Christopher Mercado, MBA, CFP®, CIMA®, AIFA®
Managing Partner at The Financial Services Network
In the financial services industry, we often hear statistics about poor financial literacy in America and how that’s attributed to a lack of understanding of basic terminology: recent GuideVine research showed that nearly half of survey respondents couldn’t adequately define the concepts of interest or bankruptcy.
The lesser-known secret is that financial advisors can be just as confused by the increasing complexity of institutional and regulatory lexicons—in fact, many that I meet struggle to continually educate themselves and keep up with all the jargon.
The term that seems to stump advisors the most these days is “hybrid,” and to be honest, I don’t blame them. Depending on its context, the label takes on new meaning, so I wanted to provide a brief explainer on the definitions of hybrid and how they’re used.
Hybrid: Demystifying the Model
Implying the best of both worlds, “hybrid” usually brings up the mental image of a Toyota Prius—or perhaps a designer dog like the Labradoodle. However, the concept has grown increasingly popular in financial services—and with that trendiness comes befuddlement.
When advisors are contemplating a transition from one firm to another, or breaking away entirely, “going hybrid” can bring up unnecessarily perplexing questions, detracting from the higher-level and more important conversation of what’s best for your business.
So let’s cut through the confusion and break down three common phrases:
1. Hybrid business model
2. Hybrid RIA
3. Hybrid advisor
1. Hybrid Business Model
One of the most commonly used applications of the term “hybrid” is derived from the type of business model that an advisor can offer a client—both fee-based and commissionable.
A commission-based business model requires the Series 6 or 7 and the Series 63 securities licenses to serve as a Registered Representative. This allows an advisor to generate a commission and earn trail revenue through a broker-dealer transaction. An advisor can build and manage a successful business working with clients in only a brokerage or commissionable business model.
However, in most cases, a broker-dealer also provides advisors with flexibility and access to accounts where an advisor can charge a fee and engage the client as a fiduciary. As such, the advisor needs either the Series 65 or 66 Investment Advisor Representative licenses that is held with a Registered Investment Advisor (RIA) firm.
This RIA is typically owned by the broker-dealer. When an advisor is affiliated with a firm’s broker-dealer and the broker-dealer’s owned RIA, the advisor is accessing a hybrid business model offering both brokerage and fee-based account solutions. This is how most independent, wirehouse, and regional firms (such as Merrill Lynch, UBS, Edward Jones, Cetera, Kestra, and LPL Financial) are structured.
2. Hybrid RIA
Advisors can join or establish their own RIA if they only want to work with clients in a fiduciary capacity and generate revenues through a fee-based relationship. The RIA will then have custodial partners (like Charles Schwab, TD Ameritrade, Fidelity, and LPL Financial) in which the advisor can access accounts, managers and investment platforms to offer clients. Some RIAs can have multiple custodial partners for greater business model flexibility.
Here’s where it gets trickier: Advisors who manage a fee-based business model through a separate RIA affiliation may still have clients with commissions. Hence, many broker-dealers offer a hybrid broker-dealer affiliation with a separate, non-broker-dealer owned RIA. Still with me?
This is where the RIA industry and the traditional broker-dealer model intersect. It is not that the traditional broker-dealer model (in most cases) did not offer RIA or fee-based account services, it’s that advisors are looking for more autonomous and flexible solutions—either through a regional/national RIA or their own.
A hybrid RIA is simply an RIA with both a custodial and a broker/dealer partner to conduct fee-based and commissionable business respectively. Notably, the RIA in this instance is not the integrated or wholly-owned broker/dealer offering, but rather a separate business and support function.
3. Hybrid Advisor
To make things even more complicated, it is common for institutions to refer to advisors as hybrid advisors—i.e. those affiliated with an RIA and a broker/dealer through separate contractual arrangements.
Some in the industry may call a hybrid advisor someone who is “dual-registered,” but we find that the term only adds to the confusion due to the varying vernacular of regulatory bodies. We can bring this full circle by simply defining a hybrid advisor as an individual who is affiliated with a hybrid RIA and thereby accessing a hybrid business model.
A Quick Recap
Going hybrid doesn’t have to be as complicated as it might sound—especially when you’re familiar with these three terms:
· Hybrid business model: a financial advisor’s ability to offer both fee-based and commissionable services to clients.
· Hybrid RIA: an RIA that has a contractual relationship with a broker/dealer, as a separate and distinct entity, to offer commissionable products.
· Hybrid advisor: an advisor affiliated with a hybrid RIA—who, by definition, also manages a hybrid business model offering both fee-based and commissionable services to clients.
What Hybrid Means to You
With all this noise and jargon in the financial services industry, it’s easy to get tripped-up on some basic fundamentals by reading too much into a name. The meaning of “hybrid” depends on its use, which is entirely based on what’s best for your business.
Whether you’re looking for full flexibility or just want the simplest-to-understand solution, our team at The Financial Services Network can help. We serve over 270 advisors nationwide, offering six core areas of focus, including compliance, operations, virtual administration, and technology consulting.
Want to learn more about going hybrid? Contact us to get started.
Investment advice offered through Strategic Wealth Advisors Group, LLC, a registered investment advisor. Strategic Wealth Advisors Group, LLC. and The Financial Services Network are separate entities from LPL Financial. For Financial Professional Use Only. Not For Public Distribution. Securities offered through LPL Financial, member FINRA/SIPC.