Wealth managers affiliated with both a registered investment advisor and a broker/dealer, known as hybrid RIAs, have long been considered a stopover point on the way to pure independence. But a recent Cerulli Associates report finds that the hybrid channel has evolved into a veritable business model, with more advisors considering it as a permanent home.
“There is a growing segment of advisors who will remain committed to the hybrid RIA model instead of using it as a stepping stone to the independent RIA channel. The difference between being a hybrid RIA—with the infrastructure and product support of a b/d affiliation—and an independent RIA is greater than it may initially seem,” Marina Shtyrkov, a research analyst at Cerulli, said in a note about the topic. “In addition, the appeal of commissionable product access can’t be underestimated, even in a fee-based environment.”
Client assets continue to shift to fee-based advisory accounts, which has proved preferential to most clients and more lucrative for wealth managers. However, commission-based brokerage accounts can, in terms of cost, be better for some clients and others simply prefer them. In the wake of the death of the Department of Labor’s fiduciary rule, Bank of America’s Merrill Lynch Wealth Management reversed course on its 2016 decision to ban commissions for brokers servicing clients’ retirement accounts, for those reasons, a Merrill Lynch executive said.
Among advisors who have switched to the hybrid RIA channel within the last five years—most of whom come from wirehouse brokerages or independent b/ds—only 23 percent said they would choose not to affiliate with a b/d again if switching firms. The share of advisors in the hybrid RIA channel has also grown from 4.1 percent 10 years ago to 8.8 percent of advisors today.
A few things are driving the growth, according to Cerulli. Hybrid channel firms are appealing to advisors who view their infrastructure will help them grow their businesses. They are also a common landing place for advisors who aren’t interested in starting their own RIA and running a business. In the hybrid model, many find the autonomy with partial infrastructure, product access (commissionable and fee-based products), and support they seek.
Independent RIAs grew their assets by more than 20 percent in 2017. But excluding new entrants and exits in and out of the channel, hybrid RIAs fared better. In growth benchmarks that exclude advisors and assets entering the hybrid and independent RIA channels, hybrid RIAs outperform independent ones. Hybrid RIAs grew at a stronger five-year compound annual growth rate than their independent RIA counterparts from 2012 to 2017, according to the report.
Retail-focused RIAs now manage more than $4.7 trillion in assets.