Building A Hybrid Practice From The RIA Side

Thursday, May 26, 2011 23:44
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Building A Hybrid Practice From The RIA Side

Tags: breakaway brokers | recruiting | registered investment advisors

Industry buzz over dual registration has focused on reps edging toward fee-based platforms, but the reverse scenario is getting traction as well.

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It flies in the face of what the industry considers the “normal” advisor career path, but lately I’ve had my share of conversations with RIAs thinking about affiliating with a broker-dealer.

 

 

I thought this was weird too, but it happens all the time.

 

 

Broker-dealers like Cambridge have made a thriving niche for themselves catering to these “reverse” hybrid firms.

 

 

And most of the custodians have aggressively negotiated for concessions from other IBDs for their RIA affiliates who want to keep, renew, or acquire securities licenses.

 

 

In bad markets like 2000-2, the motivation for this kind of move was historically survival. A new or fragile RIA needed revenue, so went back to the more established sales-driven model to get it.

 

 

But this time around, the advisors I’ve been talking to have built extremely rewarding fiduciary relationships with their clients and aren’t interested in throwing that business model away.

 

 

What they want from dual registration boils down to making their existing practices more flexible, with the ultimate goal of growing into new markets.

 

 

They want to be able to recruit new talent that already pursues a combination of fee-based and commission-based business. These dual-registered recruits may come from broker-dealers that support the hybrid model -- or they may just be looking for a place to transition away from a commission-only approach.

 

 

In fact, the ability to support recruits’ trailing commissions while nurturing their evolution toward fee-only compensation is a huge competitive advantage.

 

 

Notice, I used the word “evolution.” Like just about everyone in the A4A community, I believe very strongly that the industry as a whole is moving toward fees and away from commissions and that a lot of fee-only advisors are already ahead of the curve.

 

 

But it takes a lot of cash and confidence to make that necessary leap.

 

 

Fidelity estimates that an advisor producing $1 million a year still needs $100,000 to start an RIA and another four years for the shift to pay off -- and that’s assuming 90% of that production was already fee-based business.

 

 

Giving up the other 10% of that business is a scary prospect. The lower you go down the production scale, the bigger every marginal dollar of transaction business you surrender starts to look.

 

 

It might not be rational. It might not make ideological sense. Nobody’s suggesting that these advisors go on selling high-load funds and annuities once they join your RIA.

 

 

But an RIA that can let them keep that extra 10% of their business that comes from trailing commissions can compete that much more effectively when it comes to signing them up.

 

 

And in an environment where just about every firm in the industry is looking to capture talent and AUM, that 10% edge can be priceless.

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