Once upon a time, life insurance professionals who wanted to build a fee-based practice would become a registered investment advisor, keep their life insurance license and broker-dealer affiliation until such time as fees alone could support the practice, then dispense with the insurance business. Or so this was the expectation among industry pundits.

No longer. A growing number of advisors are choosing to permanently maintain dual registration–working as FINRA registered reps under the broker-dealer and as investment advisor reps (IAR) under their independent RIA–because it is advantageous for them to do so.

“Variable insurance products and annuities have to be run through a broker-dealer,” says Bob Taylor, CEO of Advisor Alliance, Rogers, Ark. “And product sales are an integral part of our practice. We can’t do this on an RIA-only basis. That’s why we have a broker-dealer affiliation.”

“As an advisor, you have to be dually registered to comprehensively meet the client’s goals and objectives,” adds Morrie Reiff, president and managing director of AFA Financial Group, a Calabasas, Calif.-based broker-dealer. “If you’re only an RIA, this isn’t possible. Also, you risk losing business if the client, needing to shop elsewhere for insurance, gives both the product sale and the fee-based planning to an advisor who is dually registered.”

Taylor and Reiff reflect the views of an expanding community of financial services professionals. According to the first quarter 2010 edition of The Cerulli Edge-Advisor Edition, a publication of Cerulli Associates, Boston, dually registered advisors are projected to total 11.6% of advisors by 2012, up from 7.5% this year and 4.8% in 2008. By 2012, these advisors will also garner 10.5% of assets under management, up from 8.9% and 7.5% in 2010 and 2008, respectively.

What’s fueling the surge? Echoing Taylor’s and Reiff’s comments, Cerulli points to the dually registered advisor’s ability to continue to source insurance products that are not appropriate for a fee-based platform. The advisor can also charge a commission or fee depending on which compensation model is appropriate.

Additionally, Cerulli observes, many broker-dealers have begun to support dual registration by streamlining the dual reporting of trades and by offering both service agent and broker-dealer services. Many B-Ds, have also established an in-house RIA for those registered reps who desire to charge fees and are willing to forgo independence. (Under Cerulli’s definition, however, these IARs do not qualify as dually registered, only those who have an independent RIA.)

The growing involvement of broker-dealers in investment advisory services has, paradoxically, prompted some professionals to question the merits of maintaining an independent RIA. Why invest in technology, processes and staffing to be RIA-compliant when the broker-dealer can do the work for you at potentially a fraction of the cost?

“If I were a new advisor who was thinking of becoming a registered investment advisor, I would use the broker-dealer’s RIA and not form my own because I don’t see the value in it,” says Michael Kusick, a dually registered advisor and a principal of Investmark Financial Services, Stratford, Conn. “The regulatory cost associated with maintaining the RIA can be a real challenge.”

That’s partly because he and other dually registered advisors have to adhere to two sets of regulations: one established for the RIA; and the other for the broker-dealer. By working solely under the broker-dealer’s RIA, says Kusick, he can continue to offer fee-based services, but the compliance burden would be managed by the B-D.

Conversely, says Kusick, his broker-dealer offers tools and resources that he would be hard-pressed to replicate if he were to become an RIA-only firm. Among them is software that allows Kusick to manage all aspects of a client account: asset aggregation, trades, reporting, workflow and coordination with other financial professionals.

To be sure, these services and the oversight provided by affiliating with a broker-dealer come at a cost. The B-D takes a cut of the advisor’s revenue, whether generated through commissions or fees.

When deciding whether to affiliate with B-D, the advisor also has to consider whether the B-D’s services and objectives dovetail with the advisor’s. Otherwise, problems can arise if the advisor and B-D should part ways. One example: disputes regarding ownership of the advisor’s clients.

“The broker-dealer might say, ‘the clients you acquired while you were affiliated are now ours,” says Kusick. “This could also happen if the B-D were to be acquired by another with a different business model. So there is the question about losing control of your independence.”

Or else limiting it. Apart from imposing compliance restrictions and taking a cut of revenue, the B-D may also restrict the RIA’s ability to recruit other professionals. Such is the case at Advisors Alliance where, says Taylor, allied registered reps must work with the firm’s affiliated broker-dealer; they can’t partner with their own.

This complication notwithstanding, Advisor Alliance’s dual registration has worked well for the firm to date. But Taylor acknowledges that the firm has been solicited by broker-dealers offering to fold the practice’s investment advisory services under their own RIA. For now, the company is choosing to remain independent.

“To get us to switch, the broker-dealer would have to offer extremely valuable resources–performance reporting, marketing, referral assistance, and RIA platform assistance–that would replicate what we’ve built internally, but come at a lower cost to our firm,” says Taylor. “The cost differential would also have to compensate for the flexibility we would lose in not being able to establish relationships with other 401(k) and mutual fund providers.”

For other advisors, the key issue is not whether to dispense with their own RIA in favor of a broker-dealer’s, but whether to affiliate with a broker-dealer at all. One potential turn-off is the broker-dealer’s restrictions on the RIA’s business. On this point, Scott Morgosh, principal and founder of 10 Star Asset Management, Carlsbad, Calif., echoes Taylor’s concerns.

“As an RIA, I don’t have to seek approval from a [broker-dealer's] compliance department to develop customized marketing literature,” says Morgosh. “That’s the main difference. I want to be able to present my services the way I want to market them.”

David Simon, principal of SimonDavis Asset Management Inc., Denver, Colo., says he severed his B-D relationship 5 years ago–and thereby lost also the opportunity to sell variable insurance products on commission–to operate as an RIA only. The reason: He saw commission- and fee-based sales as incompatible due to the differing standards that govern the client engagement.

Registered reps for a broker-dealer, he says, are obligated only to recommend a product that is “suitable” for the client. But investment advisor reps under an RIA are held to a higher fiduciary standard, requiring them to act in the client’s best interest. Simon adds that a fee-only practice is more in tune with the fulfillment of client objectives.

“As a fee-only advisor, I’m financially motivated to retain my clients,” he says. “If their accounts grow, I make money and if they shrink I lose money. Previously, I would make a 7% or 8% commission on a product sale, whether I told the client to take a hike or provided the greatest service.”

Simon adds the loss of commissions is a non-issue because his practice has grown to a point where he can live comfortably on fees, though he concedes the lack of commissions is often an issue for advisors just starting out.

Warren Forest, founder and president of Forest Brokerage Advisors and BrokerDealerPlace.com, Casselberry, Fla., also sees a potential conflict of interest in the ability to charge a commission or a fee. Some advisors, he suggests, might be tempted to shift, say, a $1 million deposit from a fee-based platform on which they would receive a $10,000 cut to a variable insurance sale on which they might earn substantially more in commission.

Temptations aside, advisors can address perceived conflicts, says Forest, by practicing full disclosure: telling the client when they’re acting as investment advisor and when acting as a registered rep, and making clear the implications of each. Forest questions, however, whether many broker-dealers would be as amenable as clients to the advisor wearing dual hats.

“If you were a broker-dealer, I would tell you not to affiliate with an independent RIA,” he says. “Unless the RIA can be expected to bring in a lot of money, I would think it’s not worth the hassle in terms of regulatory oversight and the potential liability that result from the RIA’s activities.”

Because of cost savings to be achieved, AFA’s Reiff similarly believes that dually registered advisors would do better to affiliate with a broker-dealer’s RIA than to operate their own. But he acknowledges that an outside RIA may make sense for advisors who desire to create an independent brand.

“Under the broker-dealer’s RIA, you lose the ability to build your own brand,” Reiff. “And this may be important if you to want to have a highly saleable business. The brand, on top of the client accounts to be sold, may add value to the firm.”