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Also available as podcast (Episode #152)
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Should I join a hybrid RIA?
TL;DR – There are multiple pathways into the RIA model worth considering for your practice. One pathway is joining an existing RIA, which offers many different value propositions to choose from. Some such RIAs provide a hybrid solution, while others do not. It’s important to understand not only what “hybrid” means, but also whether it fits your practice.
Host:
Brad Wales founded Transition To RIA in 2020 after nearly 20 years of prior industry experience, including direct RIA related roles in Compliance, Finance and Business Development. He has an MBA and has held the 4, 7, 24, 63 & 65 licenses. He has been quoted or featured in 100+ industry articles including in the Wall Street Journal, Barron’s, and most every other major industry publication. He is well known for his RIA video explanatory series, and Kitces named his podcast as a “Top Podcast for Financial Advisors.”
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Full Transcription Of Video:
Should I join a hybrid RIA? That is today’s question on the Transition To RIA question and answer series. It is episode #152.
Hi, I’m Brad Wales with Transition To RIA where we help you understand everything there is to know about why and how to transition your practice to the RIA model.
If you’re not already there, start by heading to TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There is a Vendor Profile Series. All kinds of things to help you better understand the RIA model.
Again, TransitionToRIA.com.
On today’s episode we’re going to talk about, should you join a so-called hybrid RIA?
As a starting point, and for those of you that have seen some of my other episodes, you’ve maybe heard me mention this, but just as a primer, keep in mind there are three main pathways that you could take to transition your practice into the RIA model.
I help advisors down all three, so my comments are never meant to suggest one is better than the other of the three pathways. They all have pros and cons, just like wherever you are now has pros and cons.
It’s important for you, though, to understand what those three options are, how they differ, and which path might be best for you.
So just as a quick reminder for those that have not heard me say it before, the three pathways are on one end of the spectrum is where you start your own RIA and you build up the necessary set of solution providers around it. Things like compliance, technology, E&O, marketing support perhaps.
On the other end of the spectrum is you perhaps join an RIA, and that’s what we’re going to be talking in part about today.
And then in the middle, there’s a go between those two where you’re starting your own RIA, but you’re relying on a single service provider for many of the individual pieces you would otherwise be building out yourself again on the first part of the spectrum.
So again, all three are there for advisors to consider. You should understand all three before making decisions about transitioning into the model.
With respect to joining an RIA, that comes in many different flavors of what it is to join an existing RIA.
Many of those flavors you’re not going to have any interest in. They’re not at all going to be appealing to you.
Other flavors you might find very attractive and a very good fit for what you’re looking for in the next evolution of your practice.
So don’t make any assumptions coming into this process about what joining an RIA entails. Perhaps you have heard about a particular flavor of that, or you’ve been exposed to a particular flavor, or you’ve even talked to someone at one of those flavors about their model. But that doesn’t necessarily mean that’s how they all operate.
As an example of the different flavors, some RIA platforms you could join are W2, whereas others are 1099.
Some you must use their brand – and they would argue you benefit from using their brand. Other models you create your own brand.
Some you must outsource your asset management to the firm. Others say… if you want to manage the assets yourself, have at it. Or here’s a suite of ways you can outsource the management of the assets if you’d like to choose from those, but it’s entirely optional.
Lots of other variables that go into this as well. I did a separate episode on how to evaluate an RIA to join, so if you want to do a deeper dive on that. But point being, just this idea alone of joining an RIA, just know that there’s a lot of variables that go into that.
Again, many of those flavors depends on where you are in your career, what you’re trying to accomplish next.
That’s a big part of what I help advisors with. First, which of those three pathways might be the best fit for you. And if it does make sense to perhaps be joining one, to make sure you understand all those different flavors. And we try to identify which of those flavors is going to be the best fit for you.
But then within that suite of flavors, and as the title of this episode suggests, is the idea of… should you join a hybrid RIA?
Let’s start with, what technically is a hybrid?
You’ve maybe heard me rant about this before. You must be careful with that term. I also see this with the word TAMP. The word hybrid and the word TAMP, there’s a couple other words as well, but which are used in our industry in several different ways.
No one’s doing this maliciously or whatnot, but you will hear those words used to describe some sort of offering, and then you will hear some other solution provider describing their offering in the same terminology and it’s apples to oranges of what they’re ultimately providing for you as the advisor.
So just at a high level, be careful the minute someone says, this is a “hybrid” solution or “hybrid” RIA, your first thing you want to do is make sure you understand what their definition of hybrid is in that context and what they’re offering and does that match what your understanding or your desire of hybrid is in that regard.
At a high level, there’s no regulatorily defined definition of hybrid. But it’s generally understood to be an arrangement where an advisor is essentially wearing two hats.
They are both with a broker-dealer wearing their Series 7 Registered Rep hat, and they’re able to offer brokerage solutions for clients where it’s done on a transactional basis for a commission. And they’re also able to operate in a fee basis on an advisory relationship with clients. That’s where you’re wearing typically 65 hat and you’re operating as an Investment Advisor Representative under an RIA.
So the idea of hybrid is this loose definition of saying you’re operating under both of those.
I personally would go so far as saying a more narrow definition of hybrid is where you perhaps have your own RIA and you still have a need for some sort of BD solutions for your clients.
That’s well beyond the scope of this episode. I’ve done episodes on what is an RIA-friendly broker-dealer and how can you accommodate your legacy commission assets. So feel free to dive deeper on those episodes.
But typically, my definition is, you generally have your own RIA and you’re utilizing some sort of BD solution alongside it.
Now, just because Brad Wales says that’s perhaps the most narrow definition doesn’t mean it can’t also be used in other ways. Again, it’s generally if you’re at least under both that BD and RIA setup.
Which arguably, if that’s the case, we could call every wirehouse firm a hybrid firm, because most advisors under the wirehouse model are wearing both of those hats.
Most advisors in the independent broker-dealer space are wearing both a broker-dealer and an RIA hat.
So again, you could apply that definition in a lot of different capacities. Generally, though, when you hear some solution in the marketplace positioning themselves as a hybrid RIA, typically they’re saying…. “You can come join us as an RIA, you would be an Investment Advisor Representative, you’d have fee based accounts with clients. And to the degree you have often referred to as legacy commission assets, and or you aspire to still in some instances use solutions with clients on a commission basis going forward, we have that RIA friendly broker-dealer solution available for you to use. So here we are, a so-called hybrid solution for you to utilize. And because the RIA is the predominant part of our model, we call ourselves a hybrid RIA.”
To a degree, I would agree with that. That’s fair to say. Now, I would also say that every single of the largest, as we refer to them, independent broker-dealers, are both a broker-dealer and an RIA.
Over the years, client assets at independent BDs were traditionally and historically mostly, if not entirely, just on the broker-dealer side of those firms. But as the predominance of fee-based accounts has come online, now all the large independent broker-dealers, more of the client assets in aggregate are on the fee-based side of the house.
Arguably we could be calling, or should be calling independent broker-dealers, we should be calling them independent RIAs that also happen to have a broker-dealer to the degree you need it. Or they could call themselves a hybrid RIA because they are predominantly an RIA that also has a BD solution. But because as an industry we’ve always called these firms independent broker-dealers, I don’t see that terminology changing.
But it’s just a reminder again that just because someone calls themselves something, a hybrid RIA, you must dive into… are you just what we would think of as an independent broker-dealer, and you’ve just rebranded yourself?
So, just always take a pause if someone describes something as a hybrid RIA. Again, you want to understand what their definition of it is.
That said, if you talk to someone like me and we go over the pros and cons and how each of these three pathways into the model work, and you conclude that perhaps joining an RIA is the best path for you, there are some RIAs out there, many RIAs for that matter, that are 100% fee-only. They do not have any sort of BD solution. They are not any sort of hybrid solution for that matter.
But many of the 1099 type models that you might be interested in and that you might find have good value propositions, typically part of their value proposition is that they do have some sort of BD solution to accommodate whatever commission assets you currently still have.
So for an RIA out there to say…. “we’re a hybrid RIA,” well a lot of RIAs you could join in theory could call themselves a hybrid RIA because they do have a BD solution.
Now in this example, where an RIA is 100% fee-only, they would argue you don’t need a broker-dealer. They’d say… “Let’s go through that part of your book and there are ways you can solve for that.”
That is generally correct. I’ve done episodes on that.
But there are some advisors that don’t want to take some of those pathways, or convert assets in certain ways, and they have a need or want to continue with the broker-dealer. So again, most of these attractive, particularly 1099 offerings, do have a broker-dealer with it.
So, to the degree anyone’s touting themselves as a hybrid RIA, just know a lot of them could arguably call themselves a hybrid RIA. Whether they do or not is just in how they’re positioning themselves in the marketplace.
And to kind of tie that up, and again, this is very high level, this was not to suggest here’s all the variables you should look at to evaluate a hybrid RIA, but just understand you should maybe or maybe not pursue joining an RIA. Maybe you should start your own RIA. First you must figure that out.
Then if you conclude you’re going to join an RIA, then understand and recognize there’s many different flavors of that. And then within that set of flavors, some of them are or aren’t hybrid for that matter.
I don’t say all this to try to confuse you or to make this process seem overly complicated. It just is what it is. There’s a lot of choices in the marketplace. There’s a lot of different ways that firms are positioning themselves.
That’s a big part of what I help advisors do is digest all this and understand the landscape and understand who the players are and understand what these flavors are and why one pathway might be more attractive to you than another. I’m happy to have that conversation with you as well.
I will leave you with a final note, and I don’t want to turn this into some rant, but do be careful. Any firm out there that’s calling themselves a hybrid or not, I’m not suggesting that’s not a good solution, that might be very attractive to you, that might be a very good offering.
But every so often the industry has some buzzwords that come along and it’s this sexy thing and everyone wants to slap it on their marketing and how they position things, and hybrid was in that boat.
I don’t see it as poorly used today, but I remember going back seven, eight, nine, 10 years ago, hybrid became all the rage. That’s what everyone was talking about, hybrid solutions. And you saw all these firms come out and just kind of slap the term hybrid on their offering.
In many instances, they didn’t change anything about their platform or their offering. They just started calling it hybrid something.
Now, they might have a very good offering, a very attractive offering, but it was just this easy, let’s jump on the bandwagon and call ourselves a hybrid.
I remember particularly at that time, there were, I mean, it was apples, oranges, and bananas if you wanted to categorize these different types of solutions for advisors. And they were all calling themselves hybrid.
I even saw some firms that slapped hybrid on a payout. And the reality is it didn’t really even change that much from what the non-hybrid payout was. But again, it was this sexy thing to do to slap hybrid on.
So just be careful, again, if you’re coming across, should I join a hybrid RIA? Again, it’s not to suggest they don’t have a good offering. I just have seen it used in several different ways. And I think sometimes there’s a little more cheerleading behind it than arguably is necessary to define what the platform actually is.
Again, to the degree you’d like help navigating all of this, I’m happy to have that conversation with you.
Like I said at the top, my name is Brad Wales with Transition To RIA. This is the sort of thing I help advisors with all day long. Understanding where are you at now? What does your practice look like now? What would you like to do with your practice going forward? What are all the pathways into the RIA model? What are all the flavors you have to choose from? What are the firms you have to choose from?
I have the luxury because this is all I do is help advisors transition into the RIA model that I have the luxury of spending all my time on this one topic and paying attention to just the solutions that advisors would be interested in transitioning into the RIA model.
So, you get to benefit from me spending, again, 100% of my time just focused on this one topic.
First things first though, head on over to the website at TransitionToRIA.com where you’ll find this entire series in video format, podcast format. There are articles, there are whitepapers. There is a Vendor Profile Series.
At the top of every page is a Contact link. Click on that and you can instantly and easily schedule time to have a one-on-one conversation with me, whether you want to talk about hybrid RIAs or anything else RIA related, I’m happy to have that conversation with you.
Again, TransitionToRIA.com.
With that, I hope you found value in today’s episode, and I’ll see you on the next one.
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