WEALTH MANAGER-Advisers take "hybrid" route to independence

Wed Mar 16, 2011 11:05am EDT

* Lets fee-based advisers retain some commissions

* Eases concerns about leaving money on the table

* Movement abetted by better technology

By Helen Kearney

NEW YORK, March 16 (Reuters) - Much ink has been spilled on the desire of stockbrokers to escape the tyranny of financial product sales to become fee-based advisers with their clients' best interests at heart. It's accurate, but only to a point.

The biggest employment shift in the wealth management community today is the move to the so-called hybrid channel, where advisers charge fees and also collect commissions from previously sold products such as mutual funds and from transactions such as bond laddering that do not lend themselves to an asset-based fee structure.

The trend was seeded in the 2008 market crisis when client assets and related fees tumbled, and has been enhanced by technology and services introduced by firms that support the practices of independent advisers.

"Pre-2008, if an adviser at a full-service firm was doing 75 percent of his business in fees he would leave behind his commission business," said Michael Durbin, president of Fidelity Institutional Wealth Services, the second largest provider of trading, investment and business management services to independent advisers. "Post-crisis they want to retain their sources of revenue."

BUSINESS SENSE

From 2004 to 2009, the number of registered investment advisers who held onto their Series 7 brokerage licenses almost doubled to 14,160, making hybrid the fastest growing of the seven wealth management channels tracked by consulting firm Cerulli Associates. (The other categories are big "wirehouse" brokerages, regional brokerages, insurance-owned brokerages, independent brokers and fee-only advisers.)

The shift is in large part practical since it allows brokers to hold on to some clients who prefer paying commissions on a transaction basis, or who cannot afford the conventional annual fee of 1 to 2 percent of assets a year charged by most individual investment advisers.

"Going all the way to fee-only doesn't make sense for all my clients," said Carl Stuart, an Austin, Texas-based adviser at Raymond James Financial Services' (RJF.N) independent contractor division. "It also represents a sizable amount of money, so it makes business sense."

Stuart books 85 to 90 percent of his revenue from fees but also has long-term clients who fall below the $250,000 minimum asset level he requires for fee accounts.

Independent broker-dealers such as LPL Investment Holdings' LPLA.N LPL Financial and discounters such as Fidelity and Charles Schwab Corp. (SCHW.N), the largest custodian for independent registered investment advisers, also have made it easier for advisers to meet the regulatory, record-keeping and expense requirements of running two business models.

Independent broker-dealers are increasingly establishing registered investment advisers for brokers experimenting with fee-based models, while custodians are offering account-integration software and introducing RIAs to independent brokers willing to house their commission business.

"This isn't the transitionary model that it was in the past," said Tim Oden, a senior managing director of business development at Schwab. "There's less incentive for people to take that step to fee-only."

REGULATORY ARBITRAGE

Concerns about having to meet two regulatory regimes--the Financial Industry Regulatory Authority for commission business and the Securities and Exchange Commission or state regulators for investment advisory activities--also is waning now that the SEC is working on plans to "harmonize" client-care standards and examinations in the different channels.

"There used to be some regulatory arbitrage," said Eric Schwartz, chief executive of independent broker-dealer Cambridge Investment Research, noting that regulation of fee-based advisers has been perceived as less stringent than the rules-based oversight of FINRA. "That has changed."

Some fee-only advisers, to be sure, maintain that the hybrid model -- aside from its overtones of genetic mutation -- is a halfway house between the fiduciary obligations of registered investment advisers to put their clients' interests first and the mere sales suitability requirements of brokers.

"It gives advisers the chance to get their feet wet, but I think most go fee-only eventually," said Susan John, a New Hampshire-based adviser and chair of the National Association of Personal Financial Advisors, a trade group for fee-only advisers. (Reporting by Helen Kearney, editing by Jed Horowitz)

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