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May 09, 2007 at 08:00 PM
Right now, the topic of dually registered advisors is hotter than who was just voted off American Idol. You’ll find it discussed at most advisor trade conferences and see much commentary on the subject, especially on how broker/dealer firms are trying to accommodate this new model. Different than “pure” or fully independent RIAs, dually registered or “hybrid” advisors are those who are registered as a stockbroker with the NASD and as a registered investment advisor with the SEC. Hybrid firms comprise a large segment of the advisory marketplace–about 20% of the total number of participants in the AdvisorBenchmarking survey, although the NASD estimates that 89% of RIAs are registered reps as well.
Hybrid advisors build their businesses differently than pure RIAs, and their divergent business models can result in some distinct differences. One of the most notable is that hybrid models have lower account minimums and a higher number of clients because they aren’t as dependent fees for assets under management (AUM). Small clients can still be profitable for the hybrid advisor, as opposed to the pure advisor who would have to pass on these smaller clients who simply are not profitable with a primarily AUM-based model. That explains why hybrid advisors, by comparison, have a third more clients than pure RIAs–the average number of clients is 314 for pure RIA firms compared to 420 for hybrid practices.
Another big differentiator is the firms’ sources of revenue. While AUM fees are still the predominant revenue generator for hybrid firms, between 20% and 30% of revenue comes from commissions. Pure advisors employ multiple methods of compensation and are attempting to become less dependent on asset growth. Their revenue mix consists of 24% planning/consulting fees, 75% AUM fees and 1% commissions.
Another noticeable distinction between pure and hybrid advisors is how they spend their time. According to Patrick Collins from Greenspring Wealth Management in Towson, Maryland, “Time allocation is the major difference. Advisors affiliated with broker/dealers can spend more time on client service activities and less time on administrative tasks because they benefit from the support of the broker/dealer. In contrast, RIAs have to put more time into administrative work.” That’s supported by our data, as the average RIA firm spends 27% of their time with clients compared to hybrid advisors, who spend 38% of their time with clients.
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