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 stepping stone,” 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 also are 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. That’s an important goal for independent BDs, since Cerulli says these transitional advisors manage close to $400 billion in assets, making them an “attrition risk” for IBDs.

The largest of those firms have “aspirational” goals, Shtyrkov said, “of becoming regional or super-regional” firms that can achieve “mini-United Capital dominance,” which may make it more difficult for BDs to hold onto their affiliation.

Where are hybrid RIAs coming from? Using its own data, along with numbers from the Financial Planning Association and the Investments & Wealth Institute, Cerulli found that among advisors who became hybrid RIAs between 2012-2017, 27% came from a wirehouse and 24% came from other IBDs.

The remainder came from insurance and bank broker-dealers (15% each); 12% from national or regional BDs and, somewhat surprisingly, 7% came from independent RIAs.

With those defections to the hybrid RIA and independent RIA space, is the traditional broker model on life support? “There is a place for every type of advisor,” said Shtyrkov, noting that “despite the movement to fees, there are still advisors who are rainmakers, who are not interested in running their own business, who like the ‘eat-what-you-kill’ model. There’s a place for them in the industry as it stands.”

As for hybrid RIAs, “the commission-based products serve a specific role,” she said. As that model’s growth accelerates, and as hybrid advisors offer more holistic services to clients, hybrids will “evaluate every product” in their arsenal to see if each fits their service models, “so commissions will play a role” in that process as well, she said.

Hybrids’ growth also shows that “there are more ways to be independent these days; there’s more than one route,” Shtyrkov said. “Historically, you had to drop your commissions” if you followed an independent path, she said, but “now you have more choice.”

Other Research

A different study conducted by BNY Mellon’s Pershing Advisor Solutions, “2018 Study of Pricing & Profitability,” finds the registered investment advisor revenues improved over the past three years, but that growth may be vulnerable to market changes.

According to the research, the median revenue growth was 12%, up from 7% in the 2015 study. Meanwhile, operating profit margins remained consistent at 25%.

However, the study — which includes responses from 385 advisory firms — also finds that growth in assets under management is predominantly driven by market performance.

“That the main growth driver for RIAs is the overall performance of the market should be a flag for our profession,” Gabriel Garcia, managing director and head of relationship management at BNY Mellon’s Pershing Advisor Solutions, said in a statement. “With the economy still running high, now is the time for firms to take a critical look at their business and identify areas of investment and improvement.”

According to the study, market performance beat out referrals or business development as a growth driver. Of the 19% increase in AUM across firms, market performance made up almost half of the growth at 8%. Meanwhile, business development efforts contributed to 5% of the growth.

Further, the study finds that firms have yet to realize meaningful productivity gains from new hires, even as firms have gone on a hiring spree. Nearly half of all firms (49%) responding to this year’s study hired support advisors.

Similarly, there was an increase in the number of firms hiring service advisors (20%). However, as firms have ramped up hiring to build capacity, average revenue per professional has remained stagnant at $440,000, compared with $442,000 in 2015, the study finds.

“First and foremost, firms have to find ways to maximize their investments in new hires,” Garcia said. “Training is critical in that respect. Further, firms need to increase their focus on developing marketing and client experience strategies to help differentiate themselves in a demanding economy and increasingly competitive marketplace.”

TCA by E-Trade News

Meanwhile in the platform arena, TCA by E-Trade — which provides integrated technology, custody and practice management support for RIAs — has announced a custody relationship with Edelman Financial Engines.

In addition to joining the TCA by E-Trade platform, Edelman Financial Engines also will be a “national player” in the E-Trade Advisor Network, according to the firm, meaning a channel for financial professionals to connect with clients in need of higher-touch services on the platform. The referral network will be launching in the months to come.

“Edelman Financial Engines is excited to join E-Trade’s national referral program to expand our reach and provide more financial help to American families,” John Bunch, chief operating officer of Edelman Financial Engines, said in a statement.

Since last October, TCA by E-Trade has brought in more than $12 billion in commitments to its RIA platform, as well as adding more than $2 billion in net assets under custody. The announcement comes as E-Trade is expanding its footprint into the RIA segment to broaden its target market and better serve brokerage and stock plan accounts in search of tailored services.

“TCA by E-Trade is thrilled to welcome Edelman Financial Engines — a premier and highly respected RIA in the industry — to our platform,” Josh Pace, president of TCA by E-Trade, said in the statement.

Pace added, “This new relationship comes amid a very exciting time, as we continue to grow our business while adding more services and opportunities to our overall offering.

By deploying the full power of the E-Trade brand, we have been able to showcase our platform to even more advisors.”

James J. Green, a former editor of this magazine, is editor of Jamie Green Reports, an advisor-focused writing, editing and shepherding service. He can be reached at jxgreen0@gmail.com.

Emily Zulz and Marlene Satter contributed to this report.