Hybrid advisers may have skewed report on commission business

A study released last month by Aite Group LLC claiming that RIA firms do as much commission business as wirehouse brokers has raised some eyebrows in the industry.
The study’s conclusion seemed unlikely, since most breakaway brokers who form RIAs and hold assets in custody at firms such as Schwab Advisor Services or Fidelity Institutional Wealth Services typically give up their securities licenses once they’ve transitioned their clients.
But the Aite report was pretty clear about its finding:
“The percentage of revenue generated via commissions by large-practice advisers is essentially equal across the wirehouse and RIA channels, with commission revenue comprising slightly more than 40% of overall revenue,” the report said.
The odd result appears to be due to the fact that Aite’s survey included a large number of “hybrid” advisers who have an RIA as well as a broker-dealer affiliation.
Of the RIAs who responded to the survey, roughly two-thirds were dually registered, according to reports in InvestmentNews and The Wall Street Journal .
These hybrid advisers would, by definition, be doing significant securities business.
By contrast, the traditional or pure RIA is someone “doing fee-only business under their own personally registered RIA,” said Sean Daly, an analyst at Cerulli Associates Inc. Representatives at wirehouses and independent broker-dealers do advisory business under the firm’s corporate RIA, he said.
“Dually registered advisers somewhat straddle those two options,” Mr. Daly said. “They do fee-based business under their own RIA but maintain a broker-dealer affiliation, with an LPL [Financial LLC], for example,” he said.
The Aite Group study seemed to confuse the categories. It noted that the high level of commission revenue produced by what it called “RIA-affiliated” advisers “may be due to the prevalence of dually registered advisers who carry out their fee-based advisory business through their firm’s corporate RIA structure.”
As of year-end 2011, Cerulli counted 28,714 advisers in the pure RIA channel, 18,457 in its dually registered category, and 51,450 at the wirehouses.
Aite Group’s sample also seems to have missed many of the RIAs who hold assets at the largest custodians. Just 20% of the RIAs surveyed identified their primary custodian as either Schwab or Fidelity — the industry’s two major players.
“The sample seems to be skewed toward hybrid firms,” said David DeVoe, founder of mergers-and-acquisitions consultant DeVoe & Co. LLC, and a former managing director at Schwab.
“There are very few RIAs I know of … that maintain a broker-dealer relationship,” he said.
Aite analyst Bill Butterfield referred a call to his colleague, research director Alois Pirker. Mr. Pirker did not return a call for comment.