Once upon a time, brokers seeking independence left their brokerage firm employers but detoured to a hybrid/dually registered business model before moving on to becoming fully independent RIAs.
That has changed, new Cerulli research shows, and the change is reflected in the numbers. The research firm’s U.S. RIA Marketplace 2018: Designing a Framework for Independence study found that from 2012-2017, hybrid RIAs doubled their share of the advisor headcount market, from 4.1% to 8.8%. In addition, those hybrids showed better growth than their independent RIA peers in that same five-year period as measured by assets under management. The study found that outperformance to be particularly acute between RIAs in the $100 million to $250 million AUM tier.
Marina Shtyrkov, an analyst at Cerulli who specializes in advisor channels, suggested in an interview that she “definitely expects” hybrids’ growth—both organic and inorganic—to continue, since the model provides greater autonomy for brokers while allowing them to continue to do commission-based business. The importance of commissions can be seen in hybrids’ product mix; Cerulli found that only 14% of independent RIAs sell variable annuities but 67% of hybrids sell VAs.
The hybrid model is also well positioned to attract more breakaway brokers into existing firms, partly because of the “practice acquisitions support” provided by hybrid RIAs’ broker-dealer, Shtyrkov said.
That’s not the only support that BDs provide to hybrids, she said, mentioning both business management and compliance as areas that many hybrids prefer to outsource. “Hybrids are no longer a steppingstone,” she said, citing a question that Cerulli asked about hybrids’ motivation. Long-term hybrids are planning to stay, “leveraging their broker-dealer affiliation as operational outsourcers.”
But another group that accounts for 34% of the total—the potentially transitional hybrids—“are not sure they’ll be staying” in the hybrid model. That group’s clients tend to be mass affluent like most hybrid RIAs, Shtyrkov said, but are also looking to “grow; to move up market” with services better positioned to appeal to higher-net-worth clients.
“If broker-dealers can service this group,” she said, “they can continue to keep them” in the hybrid fold.