Despite the regulatory pressure on financial advisers to transition to an entirely fee-based business, the hybrid model remains an important option to fully service high-net-worth and mass affluent clients.
Hybrid advisers, also known as dually-registered advisers, are marked by their ability to provide investment advice through a registered investment adviser while also being licensed to sell commissionable investment products through a broker-dealer. Because many current and prospective clients want access to both fee-based advice and commission-based investment products, the hybrid model has mushroomed in popularity over the past 10 to 15 years. For example, more than 90% of the advisers on our platform are hybrids, and I imagine a similar ratio holds true across much of the retail financial services industry.
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Unfortunately, since the Department of Labor's fiduciary rule was thrust into the spotlight, offering commission-based investment products has become taboo in some circles. Now more than ever, the threat of increased regulatory risk and accompanying compliance costs is pressuring financial advisers to pivot from selling commission-based products to running an entirely fee-based business.
Yet despite the trend toward an RIA and fee-based model, there clearly remain times when clients are better served through a commission-based approach. Too often ignored in the current regulatory environment is the fact that in many circumstances, commission-based services offer clients a more economical and practical way to meet investment goals. For example:
• For mass-affluent retirees, annuities with guaranteed income benefits are offered predominately through a commissioned approach. Purchasing such products on a commission basis often results in lower costs to the client over the long term as opposed to paying an ongoing advisory fee that places a drag on the account and total investment return.
• A popular strategy among high-net-worth investors is buying a ladder of bonds with staggered maturity dates. Purchasing bonds on a commission basis is frequently more economical than subjecting the portfolio to an ongoing advisory fee, which can significantly impact the investment's yield to maturity, especially in a low interest rate environment.
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• For clients with health conditions and those of advanced age, purchasing traditional insurance products can be a challenge. For these clients, an excellent alternative is to purchase an annuity with a death benefit that offers a guaranteed payout to an otherwise uninsurable client.
• More generally, clients preferring a long term buy and hold strategy have the option of purchasing securities on a one-time commission basis, as opposed to paying an ongoing advisory fee on their account value.
In my experience, many of the best financial advisers do not adhere to a binary scale or
financial planning dictated by black and white decisions. Rather, for these advisers, sound advice comes in shades of gray dictated by the unique circumstances of the client. While fee-based financial advice may serve the best interest of many clients, commission-based services can provide a lower long-term cost alternative as well as access to beneficial products only available in a commissionable structure. Because both fee-based and commission-based services play a valuable role to the investing public, the regulatory environment should promote, not inhibit, the hybrid adviser model.
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As opposed to fostering an environment that "fees = good" and "commissions = bad," the financial services industry must continue to evolve product offerings and regulation in a manner that allows both fee-based and commission-based models to thrive. Serving as a fiduciary should not be synonymous with an asset-based fee structure — it should be an assurance that advisers are acting in the best interest of their clients regardless of the product, service or compensation structure they offer.
James Poer is president and CEO of Kestra Financial.
