Schwab Finds Hybrid Practices Growing in Popularity

A report from Charles Schwab evaluates the pros and cons of combining a traditional brokerage business and fee-based advisory business.

The report, “Understanding the Hybrid Practice – Considerations for Advisors in Transition,” said there are two models for a hybrid practice–the ‘semi-captive’ model, in which an adviser joins a corporate registered investment adviser (RIA) of an independent broker/dealer and the ‘dually registered’ model, in which an adviser starts or joins an independent RIA. The report focuses on trends driving growth in the hybrid market segment, strategic considerations of choosing a hybrid practice model, and the economics of being a hybrid adviser, according to Schwab. 

In 2010, Schwab Advisor Services saw 163 advisory teams transition to independence, representing $12.6 billion in assets under management. A growing number of advisers in transition to the independent RIA model are coming from the independent B/D channel as they seek greater flexibility, the report noted. Schwab saw a 45% increase in the number of teams transitioning to independence from B/D firms in 2010 compared to 2009.

The report includes interviews from advisers who have transitioned to a hybrid model. Some of their reasons for doing so include:

  • A broader set of offerings for clients with differing needs, such as clients in an asset de-accumulation phase with more need for guaranteed income products
  • An expanded selection of alternative investments, structured products, and private placements
  • Access to different client segments such as corporate retirement plans that need brokerage products
  • Preservation of income streams from legacy brokerage business
  • Flexibility of products and services provided to clients in a rapidly changing industry
  • Ability to grow by attracting other hybrid advisers in transition to join their firm

The report also discusses five key areas of an adviser’s practice that should be considered before making any changes to a business model:

  • Overall business objectives and value proposition – What is the firm’s mission and philosophy and who are the core clients it will serve?
  • Investment philosophy – What kind of investment products does the firm need to provide in order to execute its investment philosophy and serve its clients’ needs?
  • Infrastructure and systems – What are the firm’s needs in terms of systems and technology, such as CRM, performance reporting, asset allocation, rebalancing, trade order management, and data input and reconciliation?
  • Compliance and regulation – Based on the hybrid model the adviser chooses, how will the firm be regulated? Independent RIAs are currently regulated by the Securities and Exchange Commission (SEC) or states, while IBD advisers are currently regulated by FINRA with the SEC and states having some regulatory jurisdiction.
  • Firm economics – What are the adviser’s needs and preferences around equity ownership; income preservation, income mix and income goals; and the level of personal time and effort to meet business goals?

The hybrid report is the latest publication in the Schwab Market Knowledge Tools series, an ongoing program of industry research reports, white papers, and guides.