This story was corrected on May 3, 2011, to reflect that Dynasty Financial Partners does not buy stakes in RIA firms, and that NFP Securities launched the IndeSuite wealth management platform, not Schwab Advisor Services.
Registered investment advisor firms looking for ways to expand their businesses might try turning to broker-dealers for a boost. The right broker-dealer can help an RIA firm construct a hybrid business platform as a powerful tool to recruit breakaway brokers from the wirehouse channel. Beacon Pointe Advisors, based in Newport Beach, Calif., thought so when it affiliated two years ago with Purshe Kaplan & Sterling, a broker-dealer based in Albany, N.Y.
"Historically we have been a fee-only RIA," says Beacon Pointe President Matt Cooper. "As we recognized people would start jumping ship from wirehouses, we adopted a hybrid stance."
Since Beacon Pointe made the conversion, it has recruited four registered reps. Going the hybrid route was easier than requiring former wirehouse advisors to give up their 12-month trailing revenues from selling commission-based products. "That's a sensitive subject. It's a big part of their business."
The strategy seems to be working for Beacon Point. The four registered reps, collectively, brought about $300,000 in revenues with them. Since then, they have added more than $1 million in annualized revenues to the firm. Now Beacon Pointe has some $4 billion in client AUM, managing money for endowments, foundations and high-net worth families.
In March, the RIA set up a subsidiary called Beacon Pointe Wealth Advisors, a turnkey asset management platform designed to absorb registered reps hoping to go independent. It will also buy up smaller RIA firms that want to leave the practice management to a larger firm. The subsidiary has already signed a deal with a dually registered advisor in Scottsdale, Ariz. "We're recruiting nationwide," Cooper says.
A PIECE OF THE PIE
It is hard not to notice the growth of the hybrid sector. The Advisor Metrics 2010 study by Cerulli Associates found that the growth of RIA firms with dually registered advisors has outpaced that of RIA-only firms. From 2004 to 2009, the headcount at dually registered hybrid firms grew nearly 15%, almost three times that of RIA-only firms.
Industry watchers say firms like Beacon Pointe represent a growing trend. "I definitely see some larger RIA firms evaluating the hybrid model," says Matt Matrisian, a senior vice president and director of practice management at Genworth Financial Wealth Management. "Some advisors who are coming out of the wirehouse channel, want to go independent but are not necessarily looking to go to the independent broker-dealers."
The industry is also entering an era of consolidation. Firms like Merion Wealth Partners and United Capital are buying portions of small RIA firms to create national advisory networks. Hybrid models could play a part in their plans to lure advisors into their groups. "Those firms are great strategic partners," says Scott Dell'Orfano, an executive vice president of sales at Fidelity Institutional Wealth Services. "We do a lot of great joint selling."
Earlier this year, two leading RIA asset custody firms, Pershing Advisor Solutions and Schwab Advisor Services, published research papers describing the benefits of putting together hybrid business models. Last year, NFP Securities, now known as NFP Advisor Services Group, launched NFP IndeSuite, a hybrid platform for advisors, as part of a recruiting push. Schwab Advisor Services joined the platform last year to offer custody services.
The two papers spelled out some compelling reasons for RIAs to consider making the switch. Schwab Advisor Services noted that a blended model could attract hybrid advisors in transition as a way to grow the firm. Hybrids can also offer a broader array of products to investors. "Clients in the de-accumulation phase are showing an increased interest in guaranteed income products, which generally fall into the insurance category," the Schwab report says.
Pershing concurs in its report. With revenues and profits damaged, certain RIAs are now revisiting the hybrid model as another revenue producer and a way to enhance the value of their firms in the eyes of clients, Pershing argues.
Beacon Pointe already had a head start with its product lineup-it has the scale to offer separately managed accounts, working from a list of 80 recommended managers who do intensive research to build custom stock portfolios. "We can do that because we are big relative to an RIA, but we are small relative to a wirehouse," Cooper says.
There are only a small number of firms that start out as RIAs and adopt a hybrid business model later, whether the goal is to recruit individual advisors or expand the firm by scooping up smaller advisory firms. In the typical route, registered reps leave wirehouse firms, launch their own RIAs and then affiliate with an independent broker-dealer.
Industry professionals say hybrid firms have a lot of work ahead of them to win over traditional RIA firms. RIA principals are loath to introduce conflicts of interest in their practices by selling commission-based products. They hold up the pure fee-only RIA model as the best way to advise clients under the fiduciary standard of care.
Bryan Staff, a partner and executive vice president at PKS Investments, Beacon Pointe's broker-dealer, understands all of this. "If independent advisors are going to start doing this, they don't want the broker-dealer to change the way they do business completely," Staff says.
When PKS was established about 20 years ago, it never got calls from RIA firms for back-office support. But after the recent market meltdown, things changed. "That is certainly when we started to see fee-only RIAs call and say: 'I need more education,' " Staff says.
MAKING IT WORK
When considering a hybrid practice, independent advisors must remember that compliance under a broker-dealer affiliation can be more complex than an RIA relationship. FINRA, for instance, has strict guidelines that regulate the marketing of products like insurance contracts, Matrisian says.
PKS Investments, like other broker-dealers working with RIA firms, is responsible for providing oversight on all affiliated advisors and their clients' assets, even if another custodian holds those funds. When an advisor joins Beacon Pointe, its custodian, TD Ameritrade Institutional, gets consent from PKS Investments to become an interested party on transactions being executed from TD Ameritrade's platform. PKS Investments can take electronic downloads of TD's transactions and run them through its exception reporting software to identify potential irregularities.
"We don't have to worry about churning, inappropriate mutual fund switching or any other activities," Staff says. He admits that the incremental amount of regulation on the broker-dealer side could discourage some RIAs from adapting a hybrid model.
Most industry professionals believe that the hybrid space will grow apace with the rest of the advisory business. Its headcount and assets under management might not surpass the RIA segment any time soon, but it will definitely capture more attention from advisors in the years to come.
As for the type of advisory firm that would consider making the switch, Dell'Orfano says he sees it more commonly among boutique firms in second-generation ownership. Those firms are looking to accelerate the growth of the practice and are considering doing so via acquisitions.
"They are thinking strategically about what they need to do to acquire breakaway broker assets," Dell'Orfano says. "If those trends continue, there will be more hybrid models out there because of the need of commission and fee business coming together."
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