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There’s been a lot of hype lately about the so-called hybrid model, in which an advisor maintains a commission business as well as an independent registered investment advisory firm. Though the hybrid model has been ascendant, the channel is projected to gain a mere 0.1 percent in asset market share between 2010 and 2013, according to Cerulli Associates. Why? Some advisors say new compliance and regulatory burdens under Dodd-Frank are making the hybrid model untenable.

Some of the regulatory changes include the shift to state registration for RIAs with less than $100 million; the conversion to a new Form ADV; some states getting rid of their de minimis rules; and proposal to require RIAs to pay for their audits.

Dawn Bond, owner and executive vice president of Compliance Advisory Services, Inc., said she has seen several smaller advisors chafe under the regulations and give up their hybrid model, dropping the independent RIA and shifting in-house to their broker/dealer’s RIA. Sixty RJFS advisors made the shift from their own RIA to Raymond James’ RIA since 2006, according to Jason Thackeray, associate compliance director with Raymond James Financial Services.

The requirement to register an RIA state by state, which has to be completed by June 30, 2012, is a costly law for smaller players, Bond said. The process can take three to four months, and RIAs have to register with each state in which they do business (unless that state has an exemption.) That could be a $10,000 hit, and for a smaller player already dealing with lower fees are higher costs, “that’s tough,” Bond said.

John Bodnar III, a hybrid advisor in Florham Park, N.J., has already started shifting assets over from his own RIA to his broker/dealer Cambridge’s RIA in states where he’s not registered. Bodnar has clients in several states, including Florida, North Carolina and New York. If a client moves to a different state where he’s not registered, he’ll shift those assets to the corporate RIA too. The paperwork to register your own RIA state by state is just a hassle, he says. “At $20 million under management, you might just say, ‘The hell with it!’”

Edward J. Kohlhepp Sr., a Doylestown, Pa.-based hybrid with $120 million in assets, said he reviews the option of tagging onto Cambridge’s RIA at least once a year because of the compliance burdens and high costs of running the RIA.

“We would probably save some money if we gave up our own RIA and went to the broker/dealer’s,” Kohlhepp said. “However, we believe we’d lose some independence. We’d lose some of our compliance; we’d lose some of our branding. We do have the fear that at some point in the very near future, we’ll be forced to do that because of the increase in compliance costs, which are becoming more burdensome every year.”

Kohlhepp is particularly concerned about a proposal in Dodd-Frank that could require RIAs to pay a fee when going through an SEC audit. The regulators are talking about assessing fees between $15,000 and $50,000, Kohlhepp said. “If we join the broker/dealer’s RIA, we would have to pay some of those compliance costs, but not as heavy.”

“The regulatory environment on RIAs is just getting more and more stringent,” said John Ledford, an advisor under Commonwealth Financial Network’s RIA.

Ledford said he closed his own RIA and tucked under Commonwealth’s in 2003 to cut down on costs and audits. In addition to a broker/dealer audit, his firm would see state and federal audits. Now, his firm goes through one large broker/dealer audit, which has become more thorough, lasting two to three days in length. Commonwealth has tripled the size of its compliance team in the last five years, he said. But the b/d’s audits are still less arduous than the SEC’s, which causes you to shut down for three days, he said.

For Darla Main, president of Main Advisory in McMurray, Pa., it was the new requirements for ADV forms that prompted her to drop her RIA in January 2011 and move under the wing of Multi-Financial. She felt she was spending too much time on paperwork and not enough time with clients. “The b/d has made it much easier for me.”

That said, opening up their platforms to hybrid RIAs has been a point of contention in the b/d community. At the Financial Services Institute’s OneVoice 2012 conference recently, some IBD executives said the model was cutting into their business. The costs of supporting these advisors outweigh the profits from the brokerage, and some advisors with their own RIA are competing with the broker-dealer for new recruits.

Brian Hamburger, founder and managing director of MarketCounsel, admits it’s hard for hybrids to justify having their own RIA if they only have $10 million to $20 million AUM. The model is really only worthwhile if the advisor sees the fee-based side of the business as a cornerstone of the practice and be willing to invest in. If these advisors are put off by additional regulatory and compliance burdens, they probably shouldn’t be in the RIA business to begin with. “You see guys running scared from the unknown, and that’s not the way to run a business.”

At the same time, Hamburger believes the argument that the hybrid model is untenable is being used by IBD recruiters to dissuade advisors from pursuing the model. Broker/dealer margins are tight. Those firms that are telling advisors it doesn’t pay to have their own RIA may be simply trying to bolster their own.