Skip navigation

The Hybrid Approach

The hybrid channel—made up of advisors who have their Series 7 and are registered as investment advisors—is growing, and b/ds and clearing and custody firms are here to help.

In the midst of all the mayhem on Wall Street, with wirehouse firms swooning left and right and hitching their wagons to big commercial banks, it's only natural that the prospect of independence suddenly looks more appealing to some reps. After all, for the most part, the retail brokerage arms owned by Wall Street's stumbling empires had very little, if anything, to do with the credit market mistakes and crippling capital shortages that got their firms into this mess. Why should they have to pay for it with flattened stock options and rattled clients?

In fact, for disgruntled wirehouse reps who want a change of pace, now may be the perfect time to try independence. That's because the fee-commission mix of business that is typical of a wirehouse advisor is gaining currency on the independent side of the advisory industry. Broker/dealers and custody firms are fully embracing so-called hybrid advisors — those who are part RIA advisor, and part registered rep — offering them more flexibility and extra services.

“The hybrid model is here to stay. Very few wirehouse brokers who may go independent are fee-only, hence the need for a hybrid solution,” says Chip Roame, founder of Tiburon Strategic Advisors, a financial services consultancy.

By some measures, the hybrid model is the fastest growing model of any in the financial advisory business. According to Cerulli Associates, between 2004 and 2007, the number of dually registered advisors increased 82 percent from about 7,000 to nearly 13,000. In the same period, the numbers of independent reps (with no dual registration) and wirehouse reps (including dually registered reps) dropped 3 percent each, while pure investment advisors (with no b/d affiliation) were up 7 percent. In terms of client assets, pure RIAs watched their assets grow nearly 50 percent between 2004 and 2007. Hybrid firms notched asset growth of nearly double that, or 97 percent, over the same period.

Connecting The Dots

Considering the growth of the hybrid model in advisors and assets, it's no surprise that many firms are beginning to cater directly to the group. Both Pershing and Fidelity, for example, recently introduced tools that link their custodian and clearing platforms onto one platform for hybrid advisors. Now a hybrid advisor can access trade execution, investments, operational support and practice management for the fee- and commission-based sides of their businesses on a single platform. For a while, those services were being offered to RIAs and b/d reps on entirely separate workstations, say executives.

In June, National Financial (Fidelity's b/d clearing house) and IWS (Fidelity's fee-only RIA platform) announced the rollout of HybridOne, a new service that allows hybrid advisors to access products and services from both platforms (Streetscape and AdvisorChannel). By the end of the year, they will be able to use a single sign-on and get consolidated reporting for clients. IWS trust services will also be made available to National Financial advisors, while lending will be available to IWS guys. Enhanced compliance and surveillance tools for the RIA side of the business will also be made available to National Financial b/ds who want to operate hybrids. The service has been in the works for nearly two years. “There's a debate [in the industry] about whether the hybrid model is in a transitional phase or a permanent one for advisors. We think it's permanent and built a platform that supports it,” says Ron Fiske, executive vice president of product development and management for Fidelity Institutional Wealth Services.

Pershing is planning to roll out a similar service in February 2009. That service will merge the firm's NetExchange Pro platform for independent b/d reps and NetExchange Advisor for its RIAs on to a single platform for hybrids. “We're bringing both platforms together to offer more seamless access for hybrid advisors. It's the best of both,” says Susan Theder, managing director at Pershing. Things like Pershing's managed account solutions — its Lockwood Advisors and Fundquest offerings — will be available on the single-sign-on hybrid platform. (An official name for the hybrid platform has yet to be worked out.)

Not surprisingly, executives from both firms say the new platforms will be much easier for hybrid advisors to use. Dually registered advisors were complaining about the separation of platforms under the old model, which often required different sales and relationship staff.

“We were always having conversations with advisors who said, ‘The separate fee- and commission-based platforms are too much to deal with,'” says Ron Fiske, executive vice president of product development and management for Fidelity Institutional Wealth Services. That's not the case anymore. “We don't want advisors to outgrow the services we offer,” says Fiske.

Pershing and Fidelity have an advantage over rival custodian Schwab Institutional in that they have both clearing platforms as well as custody business. Not only do they cater to thousands of RIAs, but they also offer clearing services to hundreds of independent b/ds — each with their own set of reps. That means that if one of those reps decides he wants to become a hybrid advisor and dip his toe into fee-based business, he can immediately turn to the firm he already clears with. This year, both firms announced they are ready to fulfill that request from hybrid advisors.

While Schwab doesn't have a b/d clearing service of its own, it does have an open door policy for any independent b/d that is interested in letting its reps have their own RIAs with Schwab. Since these b/ds are responsible for the oversight of commission-based assets, Schwab works with them to allow for information sharing. Currently, about one-third of Schwab's 5,000 RIAs are dually registered, or hybrid, firms. That number may be growing: About half of Schwab's incoming advisors do some sort of commission business with an independent b/d, say executives. But the firm doesn't necessarily seek out these relationships with independent b/ds. The ones that exist are mostly selected by individual advisors, says a Schwab spokeswoman.

Succumbing To The Hybrid

It's not just custody firms that are making life easier for hybrid firms. Some independent b/ds have done an about face, and are now allowing their hybrid advisors to start their own RIAs for the first time. It used to be that b/ds would require advisors who wanted to do fee-based business to use the corporate RIA, except in very special cases. But financial advisors like running their own show when it comes to RIAs because it allows them to charge clients as they see fit, and to customize their own investment policy statements.

“Independent b/ds are faced with a difficult decision,” says Roame. “They'd rather keep control and make their reps work under the corporate RIA. But more reps want their own RIAs. It becomes a recruiting challenge not to allow them to start their own RIAs.”

Indeed, in September, LPL Financial, the largest independent b/d in the U.S., rolled out its official launch of an RIA custodian. Not only will it serve pure, fee-only RIAs and compete with the likes of Schwab Institutional, Pershing and Fidelity, but it will also allow its own vast army of advisors to start their own RIAs — a move the firm had prohibited in the past.

“Advisors who are presented with choices, like the option to be a hybrid, are probably more likely to stay. Providers that can offer choice are going to be the ones to attract them,” says Gary Gallagher, executive vice president and head of RIA services at LPL Financial. In fact, the firm's multi-affiliation model has received “tremendous interest” in recent weeks from employee reps considering the independent route, says Gallagher.

Independent b/ds' reluctance to allow advisors to start their own RIAs, and therefore custody their assets outside of the b/d, is primarily a regulatory matter. Independent b/ds are responsible for overseeing the assets of their reps regardless of where they are custodied and it's harder to oversee assets custodied elsewhere.

Woodbury Financial, a Woodbury, Minnesota-based independent b/d with about 1,800 reps may be the next firm to allow its dually licensed reps to launch their own RIAs. Today, over 1,000 of the firm's reps are dually licensed to do both commission- and fee-based business. “I think that number will continue to grow. It's not just a way station to the fee-only model anymore,” says Walter White, president of Woodbury Financial.

For now, dually licensed reps at Woodbury are operating under the firm's corporate RIA. But White says he may be ready to consider other options. “Up until now, I preferred that dually licensed advisors use the firm's RIA. But from a recruiting standpoint, I think there are bigger groups of producers who want their own RIAs, and we'll want to accommodate that going forward.”

While allowing reps set up their own RIAs may be primarily motivated by recruiting efforts, White says technology has also helped soften his position on the issue. “There have been improvements to technology that help us better oversee the assets held outside,” he says.

Raymond James Financial Advisors and Cambridge Investment Research are two independent b/ds that have allowed reps to start their own RIAs for quite some time. Last year, Cambridge took it one step further and teamed up with Schwab to create one integrated platform for hybrid advisors. Now, for example, a hybrid advisor using both Schwab and Cambridge has a single sign-on for all his RIA and b/d accounts, and is able to get a consolidated performance reporting on assets from both sides. Further, back-office service teams (which answer questions about anything from trading to billing) from both firms have received exclusive training aimed at helping the hybrid reps. Cambridge's advisors custody almost one third of their assets, or $5 billion of a total $14 billion, with Schwab Institutional.

At Raymond James, dually registered advisors have had the option of setting up their own RIAs for almost a decade. About 400 of the firm's 3,000 reps have their own RIAs. Bill Van Law, senior vice president and national director of business development for the firm, says, “The hybrid model is more than just stepping stone.”

Surely, more hybrid offerings are on the way. As associate director at Cerulli Associates, Bing Waldert, puts it, “These days, instead of advisors asking the firm about his options, you have independent b/ds telling reps, ‘Mr. Advisor, you tell me how you want to operate and we'll accommodate you.'”

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.