Not long ago, maintaining dual registration—as a Series 7 commission broker and as a registered investment advisor—was unusual. Mostly, dual registration was regarded as a transitory phase, as financial advisors moved their businesses from commission to completely fee-based (see, Why More Reps are Getting Their Kicks on Route 66, Registered Rep., February 2005).
Now, according to research commissioned by the clearing giant Pershing and conducted by consultants Moss Adams, the dual-registration hybrid is emerging as a viable, long-term business model. There are several reasons for the trend, including the blurring roles of reps as they learn the tricks of the financial-advisory trade.
So, lately, broker/dealers have done a one-eighty on the idea of dual registration, says Philip Palaveev, senior manager of Moss Adams and author of the study. “Five years ago, a larger percentage of RIA firms were hybrid, but they had trouble reconciling being a b/d with being fee-based,” Palaveev explains. “And five years ago, b/ds were not recognizing this as an opportunity.”
Now, wirehouses and independent b/ds are embracing the dual-registration model—not as an act of love, but as a wrestling hold. The wirehouses have created a cadre of extremely successful financial advisors who do a sizeable portion of their business in fee-based accounts and they want to keep those producers in-house. “Wirehouse reps looking to go independent are a perfect fit for this model,” notes Palaveev. That means it is worthwhile to the firms to support the hybrid model, even if it requires additional oversight.
Operators of independent broker networks are looking at hybrids as a way to keep their reps from moving all the way to RIA. According to Moss Adams, every year some 5 percent to 6 percent of independents move to RIA platforms like Schwab Institutional. Meanwhile, Palaveev notes, pure RIA shops are taking another look at the hybrid model so that they can sell clients a full complement of products, including variable annuities.
According to the Moss Adams study, the hybrid model is becoming increasingly profitable. The company identified 5,612 SEC-registered firms that are also RIAs and estimates that one in eight b/d-affiliated advisors now maintains an RIA. Between 2002 and 2004, the study found operating margins for such firms doubled from 8.9 percent to 17.6 percent, and the top quartile of these had $7,000 in revenue per active account and operating margins of 21 percent. The data suggest that, increasingly, top brokers and RIAs are drawn to the hybrid model, which gives them a broader array of products and services to offer clients.
Hybrid Firm Facts
- $716 billion in total client assets, one-third of which are managed in advisor-owned RIAs
- $482 billion or 16 percent of all independent b/d assets
- $6.3 billion in annual revenue
The hybrid model is not without its challenges, the report notes. While it’s possible to offer an attractive blend of equities and managed money, it also requires systems that can present a clear picture of how those assets are allocated and how they are performing. And brokerage firms still have to get their heads around the challenge of providing proper supervision for investment advisors.
What’s next? Palaveev figures that the hybrid model can expand 15 percent to 20 percent annually through “organic growth”—but could go higher. “Growth of the hybrid model really boils down to regulation,” he says: If a simpler regulatory regime emerges, which combines broker and advisor supervision under a single system, hybrid registration would be almost a no-brainer. “Standardized compliance would be a monumental change for the entire industry.”