Registration Case Study
|Unlike bigger broker dealers, we encourage dual registration - as a commission based stockbroker with the FINRA and as a fee based registered investment advisor (RIA) with the state or SEC. Today, this hybrid has emerged as a popular, and profitable, model in its own right. As more traditional brokers turn to advisory business, some of them are straying across the line to the RIA side. Many of these brokers still do substantial commission business, however, and would like to keep it up.
Consulting firm Moss Adams estimates that about 2,000 brokers leave to set up RIAs each year. "It's not a massive migration, but it's no small potatoes either," says Philip Palaveev, senior manager of Moss Adams. For these reps, dual registration - affiliating with a b/d and setting up an RIA - offers the best of both worlds. Reps can have true independence on the fee side without entirely giving up home-office support or commission clients and products, like insurance, annuities or front-load mutual funds. And they can make good money doing it.
According to research conducted by Moss Adams, one in eight b/d-affiliated advisors now maintains an RIA, representing about 5,612 advisory firms. Between 2002 and 2004, the study found operating margins for such firms doubled from 8.9 percent to 17.6 percent, and the top quartile of these had $7,000 in revenue per active account and operating margins of 21 percent.
Advisors say the b/d-RIA hybrid gives them freedom to choose what products, services and fees are best for their clients. Many advisors/reps, for example, use commissions for their smaller clients and those that are comfortable investing in a single fund family - that way they can get them breakpoints. Other clients need a little bit of both fees and commissions, they say. This is particularly true when it comes to estate planning, where advisors often need to have access to commission-based insurance products.
Advisors say there are several reasons for choosing to set up an independent RIA rather than use a corporate one: It allows them to demonstrate their independence to clients, it gives them room to create a strong brand identity and offers them the flexibility to move. An independent company with that brand is something that's going to be portable. So if things change at this or that b/d you will still have that brand you have built around your firm and team.
The Hybrid Model in Numbers
$716 billion in client assets, one-third of which are managed assets in advisor-owned RIAs and the remainder invested on brokerage platforms
$234 billion in assets under management through their own RIAs, representing 28 percent of all retail RIA AUM.
$482 billion, or 16 percent, of all independent broker/dealer assets. $6.3 billion in annual revenue, with the average hybrid advisory firm generating revenue of $1.13 million in 2004.
$6.3 billion in annual revenue, with the average hybrid advisory firm generating revenue of $1.13 million in 2004.
Source: Moss Adams LLP
Excerpts from: “The Best of Both Worlds” by Kirsten French, Registered Rep, March 2006