Dual registration has helped Registered Investment Advisors (RIAs) capture more assets in recent years. Could more compliance risk be far behind?
When it comes to succeeding, a lot more Registered Investment Advisors (RIAs) are choosing to straddle the fence, according to the recent research.
Over a third of RIAs are now “hybrid,” which means they have retained ties to a broker-dealer in order to continue to offer commission-based products alongside their fee-based asset management services, according to a Cerulli Associates’ report: U.S. RIA Marketplace 2018: Designing a Framework for Independence.
Until recently, advisors typically only adopted the hybrid approach temporarily to ease their transition from working for a broker-dealer to becoming fully independent RIAs. Cerulli’s research explains why that is no longer the case. Hybrid RIAs, the firm reports, outperformed independent RIAs in the last five (5) years in terms of growth of Assets Under Management (AUM).
This is somewhat surprising considering the increase compliance risk hybrid advisors face compared to independent RIAs.
What is a hybrid advisor?
The hybrid model was traditionally used to help advisors ease the transition from a more transactional compensation model based exclusively on commissions to a more relationship-based model based on asset management fees.
It also enabled advisors to transfer client assets without triggering any negative tax or other consequences for those clients and retain recurring revenue from past sales of insurance and other products.
It enabled advisors to keep all or some of their commission-based business, while building a fee-based practice. In short, it gave them more control of their income and their future.
Still, up until about five (5) years ago, a higher percentage of RIAs would sever ties with a broker-dealer once they had enough AUM to support their financial goals. Surveys consistently showed advisors migrated to the RIA model because it freed them from having to push proprietary products over other investments that might provide a better fit for their clients, often at lower costs. If anything, this approach was thought to be gaining steam in the wake of the 2008 financial crisis, which prompted a call from regulators and investors for more independent investment advice.
Today, however, RIAs are facing competition from robo-advisory firms that have combined algorithms and apps to greatly reduce the cost of acquiring and managing assets. While startups like Betterment, Personal Capital and Wealthfront helped bring many younger and less wealthy investors into the asset management business, robo-advisors are also taking significant market share from broker-dealers and RIAs. Between 2016 and 2019, Statista.com estimates robo-advisors captured nearly $1 trillion in assets and are on track to manage twice that amount by 2020.
Wentworth Management Services LLC was formed as an investment vehicle in 2016 in part because it recognized how robo-advisors had the potential to change the asset management business much in same way that e-commerce changes retailing. Its mission is to provide broker-dealers and RIAs with the capital, technology and compliance tools they need to survive and even thrive amid the disruption.
The Downside
The hybrid route, however, poses many challenges for RIAs, particularly on the compliance front. Dually registered RIAs are regulated by the Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC) and state authorities. They must have systems in place to ensure that they are always meeting their fiduciary duty, including when they are selling commission-based products.
Based on Cerulli’s research, it appears that the advantages of the hybrid model outweigh the challenges, at least for now. What the future will bring, is anyone’s guess, but it is a good guess that it will bring more regulatory scrutiny.
This is why, in addition to offering technology and platform integration, Wentworth takes a proactive approach to compliance and regulatory trends. Risk vigilance a central tenet of its management philosophy, policies and procedures not just because it fosters a positive working relationship with regulators, but because it gives advisors the clarity they need to succeed.
To learn about Wentworth Management Services LLC’s commitment to compliance and other advantages of partnering with us, contact our team today.