Trends and Options in Hybrid RIA Structures

As fee-based approaches have become more central to advisor / client relationships over the past decade, the hybrid RIA model has grown vastly more diverse – and a steadily climbing number of advisors have shifted to the growing hybrid RIA channel.

Cerulli data demonstrates that the hybrid RIA model – far from serving as a ‘transitional’ step for broker-dealer-affiliated advisors who eventually want to establish their own independent RIAs – has become the fastest-growing and most vital model in the RIA channel overall.

As one example: For RIAs managing over $1 billion in assets, hybrid RIAs experienced a compound annual growth rate (CAGR) of 14% between 2012 and 2017, while independent RIAs saw a CAGR of 10% during the same time frame.

Moreover, among advisors who joined the hybrid RIA channel in the last five years, 70% say they intend to maintain some form of hybrid business model – versus only 23% who intend to go the fully independent route.

With the hybrid model becoming increasingly crucial for the future of our industry, OneVoice 2019 provided a perfect opportunity for several thought leaders who are on the front lines of the model’s continued development to come together to offer their thoughts for firms that seek to stay in front of this trend in order to maximize flexibility for the advisors they serve.

 

‘Pendulum Shift’ Toward Partners with Established Infrastructure

As panelist Adam Roosevelt, Director of Advisor Solutions at BNY Mellon / Pershing noted, the maturation of and increased competition within the RIA market is leading to a renewed awareness among hybrid advisors of the value of third-party partners that can provide capable, established RIA infrastructure.

“What we’re seeing is, there’s going to be this ‘pendulum shift’ back toward the need for infrastructure and support,” said Roosevelt. “RIAs are realizing that it’s difficult to do it on your own as this market has matured.”

Stephen Smith, Chief Compliance Officer of 1st Global, concurs. “Most of what we see among mid-size to smaller firms is going from having their own independent RIAs to the corporate RIA. It doesn’t make a whole lot of sense for some of these firms to maintain their own RIA as costs continue to go up – they don’t want to pass those costs through to their customers.”

Smith notes that most firms choosing the fully-independent route are larger firms that have the means to deploy their own robust technology platforms and compliance infrastructure.

 

Support Offerings Built for the Advisory Model

Triad Hybrid Solutions CEO Michael Bryan, however, notes that hastily-assembled hybrid RIA infrastructure offerings – or those that amount to a slightly-modified version of existing broker-dealer offerings – will no longer cut it in this segment of the market.

“The days of being an independent broker-dealer who also has the red-headed stepchild of an advisory business are long gone – and we have to decide as an industry if we’re ready to embrace that,” he said.

Bryan noted that broker-dealers who seek to stay competitive in serving hybrid RIAs need to understand the advisory business on a granular level.

“For an advice-focused business, do your operations people understand what it’s like to be in an advisor’s office and execute paperwork on a daily basis?” Bryan asked. “Are your systems built to support that experience? Or are they primarily built to support your broker-dealer experience?”

 

Establishing an Open Dialogue to Meet Hybrid Advisors’ Needs

The panelists agreed that the most important development they have seen among firms seeking to effectively serve hybrid RIAs is a move toward establishing sincere and open dialogue with advisors about the needs of their firms and clients.

“The number one thing we’re seeing,” said Roosevelt, “is that firms are sitting down and asking themselves and advisors, ‘What is the problem we’re trying to solve?’ And there are a lot of ways that we can work together to try to fix those problems.”

As evidence of this newfound flexibility, Roosevelt cited broker-dealers that have established new RIAs to provide services to hybrid practices on an a la carte basis; other firms that have outsourced their RIA operations to RIA custodians to drive efficiencies around middle office support; and others that have decided to significantly boost investment in their existing corporate RIAs.

As Bryan emphasized, the challenge is in making sure that firms’ large-scale structural changes translate into the value-added service offerings hybrid advisors want.

“Value is in the eye of the hybrid,” said Bryan. “You’re going to want to find out what they want to accomplish, and then go give it to them. If they want third party managers, give it to them. If they want access to financial planning platforms – maybe even more than one – you’re going to need to find a way, potentially, to give that to them and supervise those offerings.”

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