From the July 2008 issue of Research Magazine • Subscribe!

Fidelity Introduces 'HybridOne' as Competition Heats Up

Fidelity Investments has said that its registered investment advisor (RIA) custody business, Fidelity Institutional Wealth Services, and its correspondent broker/dealer business, National Financial, have jointly launched HybridOne to help meet the needs of firms and advisors that conduct both commission- and fee-based business. The hybrid market is a fast-growing segment, according to a Fidelity survey, with the majority of all brokers and advisors managing some combination of commission and fee business.

"Through HybridOne, we have taken a more holistic approach to serving the needs of dually registered firms and advisors," explains Norman R. Malo, president and CEO of National Financial. "We have developed an objective, consultative process that engages clients to help them determine which business model is right for conducting their commission- and fee-based business."

"With more experience serving the needs of both commission- and fee-based firms and advisors than any other provider, we are uniquely positioned to meet the evolving demands of the fast-growing hybrid market," adds John W. "Jack" Callahan, president of Fidelity Institutional Wealth Services. "HybridOne is a major initiative for Fidelity, and we are confident that clients will find that the program's level of product availability, integrated technology and streamlined client support will make it easy to manage the complexities inherent in a hybrid model."

Fidelity Institutional Wealth Services and National Financial custody over $1 trillion in assets, which Fidelity says is more than any other broker/dealer clearing firm and RIA custodian. The companies provide service to some 3,400 RIA firms and 330 broker/dealer firms with 85,000 brokers and advisors.

"The hybrid market has emerged as a major trend only over the last few years," says Callahan. "As this market grows and evolves, we are working with our dually registered clients to deliver the strongest solution in the industry by continually investing not only in the technology, investment products and services that meet the distinct needs of this segment, but also in the people and processes to ensure a superior client experience."

One month earlier, LPL Financial said it has plans to introduce an integrated advisor solution platform, supporting independent registered investment advisors (or RIAs) and hybrid (or dually registered) financial advisors by year-end. To support this effort, the company has named Gary Gallagher, formerly of Fidelity Investments, as head of RIA services.

According to Mark Casady, LPL Financial's CEO, the move to support RIAs is an extension of LPL's other initiatives that have been designed to "redefine independence." "We've been a leader at providing any product with unbiased selection. We're a partner to FAs," and LPL sees advisors as business owners. "This step gives FAs an unbiased business structure," Casady explains. "It lets them take a new strategy and say, 'I want to do business as my own RIA.'"

Boston- and San Diego-based LPL Financial began considering ways to further work with RIAs two years ago, and immediately put Gallagher on its list of executives who could help the firm "make it happen." Gallagher was hired in November 2007. LPL Financial now includes some 11,800 advisors. About 10 FAs have been involved in the new RIA pilot efforts.

The broker-dealer expects up to a few hundred advisors to take advantage of this new offering in the near term. Some 8,000 already rely on LPL Financial's existing RIA business; this corporate-custody work includes some $75 billion in assets under management. (LPL's total AUM stands at about $285 million.)

But it also anticipates that it will be quite attractive to "breakaway brokers," advisors now with the wirehouse/full-service firms who are considering a shift into independence. "We want to build this as a model of new business growth," shares Casady.

"This is about refining the independent model," explains Gallagher, beyond the custodial, fiduciary roles. "LPL will let you build out your own RIA and do it all in one place." This should create an integrated experience for both FAs and clients, he says. "And this will be easier on FAs and clients. Investors' experiences will be more seamless."

Casady adds that this new offering isn't just about adding scale to FAs with LPL and those looking to come to LPL. "It's also about adding scale and capability to this marketplace."

LPL also disclosed that it launched Model Wealth Portfolios, a centrally managed fee-based asset allocation platform, in mid-May. Model Wealth Portfolios will be made available to over 11,000 of LPL Financial's financial advisors.

"We launched Model Wealth Portfolios to meet the increasing demand from our advisors for advisory platforms as evidenced by our 79 percent growth in advisory assets over the last two years," says John Moninger, senior vice president of Advisory Consulting Services at LPL Financial.

Model Wealth Portfolios offers theme-based asset allocation investment strategies to help advisors meet unique client needs, according to LPL. The themes are: diversified, alpha focused, socially responsible investing, income focused, tax aware and downside-risk aware. The downside-risk aware model, for example, uses a unique combination of mutual funds and seeks to outperform their benchmarks, especially in down markets by lowering overall volatility.

LPL Financial believes that advisors and their clients will benefit from the simplicity of having one account with one set of paperwork that is subject to one program fee. As of February 29, 2008, LPL Financial managed over $71 billion in fee-based assets.

In connection with LPL's announcement that it will soon be permitting its advisors to custody assets elsewhere, rival Raymond James had said that it has offered this option for several years. Today, this model is part of Raymond James' AdvisorChoice program, which gives FAs a range of options to choose from when affiliating with the Florida-based broker-dealer.

Raymond James Financial Services has some 2,536 financial advisors that rely on Raymond James' RIA, while 464 advisors do business through their own RIA, company executives say. Raymond James Independent Advisor division, part of RJFS, has some 200 financial advisors that work through about 85 RIA firms.

"Our model involves fully integrated technology. It's all there - client statements, integrated performance reporting, etc.," explains Mike DiGirolamo, who runs Raymond James Investment Advisor Division for independent RIAs.

"Our platform expansion came in stages," says Bill Van Law, senior vice president and national director of business development for RJFS. "The Independent Advisor Division opened about seven years ago, and five years ago, we'd built and were running Advisor Select, our independent employee platform."

"And about eight and a half years ago, Raymond James had already introduced the technology, resources, high-net-worth and other solutions that could be easily leveraged by RIAs," adds DiGirolamo.

Another firm eager to stress its experience in the RIA world is Charles Schwab. "We saw this trend coming a couple years ago and started investing heavily in it," says Barnaby Grist, managing director of strategic business development for Schwab Institutional. "A year and a half ago, we announced a hybrid platform with Cambridge Investment Research, and about six months ago, we announced that we'd gone beyond that by buying Etelligent Conculting," an RIA back-office outsourcing provider."

"It's validating to see these [other firms] try to do it, but they're way behind," Grist says, noting that Schwab Institutional's average advisor client is north of a $100 million in assets under management.

For its part, Commonwealth Financial says its fee-based roots go back to the early '80s, when a Commonwealth affiliate named the Cambridge Group offered the management of no-load funds for a fee, says Wayne Bloom, a managing principal. "We were a tad ahead of our time back then."

"Historically, RIAs affiliated with us did their own thing with respect to running their businesses," Bloom explains. "Over time, they watched the success of the advisors using our in-house program and started kicking the tires a bit. What they found out is that we had perfected our model to the point that we started having great discussions on how we might offer our infrastructure on an outsourced basis rather than through our formal corporate RIA program.

This arrangement has allowed advisors to focus on expanding their businesses, building client relationships and improving client-facing activities like financial planning rather than running a back office, according to Bloom. "I see what we do as very unique to a very clearly defined target market -- we are not competing with traditional fee-based custodial platforms.

"At its core, it's simply an outsourcing model but we enhance the whole offering with an intense focus on integration. We lead with tech integration and combine it with the industry's best practice management support, as well as our high-touch service model in part supported by our industry leading 3.1-to-1 advisor-to-home-office-staff ratio.

Of Commonwealth's 1,100-plus FA clients, some 300 advisors are affiliated under 137 RIA firms.

Overall, says Schwab's Grist, there could be plenty of the RIA pie to go around, since that market is really set to take off. "It's all about meeting client needs - what advisors can do and how they can best serve their clients. And they are increasingly finding that the options available in the independent world are dramatically better than what's available in the wirehouse world."

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Janet Levaux, MBA/MA., is the managing editor of Research; reach her at jlevaux@researchmag.com

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