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With stark warnings about scale, IBDs make their pitch to RIAs

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GRAPEVINE, Texas — Independent broker-dealers are refining and expanding their hybrid channels in a bid for thousands of RIAs, warning smaller firms they have serious problems of scale.

Executives from Pershing Advisor Solutions and Fidelity Clearing and Custody Solutions, the two primary clearing firms in the IBD space, as well as Private Advisor Group, a major hybrid firm and super office of supervisory jurisdiction, described their pitch in a panel at last week’s FSI OneVoice conference.

Just a few large RIAs dominate the industry, while the vast majority of firms are much smaller. Only 4% of RIAs — those with more than $1 billion in assets under management each — control $2.4 trillion of the whole channel’s $4 trillion in AUM, according to Cerulli Associates. In contrast, state regulators oversee a crop of more than 17,600 RIAs with $100 million in AUM or less, their latest enforcement report shows.

Cerulli predicts that RIAs and hybrids will gain three percentage points of market share from the wirehouses in the next three years. That said, smaller RIAs face a growing set of challenges around compliance and technology. IBDs’ hybrid channels can offer them solutions, said David Canter, Fidelity’s RIA head.

“My fear is that what’s going to happen is they’re going to do nothing,” he said. “They’re going to do nothing, and their businesses are going to dissolve, because sometimes it’s easier to do nothing than to actually make a choice.”

Canter, whose firm counts nearly 200 IBDs as clients, was speaking in response to a comment from Private Advisor Group founder John Hyland: The record-breaking bull market is hiding small RIAs’ vulnerability, Hyland said.

LPL's acquisition of National Planning Holdings' assets alone resulted in 10 moves of $744 million or more of clients assets.
December 18

For example, an RIA with $50 million in AUM must now spend a comparable amount on cybersecurity as his much larger firm, which has $15 billion in AUM, Hyland notes. Such expenses will prompt difficult decisions if there is stagnation or downward movement in the stock market, he says.

Hyland’s LPL Financial-affiliated firm allows its 623 advisors in 34 states to choose among three options: join LPL’s corporate RIA, come to Private Advisor Group’s hybrid platform or start a fee-only independent RIA. “Sub-scale RIAs” should see the writing on the wall, he said.

“They’re done, by and large,” said Hyland, whose firm is based in Morristown, New Jersey. “The question is who’s going to be able to scoop them up? Who’s going to be able to put a model in front of them that is going to get them 80%, 95% of what they wanted to get by being their own RIA, but not going at it alone anymore? I think that’s really critically important.”

IBDs must offer RIAs several different ways of affiliating themselves to tap the market, Pershing Advisor Solutions Director Gabe Garcia agreed. Pershing has 132 bank and brokerage clients.

The firm is working with “three very sizeable relationships” on redesigning aspects of their corporate RIA, Garcia said. The changes relate to issues like partnership agreements, operating agreements and succession plans, he noted. Pershing is also developing more flexible approaches to services like client portals, back-office technology, real estate and infrastructure, as well as front-end tech connecting RIAs to IBDs.

“Those are some of the things that we’re exploring to leverage the entire organization of BNY Pershing, whether it’s RIA custody, whether it’s clearing, whether it’s corporate RIA, hybrid RIA — all of those things coming together, and I think that the dialogue will move the conversation forward,” Garcia said. “We’ll see more and different kinds of solutions out there.”

Early hybrid adopters saw success on the recruiting trail in 2017. Triad Advisors, a Ladenburg Thalmann firm based in the Atlanta area, set a record for the second year in a row in the number of advisors and offices joining the firm, adding $37 million in gross dealer concessions, according to CEO Jeff Rosenthal.

About 80% of the 600-advisor firm’s offices act as fiduciaries at the No. 29 IBD, which has been specializing in hybrids since opening in 1998. Advisors need scale to “to remain relevant in this space,” Rosenthal says.

“The majority of advisors that I know didn’t get in the business to be compliance officers. They didn’t get into the business to be technology specialists,” Rosenthal said.

“So, when I talk about scale, that is building a business that is large enough to employ people like that and allowing the advisor to do what the advisor is best at,” he added, “or partnering with firms, whether that be custodians, RIAs or independent advisory and brokerage firms such as a Triad, where they can leverage that home office on their behalf.”

Another Ladenburg firm, Securities America, also just finished a record year for recruiting, said CEO Jim Nagengast, who credits the firm’s flexibility. Advisory platforms at the firm, which is based outside Omaha, Nebraska, include a traditional corporate RIA and a corporate RIA allowing for outside custody.

Assets at the second option, which is called Arbor Point Advisors, have topped $2 billion, according to Nagengast. The parent company of Orion Advisor Services, NorthStar Financial Services Group, maintains a minority ownership interest in Arbor Point, according to its ADV.

Securities America, which is the No. 9 IBD, also allows advisors to launch their own independent RIAs.

“In each of those platforms, there are different services and products that we think we can deliver as part of our value proposition, and we try to price accordingly,” Nagengast said. “But I think the key is that you have to have a value proposition that fits all of those different landing pads.”

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