By Cyril Tuohy
There’s a new kind of advisor in town — the hybrid advisor. And, yes, most advisors working today have probably heard of the term. But what does it mean?
Tom Daley, founder and chief executive officer of the Advisor Center, an educational clearing house for advisors, likens the hybrid registered investment advisor (RIA) model as a cross between the full-service corporate RIA and the independent RIA.
The hybrid RIA, he writes, means that the advisor “is affiliated with a broker-dealer for commissionable business and conducts fee-based business though an outside RIA.” In other words, the hybrid lives on both sides of the commission and fee-only divide.
Whether one revenue model is better than another, as far as the client is concerned, is up for debate. Commission-based advisors insist their model is best for a particular type of client. Not surprisingly, fee-based based advisors claim theirs offers the best fit as it eliminates conflicts of interest.
What is no longer up for discussion is that hybrid RIAs as a group are growing fast.
Last year, hybrid RIAs grew by as much as 15 percent, and that was on top of a 7 percent increase in 2011, according to Matthew Enyedi, senior vice present of RIA services at LPL Financial, citing data from Cerulli Associates.
“Indeed, the hybrid RIA sounds like the solution, and for many advisors, it is,” Enyedi wrote, in a piece published last month in Investment News. “The trouble is that seemingly every firm now claims to support this model, and every advisor claims to be one — without agreeing on a consistent definition of what a hybrid RIA is.”
Even if the definition of a hybrid RIA is inexact, and may even vary from one firm to another, hybrid RIAs are clearly in vogue. The question is why?
Clients, particularly the mass affluent, affluent and wealth markets with between $500,000 and $10 million in investable assets, want customized services and solutions, according to Daley. That puts pressure on advisors to move beyond a bipolar world divided by the commission-based hoards and the fee-based tribes.
Daley’s view is that adviseos like to offer clients fee- and commission-based options, and some advisers prefer to benefit from both revenue models at the same time.
“Under the hybrid model, advisors can retain the recurring revenue as compensation for products sold and capture recurring revenue on future commissionable opportunities,” Daley wrote in a paper titled “Navigating the RIA Landscape” published earlier this year.
The hybrid platform was originally designed to make it easier for a broker moving from the wirehouse to the independent space, and hybrids were even once considered a “safety net,” allowing the advisor to keep and service commission-based clients while growing his or her fee-based book of business until the time had come to move into a traditional RIA-only platform, according to Daley.
That is no longer true. Much of the uptake for RIA hybrid models comes from independent financial advisers looking for more flexibility and the ability to offer customized services. “Now, what was once seen as a stopgap to ease transition is considered the end goal,” Daley wrote.
To be sure, the hybrid model that is hot today may not be in five years. But for the moment, there’s no doubt hybrids are offering a model advisors want.
Enyedi said that hybrid models are best suited for larger fee-based advisory firms “looking for more flexibility and control than a corporate RIA allows but that still want the full suite of products that a broker-dealer offers and the support services that go along with those offerings.”
Nor is the attraction to the hybrid RIA model happening in a vacuum. The surge in the hybrid RIA model is happening as advisors appear drawn toward independence through the creation of boutique firms, “one-off breakaway practices, and the recruitment of experienced advisers into more independent channels,” according to a report last month by Cerulli titled “Boutique Advisory Firms and RIAs.”
As advisors continue to enter the independent distribution segment, “a system of structured autonomy would be a best-case scenario,” according to Scott Smith, a director with Cerulli.
“Recognizing this opportunity, both traditional employee firms, like wirehouses and regionals, as well as independent broker-dealers (IBDs) have been altering their value propositions in order to attract advisors looking for independence with a degree of support,” Smith wrote.
In other words, advisors looking for a splash of independence yet still with some form of support sounds very much like a hybrid model.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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