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IBDs Dress Up Offerings For Hybrids

The hybrid hype is growing. Independent broker-dealers have lately been ramping up their efforts to attract hybrid advisors, launching new recruiting efforts and rolling out integrated commission and fee-based platforms and hybrid-specific services. Meanwhile, two major custodians released reports about the importance of the hybrid market in the past two weeks.

The hybrid hype is growing. Independent broker-dealers have lately been ramping up their efforts to attract hybrid advisors, launching new recruiting efforts and rolling out integrated commission and fee-based platforms and hybrid-specific services. Meanwhile, two major custodians released reports about the importance of the hybrid market—defined as those firms that operate an independent RIA and have a broker/dealer affiliation—in the past two weeks.

Cerulli Associates projects total hybrid headcount to grow 11.8 percent this year to about 15,830. But that still represents a small segment of the business. Hybrid advisors account for only about 5 percent of all advisors, and that number should rise to around 8 percent by 2014, according to Cerulli.

“Broker-dealers who do not carefully evaluate the hybrid opportunity run the risk of being at a competitive and economic disadvantage,” said Jim Roth, managing director at Pershing. Pershing released an independent study last Wednesday called The Economics of Constructing a Hybrid Platform that encourages broker-dealers to consider developing hybrid platforms. Pershing worked with FA Insight, which interviewed firms that had existing relationships with Pershing as well as those that did not. Meanwhile, Schwab Advisor Services released a report Feb. 24 titled Understanding the Hybrid Practice that outlines trends in the growing hybrid space and offers suggestions for advisors making the transition to a hybrid practice.

Today, virtually all broker/dealers allow their advisors to do both commission and fee business, and 75 percent of all financial advisors are licensed to do both. Most of these b/ds allow advisors to conduct fee-based business under the firm's corporate RIA. A much smaller number of firms allow their affiliated advisors to act as true hybrids—to maintain a b/d affilliation and manage their own outside RIA. This can be important to some advisors, who may prefer to have full control over how they provide fee-business to clients.

LPL Financial, which has its own RIA custody platform, is an example of one industry giant with a lot of plumbing going after hybrids, said Scott Smith, Cerulli Associates senior analyst. Some other b/ds that allow independent RIAs include Cambridge Investment Research, United Planners Financial Services, Comprehensive Group, Geneos Wealth Management, Ausdal Financial Partners and Williams Financial Group, according to Jonathan Henschen, president of recruiting firm Henschen & Associates. American Portfolios Financial Services, Summit Brokerage Services and First Allied, also allow independent RIAs on their platforms, according to the Pershing study.

NFP Advisor Services Group (formerly NFP Securities) only recently repositioned itself as a home for hybrids, allowing advisors to operate their own independent RIAs while also using NFP brokerage services. Just this month, the firm started aggressively recruiting hybrid advisors, with direct mail and print ad campaigns as well as road shows, and NFP plans to add three new recruiters by mid-year, said James Poer, president of NFP Advisor Services Group. The firm also recently rolled out IndeSuite, a wealth management platform that centralizes an advisor’s fee and commission-based businesses through an integrated dashboard. While Schwab is the first custodian on the platform, Poer said the system is not restricted to one custodian. Today, more than 90 percent of NFP’s advisors operate under the traditional model, in which they use the corporate RIA. But Poer expects the new effort will attract a broader universe of high-end advisors.

Cetera Financial Group, the holding company for former ING b/ds Financial Network, Multi-Financial and PrimeVest, has also been gearing up to attract hybrids. Of the 4,000 advisors who are affiliated with Cetera’s three IBDs, about 1,400 are hybrid advisors who do both fee- and commission-based business, said Barnaby Grist, executive vice president of wealth management. Cetera has doubled the number of recruiters at the firm in the last year to attract both hybrid and commission-based advisors. In its effort to appeal to hybrids, Grist said the company has also been building out its technology architecture, which now includes an integrated reporting system and a way to aggregate advisors’ fee- and commission-based business in one place. Cetera’s corporate RIA custodies with Pershing, but advisors who use an independent RIA can custody with other firms, and in January, the firm completed the integration of data flows from 19,000 financial institutions. Advisors can now see information about assets custodied at these institutions, with client consent.

Cetera is also introducing a new consulting agreement, which allows Investment Adviser Representatives to offer consulting without a written financial plan. The agreement extends for a period of one year, and advisors can choose between a fixed fee or hourly fee in how they charge, Grist added. Cetera also revised its client agreements, so advisors can more easily reassign accounts to another IAR without having to obtain a new advisory agreement. The firm also has a new technology architecture that includes a reporting system and a way to aggregate advisors’ fee- and commission-based business in one place.

Capital Analysts, an independent b/d in Cincinnati, Ohio, has also been ramping up its efforts to support the hybrid model recently, beefing up its on-boarding and new business development team to recruit hybrid firms. Last year, the independent broker-dealer brought on James Barnash, a former president of the Financial Planning Association, to head up its branch development team. In the last year, Capital Analysts has added over $1 billion in new assets from dually-registered advisors, said Matt Lynch, president and CEO. Ninety-eight percent of the firm’s advisors are dually-registered. In September 2009, Capital Analysts moved from National Financial to Pershing to provide clearing services. Pershing’s RIA Complete platform allowed Capital Analysts’ advisors to manage commission- and fee-based business in an integrated technology platform. The broker-dealer also eliminated custodial fees for clients, something the firm’s hybrid advisors felt was needed to better serve clients, Lynch said.

No Longer a Stop-Over?

The hybrid channel used to be seen as a stop-over point for advisors who wanted to eventually go fully independent, said Tyler Cloherty, an analyst with Cerulli Associates. But only 11 percent of hybrids are dumping their broker-dealer registration today, Cerulli data shows. Many advisors see the hybrid model as the best of both worlds. They get the benefits of going fee-based, while maintaining access to commission-based products they want, such as variable annuities, non-traded REITs, limited partnerships, and non-purposed loans, Cloherty said.

Kelly Campbell, principal of Campbell Wealth Management, made the transition to a hybrid model last year when he started his own RIA. The firm uses LPL for brokerage services. Campbell said he didn’t want to give up certain commission-based investment products, such as REITs and annuities, nor did he want to lose the clients in those products. At the same time, Campbell likes that he can approve advertising and marketing campaigns for compliance purposes in house. He believes the move also gives the firm more credibility with clients, as it’s now regulated by more organizations—FINRA and the SEC.

Chip Roame, managing principal of Tiburon Strategic Advisors, doesn’t expect the trend toward hybrid practices to slow down. “The crop of break-away brokers from the wirehouses is mixed fees and commissions,” he said. “Plus they want to exert their power to use their own RIAs.” In 2010, 20.4 percent of all advisors switching firms left a wirehouse for an independent broker-dealer. Some IBDs may be trying to attract hybrids to keep their margins up, while others don’t want to lose money to other RIAs, he said.

“We believe the hybrid model will be a winner and will continue to grow,” said Mark Schlafly, president and CEO of FSC Securities Corp. Of FSC’s 1,100 independent financial advisors, about 300 have their own RIAs, he said.

The Research

The Pershing/FA Insight study highlights the recent growth in the hybrid space, noting that RIAs and dually-registered advisors grew by 52 percent from 2005 to 2009. Some of the motivators for adopting the hybrid approach include gaining greater control, uncovering new revenue sources and increasing the value of their business, the research said.

Using the hybrid platforms of American Portfolio Financial Services, Summit Brokerage Services and Capital Analysts as case studies, the Pershing report analyzes some of the ways to build a hybrid platform and the implications to the broker-dealer. For example, broker-dealers should develop a plan that suits the needs of their firms. Other factors that should be considered when building a platform include compliance oversight, technology and expenses. The report also outlines revenue impact of various hybrid models, such as losing the ability to charge a program fee if an advisor uses his own RIA.

For Schwab’s white paper, Understanding the Hybrid Practice, the firm interviewed advisors on their reasons for choosing the hybrid model. According to the report, the hybrid model provides a broader set of offerings, such as guaranteed income products; a greater selection of alternatives investments; access to different client segments; and a flexibility of products and services. The hybrid model also allows advisors to preserve income and grow by attracting other hybrid advisors in transition. The report also outlines key considerations advisors should think about when looking at the transition. Advisors should evaluate their business objectives and value proposition, their investment philosophy, infrastructures and systems, compliance and regulation and their firm economics, the report said.

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