The number of hybrid registered investment advisors – those who operate independently but are affiliated with broker/dealers - continues to soar.
In 2007 each advisory firm had 2.7 hybrid RIAs. A decade later that number nearly tripled, to 7.5 hybrid RIAs, says Marina Shtyrkov, a Boston-based research analyst with Cerulli Associates.
Shtyrkov attributes the increase to the flexibility the role offers advisors. “They can run their channel as they see fit while receiving operation support and product access,” she says, a win/win situation.
Hence, RIAs can maintain independence. “You can choose your own technology, have your name on the door, make decisions about how you market yourself, and determine your planning and investment philosophy,” Shtyrkov notes. But becoming a hybrid yields the “support from the broker dealers and for implementing their marketing and technology,” she adds.
For example, after twenty-five years as a financial advisor with Merrill Lynch, Craig Robson launched Regent Peak Wealth, an Atlanta, Ga.-based hybrid firm with five employees that oversees $450 million of assets under management.
Why did he move from a full-time broker/dealer to stake out his claim as an independent RIA and then become a hybrid RIA? When a client of Merrill Lynch’s asked him for the best lending solution, he was “limited to one provider,” he said. Restricted by what solutions he could offer, he wanted to embark on his own and offer a range of options.
As a hybrid RIA, Robson could offer “multiple concierge levels of service, as well as investment solutions, not exclusively branded by one firm.”
Hence, he formed an alliance with PKS Investments, a full-service broker/dealer headquartered in Albany, N.Y. That enabled him to offer clients an array of products such as insurance solutions, alternative investments like private equity and 529 College Savings plan.
Won’t Regent Park feel pressure to offer commission-based products to boost fees? Robson said he pondered this question for two years when he was conducting the due diligence to launch his firm. “You need to disclose the different fees to your client. Then you’re giving them the optionality of which of those offers are best-suited to their needs,” Robson explains.
Another study showed that hybrid RIAs have been more proficient at growing their assets under management than traditional RIAs, particularly with those overseeing $100 million to $250 million AUM. Shtyrkov attributes that growth to the fact that hybrids “can rely on the broker/dealer for support and resources, which gives RIAs who run smaller shops more time to devote to business development.”
Independent RIAs need to manage all aspects of their business including technology, marketing, compliance, and HR, “but having that extra” support from the broker/dealer eases some of the multi-tasking, Shtyrkov points out.
Aine Donovan, a business professor at the Tuck School of Business at Dartmouth University in Hanover, N.H., and former director of its Ethics Institute, says there’s nothing inherently unethical about selling commission-based products. But she adds that the line can get fuzzy when the client “is unaware that the broker is receiving a fee for his/her service. It raises a red flag about being sure that the client is aware of the conflict of interest.”
If the conflict of interest is transparently divulged and stated clearly, then it’s up to clients to make choices about whether the investment is right for them, Donovan notes.
In explaining the rise of hybrid RIAs, Robson says, “The industry is moving toward an advisory model, so I want to offer clients the flexibility to decide which offerings are best for them.”
