A new study by Moss Adams claims that dual registration–which means advisors who are registered with both the SEC and the NASD, and are collecting both fees and commissions–may be the model of the future because it not only allows the advisor to offer clients more choice, but it turns out these hybrid firms also tend to be more profitable.
The downside (there always is one): the burden of complying with both NASD and SEC rules.
The study, Dually-Registered Advisors: Opportunity Knocks, which was released in February and presented at the Financial Services Institute conference, challenges the popular notion that advisors must choose between fees and commissions to be successful and illustrates that “it’s the advisor that is fee and commission that is the most attractive space in the marketplace today,” says Jim Crowley, managing director of Pershing, the big clearing firm based in Jersey City that sponsored the study. John Iachello, managing director of Pershing Advisor Solutions, adds that “Pershing is a mirror image” of the dually registered market because while it’s the clearing firm for 1,100 independent broker/dealers (the largest in the industry), it also custodies assets for 300 RIAs.
The hybrid market is big, Crowley says, with 5,612 hybrid firms (RIAs) with $716 billion in assets under management (representing one in eight of all broker/dealer firms), and $6 billion in revenue. By contrast, there are 9,000 fee-only RIAs with $602 billion in AUM; there are 25,888 independent B/D firms with $2.52 trillion in AUM, according to the report.
Good for Advisors and Clients
Philip Palaveev, the Moss Adams analyst who auth-ored the report, says that if it wasn’t for the cost and burden of complying with both NASD and SEC rules, “every advisor would choose to be dually registered.” Advisors, he says, “love the flexibility to open accounts on the brokerage and custodial platforms, and [to offer] all types of financial services and products.”
Indeed, Crowley adds that being dually registered is more appealing to clients because they “can consolidate their investment relationships with one advisor.” Advisors under this model benefit because they can offer a more flexible menu of investment, technology, pricing, and operational support, the study says. The Moss Adams study also shows advisors of all stripes are competing for high-end clients. The hybrid model also allows the advisor to broaden his relationship with the client, according to Crowley. An advisor can say to their high-end client, “We’ve had this fee-based relationship, I know you have other related accounts, maybe your children’s accounts, maybe it’s a rollover 401(k)–I can work with you and serve those relationships as well.” It’s a win for the broker/dealer, too, because regardless of whether the advisor is SEC registered or is a Series 7 broker, the B/D is responsible for overseeing all of the advisor’s activities, Crowley says. Under dual registration, the B/D has the “advisor’s and broker’s activity in one place–inside the B/D under one custodial relationship,” he says.
Larry Papike, president and owner of Cross-Search, an executive recruiting firm in California that helps brokers find the right independent broker/dealer, says most advisors have felt the need to become dually licensed so that they could launch their own RIA. However, since the majority of B/Ds themselves–about 90%–have an RIA, “there isn’t that big of a need” for advisors to have their own RIA “because they can do all of the same things through the B/D’s RIA,” he says. Because of this trend, Papike says he’s noticing that most dually registered advisors are contemplating getting rid of their securities license and “going to a fee-only practice so they don’t need a B/D.” Dually registered advisors who are doing more fee-based business than commissions are also shedding their NASD license so they can avoid paying their B/D. Even though an advisor may have his own RIA firm, which is considered an outside business, the B/D is still responsible for supervising it, Papike says, so the B/D “is going to take a piece of the [RIA's] gross.” So “if an advisor is doing 90% of his business in fees, but he’s paying his B/D $100,000 a year and they’re really not doing a lot, then he’s going to give up his NASD license.”