This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
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Ask 10 people in the advisory profession what a “hybrid” is and you will get 10 different answers.
What exactly then is a “hybrid,” not to mention a “hybrid RIA”?
There is consensus that to be hybrid means to be operating under both a broker/dealer as well as an RIA.
That is where the harmony ends.
After all, if that is the definition, isn’t almost every “advisor” already under a hybrid structure?
Wirehouse advisors are generally registered representatives of their firm’s broker/dealer, while also being investment advisor representatives (IARs) of the firm’s accompanying “corporate” RIA.
It is no different with independent broker/dealer advisors. I’ve even seen some such firms tout a “hybrid” model, which in effect did not differ from their traditional indie-BD affiliation model, albeit with an altered payout structure. This magically transforming it into a “hybrid” solution, at least in self-declared name.
From here, the variations expand wider.
Does joining an existing standalone RIA that utilizes the services of a “RIA friendly broker/dealer” qualify as a hybrid?
What if you’re the one that owns the RIA yourself while also using a friendly broker/dealer?
Heck, what if you own the RIA and the broker/dealer? Not that owning a broker/dealer is a popular idea nowadays!
Further, do both the RIA and broker/dealer have to use the same underlying clearing firm to make it a hybrid? Or can each piece incorporate separate custodian solutions?
Do both B/D and RIA sides have to integrate from a technology perspective to be hybrid? Or can differing technologies under each side still fit the bill?
Is there any rule that you must hold more assets on the advisory side than the commission side to qualify for a hybrid anointment?
Be careful who you ask about this and who you hear touting a hybrid solution.
That’s not to suggest that any of these participants are disingenuous with their assertions, but that what they are referring to might not align with what you think.
One firm’s “hybrid” solution could differ significantly from another firm’s offering.
One solution might be a great fit for you, while another might be a step backward from what you already have available to you now.
What then makes for a hybrid arrangement?
I am by no means the kingmaker on this issue, but I will share how I generally interpret the phrase.
A common misconception about the RIA model is that you must be 100% fee only.
A significant number of RIAs operate 100% fee only, some of which are quite vocal about the virtues of doing so.
There is nonetheless no regulatory requirement that you operate as such.
While an RIA itself can only accommodate advisory services underneath it, there is nothing stopping (beyond various disclosures) the advisors of an RIA from separately utilizing the services of a broker/dealer on the side.
This “RIA-friendly broker/dealer” arrangement is quite common.
A typical scenario is where an advisor/team starts their own RIA, but still has some degree of legacy commission business they need/want to retain.
Sometimes, the desire is to continue to incorporate commission solutions in the practice, while also servicing existing commissionable positions.
Other advisors desire to turn the page on new business but have a meaningful amount of legacy (often trail-paying) commission assets they seek to maintain.
This is not always an economic decision. Sometimes, the primary motivator is the protection of the client relationship. Consider a client with both commission assets, as well as advisory assets. If an advisor transitions to the RIA model and leaves behind the commission part of the relationship, inevitably, the prior firm will work to solicit the client for their advisory assets as well.
Hence, the need or desire to find an accommodating solution for the entirety of the client’s assets.
Enter the hybrid solution!
When I hear “hybrid,” I generally think of an advisor/team either starting their own RIA, or joining an existing RIA, while also utilizing an RIA-friendly broker/dealer.
As to whether the assets are held in custody on the same platform or if the technology of both sides is integrated, it is irrelevant in my definition of hybrid. It’s a matter of transitioning to the RIA model via one of its various flavors while maintaining a commission component to your practice.
The availability of such solutions has me predicting that independent broker/dealers will continue to be squeezed going forward.
Why would increasingly fee-based advisors, who are already able and willing to take on the responsibilities of an independent practice, not turn to the better economics and flexibility of the hybrid RIA model?
I experience this daily. Advisors contact me to ask what they are missing. There must be some catch to it all, right?
As I always explain, there is no golden goose. Every model has its pros and cons. The hybrid model is no exception.
But the appeal of the model is only gaining speed.
I often encounter advisors unfamiliar with the ways in which they could incorporate a hybrid solution into their practice. Once made aware, though, it’s hard to ignore the benefits of being hybrid.
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.