* 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 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."
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
"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."
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
(Reporting by Helen Kearney, editing by Jed Horowitz)