The narrow-margin independent broker dealer business is facing a huge challenge: the growth of the hybrid RIA model. This hybrid model has cut IBDs’ bottom lines and crushed profit margins for some of their largest advisory practices.
“IBDs are grappling with their ability to maintain profitability in supporting large OSJ and hybrid practices, and whether they can justify the ROI in retaining them,” said Dennis Gallant, president of GDC Research, which provides research and consulting services to the financial-services industry.
Hybrid advisors typically own their own RIA and custody many of their fee-based assets outside of their broker-dealer. They do commission business through an IBD and rely on it for technology and compliance resources.
However, more advisors are opting to place customer assets with outside RIA custodians instead of using IBDs’ costlier corporate RIAs, and that puts IBDs in a bind: Unless they offer their advisors an RIA platform, the advisors may bolt and set up their own independent RIA or join an existing RIA.
“RIA platforms at IBDs are primarily defensive in nature,” said Kenton Shirk, director at Cerulli Research and head of their intermediary practice.
Rise of Third Parties
Many of their largest and most successful advisors crave what they feel is the enhanced objectivity of using third-party custodians like Schwab, Fidelity, TD Ameritrade and Pershing. For others, this signifies that they’ve arrived as consultative, fee-based advisors who are not beholden to one platform.
Plus, most advisors feel that these RIA practices are worth more than those at IBDs, because there is a broader universe of potential buyers.
IBD practices often are sold within their broker-dealer so that the buyer doesn’t have to repaper their accounts. RIAs, though, can be purchased more easily by other using the same custodian. Banks or serial aggregators are potential suitors, too.
IBDs recognize these advisor perceptions and compete for them by touting the prowess of their RIA platforms. For example, Commonwealth Financial Network describes itself as “the largest privately held RIA independent broker-dealer.”
Yet reversing the advisor viewpoint that RIAs are paragons of unbiased advice as opposed to advisors who do both commission and fee-based business is a tough, uphill slog. Fee-based business has been awarded a halo by both regulators and by broker-dealers themselves.
Down, Down, Down?