Once upon a time, brokers seeking independence left their brokerage firm employers but detoured to a hybrid/dually registered business model before moving on to becoming fully independent RIAs. That has changed, new Cerulli research shows, and the change is reflected in the numbers.
The research firm's "U.S. RIA Marketplace 2018: Designing a Framework for Independence" study found that from 2012–2017, hybrid RIAs doubled their share of the advisor headcount market, from 4.1% to 8.8%.
In addition, those hybrids showed better growth than their independent RIA peers in that same five-year period as measured by assets under management. The study found that outperformance to be particularly acute between RIAs in the $100 million to $250 million AUM tier.
Marina Shtyrkov, an analyst at Cerulli who specializes in advisor channels, suggested in an interview that she "definitely expects" hybrids' growth — both organic and inorganic — to continue, since the model provides greater autonomy for brokers while allowing them to continue to do commission-based business.
The importance of commissions can be seen in hybrids' product mix; Cerulli found that only 14% of independent RIAs sell variable annuities but 67% of hybrids sell VAs.
The hybrid model is also well positioned to attract more breakaway brokers into existing firms, partly because of the "practice acquisitions support" provided by hybrid RIAs' broker-dealer, Shtyrkov said.
That's not the only support that BDs provide to hybrids, she said, mentioning both business management and compliance as areas that many hybrids prefer to outsource.
"Hybrids are no longer a stepping stone," she said, citing a question that Cerulli asked about hybrids' motivation. Long-term hybrids are planning to stay, "leveraging their broker-dealer affiliation as operational outsourcers."
But another group that accounts for 34% of the total — the potentially transitional hybrids — "are not sure they'll be staying" in the hybrid model. That group's clients tend to be mass affluent like most hybrid RIAs, Shtyrkov said, but also are looking to "grow; to move up market" with services better positioned to appeal to higher-net-worth clients.
"If broker-dealers can service this group," she said, "they can continue to keep them" in the hybrid fold. That's an important goal for independent BDs, since Cerulli says these transitional advisors manage close to $400 billion in assets, making them an "attrition risk" for IBDs.
The largest of those firms have "aspirational" goals, Shtyrkov said, "of becoming regional or super-regional" firms that can achieve "mini-United Capital dominance," which may make it more difficult for BDs to hold onto their affiliation.
Where are hybrid RIAs coming from? Using its own data, along with numbers from the Financial Planning Association and the Investments & Wealth Institute, Cerulli found that among advisors who became hybrid RIAs between 2012-2017, 27% came from a wirehouse and 24% came from other IBDs.
The remainder came from insurance and bank broker-dealers (15% each); 12% from national or regional BDs and, somewhat surprisingly, 7% came from independent RIAs.
With those defections to the hybrid RIA and independent RIA space, is the traditional broker model on life support? "There is a place for every type of advisor," said Shtyrkov, noting that "despite the movement to fees, there are still advisors who are rainmakers, who are not interested in running their own business, who like the 'eat-what-you-kill' model. There's a place for them in the industry as it stands."
As for hybrid RIAs, "the commission-based products serve a specific role," she said. As that model's growth accelerates, and as hybrid advisors offer more holistic services to clients, hybrids will "evaluate every product" in their arsenal to see if each fits their service models, "so commissions will play a role" in that process as well, she said.
Hybrids' growth also shows that "there are more ways to be independent these days; there's more than one route," Shtyrkov said. "Historically, you had to drop your commissions" if you followed an independent path, she said, but "now you have more choice."
Other Research
A different study conducted by BNY Mellon's Pershing Advisor Solutions, "2018 Study of Pricing & Profitability," finds the registered investment advisor revenues improved over the past three years, but that growth may be vulnerable to market changes.
