately 15,500 to nearly 17,000, according to Cerulli.
After watching all these brokers flee their firms these past few years, more IBDs are investigating ways of holding onto these so-called breakaway brokers by carving out a new home for them. But the challenge is transforming intentions into a workable business model. The devil, as they say, is in the details. How do IBDs come up with RIA platforms that fulfill the broker or hybrid adviser's goal of a fee-only practice, while addressing issues such as ongoing product income?
"Variable annuity trails, 12b-1 fees, life insurance commissions — the typical adviser with $100 million in assets under management can't afford to lose that revenue," Mr. Bachrach said. "If such an adviser generates $850,000 in revenue for his firm, 40% of the profit can easily come from brokerage or insurance commissions. How much is the broker-dealer willing to commit to the business development of advisers who want to make that move from a hybrid to an RIA only?
"To go from hybrid to 100% fiduciary, you either have to have deep pockets or a partner that really wants to help the adviser and give financing of some sort or business development support," Mr. Bachrach said. "It could be books, seminars, media, connections to trade or local business groups — any way to increase clients.
"The constant question is, how do I get to the cleanest, most straightforward relationship with the client," he said. "Advisers all started out in the swamp — commissions, conflicts, that's the swamp — and we're trying to pull ourselves out and get cleaned up. With these new broker platforms, the firms are going to have to spell it out for advisers how to move to the RIA side."
Shirl Penney, CEO of Dynasty Financial Partners, which helps breakaway brokers set up their own RIAs, said it is not only advisers who are driving the trend toward fee-only. He said clients are becoming smarter and more sensitive to the different ways in which advisers are getting paid.
"As more clients continue to understand these conflicts and true fiduciary-minded advisers become more focused on them, the march to the pure RIA model for clients and advisers will only accelerate," Mr. Penney said.
Clients sensitive to pay models
"The massive growth is on the RIA side," said Jodie Papike, president of Cross-Search, a recruiting firm. "Most broker-dealers are defensive of that and are fearful of evolving. [On the other hand] being a totally independent RIA is clearly not for all advisers. The problems facing the broker-dealers is to figure out how to structure the services for breakaway brokers and then what to charge them."
Commonwealth Financial Network, LPL Financial and Wells Fargo Advisors, which operates an independent channel called FiNet in addition to its wirehouse, are in different stages of introducing a variety of new platforms in an effort to hang onto or recruit these brokers and hybrids. Major players such as Raymond James Financial Inc. and Cambridge Investment Research Inc. introduced their fee-only, RIA platforms for brokers earlier this decade.
As you might expect in this hypercompetitive industry, the broker-dealers making the most noise about creating new RIA platforms are playing their cards extremely close to their vest. Details about their plans are sketchy, but that hasn't stopped them from forging ahead.
LPL Financial's largest affiliate, Private Advisor Group of Morristown, N.J., said this month it is launching a new platform its partners believe will give it the ability to attract wirehouse brokers who want to transition to the RIA channel.
Waiving a fee
The new wrinkle in Private Advisor Group's platform is LPL's waiving a five-basis-point fee it usually charges advisers who hold assets in custody at competing custodians, including Schwab Advisor Services and Fidelity Clearing & Custody Solutions. But it was not clear if other LPL branches would have the ability to offer the same five-basis-point discount.
Earlier this month, Wells Fargo Advisors opened the first of what it said will be several RIA offices around the country. Carl Schultz, a Wells Fargo private client group adviser in the Philadelphia area, was the first to sign up as an RIA affiliate.
Mr. Schultz's firm, Forefront Wealth Management, uses the custodial services of First Clearing, which is a part of Wells Fargo Advisors. That may appear to be a conflict to some RIA executives, but Mr. Schultz said that he was under no pressure to custody assets with First Clearing.
He said he chose First Clearing in large part because the transition would be the easiest for his clients since they wouldn't have to fill out new account forms at a different firm.
"If I find Schwab is a better place to custody assets, I would move the assets there," Mr. Schultz said. "There's no restriction on custody of assets."
Commonwealth Financial Network has recently seen at least 75 of its 1,800 reps shift their business totally to fee-only from either commissions or a mix of commissions and fees.
To stay ahead of those brokers, the firm intends to launch a separately branded business for RIAs this year and compete with heavyweight custodians such as Schwab Advisor Services and TD Ameritrade Institutional.
"We're simply approaching this from the premise that the financial services industry has clearly transitioned from the legacy commission model to a primarily fee-based model, and now many advisers want to take it further and be fee-only," said John Rooney, managing principal at Commonwealth.
Cambridge Investment Research Inc., an IBD that started a stand-alone RIA earlier this decade, has seen increased interest in the market recently.
"Cambridge has been more reactive in this space until now," said Colleen Bell, senior vice president and chief fiduciary service officer at the firm.
"Last year and this year we are being more proactive," she said. "This business is seeing more of an expansion, due to the increased interest of advisers in becoming fee-only advisers."
One factor that IBDs have going for them as they try to create a fee-only space is that they already have an ongoing relationship with advisers.
"In general, IBDs typically attribute acquiring or creating an RIA as a way to retain their most valuable advisory teams and assets," said Donnie Ethier, director of wealth management research and consulting for Cerulli Associates. "The idea is that if an advisory team is interested in going to the hybrid or RIA channels, it may be an easier transition to do so with their existing IBD."
"Of the 42% of IBD advisers that have at least considered opening an RIA in the past 12 months, 20% indicated they would likely retain affiliation with their current B-Ds' RIA platform, if it's an option," Mr. Ethier said. "Another one-third noted that they would consider it, but also explore other options."