Which RIAs are growing faster: hybrids or indies?
Hybrid RIAs of all sizes outperformed their independent peers in growth of assets under management over the past five years, thanks to the advantages of broker-dealer affiliation – though it's an advantage most seen in small to midsized firms.
That's according to a new report from Cerulli Associates, which defines hybrids as practices that maintain RIAs alongside their BD affiliations. The study only measured advisory assets.
The channel "has claimed its place as a veritable business model," the study found, by evolving into a "more permanent stopping point for advisors with specific reasons for straddling the advisory-brokerage line."
To be more specific, says Cerulli research analyst Marina Shtyrkov, “access to commissionable products can’t be underestimated, even if there’s a fee-based environment and even if a hybrid RIA is majority fee-based.”
Commission-based brokerage accounts, technology, back-office support and outsourced services from affiliated IBDs have helped push up hybrids' share of the industry’s advisors to 8.8% from 4.1% over the past decade, the research and consulting firm says.
The greater compound annual growth rate of AUM for hybrids came in the five-year period between 2012 and 2017. Hybrids with between $100 million and $250 million in AUM displayed the biggest edge of any segment.
To design the study, Cerulli removed certain more exogenous factors that have been driving the greater reported growth rate of the independent RIA channel: the departure of retiring advisors, rookie entrants to the channel, market fluctuations and all movement of advisors.
"An advisor just starting out and departing advisors, those are stripped away," Shtyrkov said, explaining that she sought only firms that had been in existence for the full five years under examination. "That benchmark is kind of a cleaner way [to see] who is really growing faster."
With all that data left in, indie RIAs' 20% gain in assets outpaced hybrids' 14% in 2017. Measured this way over the same five years covered by the study, indies grew by 13%, while hybrids grew by just 8%.
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The hybrids' fast growth poses a risk for IBDs in allowing their advisors to adopt that model. Brokerages struggle to retain their increasingly powerful hybrid enterprises, and they lose revenue from assets held outside their platforms.
“When you hear [IBDs] say, ‘We’re hybrid-friendly,’ that can mean a lot of different things,” says recruiter Jodie Papike of Cross-Search, depending on how brokerages split revenue share and structure their relationships with hybrids. “They don’t want to lose that business, they still want to be competitive in that space, but they do have very small margins as it is.”
That said, there's a reason IBDs are motivated to solve this quandary: the RIA channel has grown to more than $4.7 trillion in advisor-managed assets, according to Cerulli. That's due in great part to the continuing stream of wirehouse breakaways, adds recruiter Louis Diamond of Diamond Consultants.
“It’s extremely rare that you find a wirehouse breakaway who doesn’t need or want the broker-dealer capability,” he says.
Wirehouses remain the most common prior channel for hybrid advisors, accounting for 27% of representatives who came over in the past five years, the study found, while other IBDs represent 24%. Only 7% of the hybrid RIA advisors made so-called reverse breakaways from indie firms.
Diamond points out that higher valuations of fee-only practices is a strong lure for those moving away from commission business models.
Another factor with a significant impact on the channel is that a third of advisors at both kinds of RIAs plan to retire in the next decade, according to Cerulli, which will put more than 38% of RIA assets in transition. Succession questions have, in part, caused the number of hybrid RIA practices with less than $50 million in AUM to tumble by more than half to 853 in the past five years, the study found.
Other small hybrid RIAs simply dissolved their so-called lifestyle practices amid higher regulatory and technology costs, feeding the “acute” consolidation in the hybrid channel, Cerulli says.
At the other end of the scale, larger firms are less impacted by any boost from IBD affiliation, according to the study. Hybrid RIAs with $500 million to $1 billion in AUM get the lowest growth advantage over indies by retaining brokerage ties, Shtyrkov says.
She concludes that firms at this size have hit a “critical growth juncture."
IBDs who want to hang onto them should take a close look at whether their particular hybrids value their affiliations most for brokerage services, outsourced capabilities, technology, lead generation or for other reasons, she says.
“The same messages don’t resonate with every hybrid RIA,” Shtyrkov says. “There are different paths for different hybrid advisors. Understanding that is important.”