If the full-service corporate RIA model is the mainland and the independent RIA-only model is an island, the open architecture of the RIA hybrid could be considered the bridge between the two.
Under the RIA hybrid model, the financial adviser is affiliated with a broker-dealer for commissionable business and conducts fee-based business through an outside RIA. Maintaining a broker-dealer affiliation allows advisers to provide clients with commissionable products such as mutual funds, variable annuities, stocks and bonds.
Independent broker-dealers are the first to embrace the hybrid model, permitting their financial advisers to own their own RIA. The broker-dealer affiliation also allows the adviser to retain their series 6 or 7 securities licenses, among others.
Five reasons the RIA hybrid is growing
1. Client Demand: Increasingly, the industry is moving away from either-or scenarios. Access to around-the-clock investment information and practical technology, accompanied with an educated client base has made the marketplace more diverse. Many clients aren't looking for fee-only or commission-only advisers. Instead, clients, especially those of higher wealth, want tailored services, customized portfolios and personal relationships with their financial advisers. Additionally, a solely fee-based model may restrict servicing a wider and more diverse client base.
2. Adviser Flexibility and Support: Many advisers prefer to offer clients a variety of fee-based and commission-based solutions. In addition, the ability to grow their businesses under diverse revenue streams and avenues of cash flow provides greater peace of mind for some. The typical hybrid adviser may prefer the support offered by the broker-dealer—including marketing, technology and compliance.
3. Ability to Retain Recurring Revenue: Advisers with trailing revenue on commission investment products sold will lose this income if they move to the RIA-only platform restricted to facilitating fee-based transactions. Under the hybrid model, advisers can retain the recurring revenue as compensation for products sold and capture recurring revenue on future commissionable opportunities.
4. Recruiting Advantage: Offering financial advisers a choice between the full-service or RIA hybrid model provides broker-dealers with a recruiting advantage. The hybrid platform was originally designed to ease the transition of a broker moving from the wirehouse to the independent space. The hybrid was seen almost as a safety net, allowing the advisor to maintain and service commission-based clients while growing the fee-based side of the business until such time as the adviser was ready to move into a traditional RIA-only platform.
However, the largest movement into the RIA hybrid model is from independent financial advisers looking for increased flexibility and client service customizations. Now, what was once seen as a stopgap to ease transition is considered the end goal.
Clearly, a growing number of advisors prefer the hybrid landscape and are rooting their businesses in the model. Trends also show some advisors breaking away from the broker-dealer's RIA to establish their own hybrid practice where a combination of fee-based and commission-based revenues can be garnered.
5. Broker-Dealers Retain Assets: While the RIA hybrid helps broker-dealers recruit brokers, at the same time they are also losing advisors lured by the freedom of establishing their own RIAs. Offering both commission and fee-based revenue streams, the RIA hybrid gives the independent broker-dealer the leverage to retain advisors and keep at least a portion of these assets under the BD umbrella. Interestingly, we are now starting to see some independent broker-dealers also allow financial advisors to only affiliate with the broker-dealer's corporate RIA (and not carry the series 6 and/or 7 licenses).
Benefits of the RIA hybrid model
• Advisers gain the flexibility to offer clients both commissionable and fee-based services.
• The adviser can leverage the broker-dealer's compliance and technology infrastructures, in addition to the services and technology offered through a custodian.
• In addition to the RIA-only benefits previously mentioned, owning the RIA side of the business, means advisers make decisions in many areas of the operation, can choose one or more custodians, control how to invest for clients and leverage increased pricing flexibility.
• Having both a broker-dealer relationship and independent RIA increases the owners' ability to reach and recruit additional financial advisers. Under this model, solutions are provided to advisers that want to maintain a broker-dealer relationship, advisers that want to be “fee-only” and those advisers wanting both a broker-dealer and fee-based practice.
This blog post is an excerpt from a white paper, "Navigating the RIA landscape", authored by The Advisor Center. To download the white paper, click here. Tom Daley is the CEO and founder of The Advisor Center.
