More financial advisors are rolling up their own RIAs to join those of Cambridge Investment Research and Commonwealth Financial Network to avoid red tape spewing out of government regulators in the wake of the financial crisis, according to executives of those two companies.

The tougher regulatory environment is helping those RIA-friendly IBDs get an even deeper stake in the fee world. When an advisor who formerly kept his or her own RIA comes under an independent broker-dealer’s RIA instead, the IBD can charge higher fees for the compliance services they are offering.

Five years ago, 70% of Cambridge’s advisors had their own RIA. Now, that’s completely reversed, says Eric Schwartz, chief executive officer. Currently, 70% of the 1,900 advisors are under Cambridge’s RIA with just 30% maintaining their own RIA.

Now that 60% of the company’s revenues come from the fee side, he muses: “Are we a super-RIA or an IBD?”

More than a dozen advisors have come under Commonwealth’s umbrella in the past year, says Wayne Bloom, Commonwealth’s chief executive officer. The company, based in Waltham, Mass., now has about 92% of its advisors who are under the firm’s RIA. That’s up from about 80% over the past few years, Bloom says.

“That’s a lot more than usual,” he said. “They didn’t want to do all of the ongoing paperwork and ongoing filings. They realized that we’d do all of this for them.”

Evolution of the hybrid market

It’s no surprise that some advisors are frustrated by compliance issues, though it may be too early to draw conclusions about how much more difficult the compliance burden eventually will become (see related story). Still, some of the changes that have already taken effect are clearly more burdensome. There are now new rules for advisors who have assets between $25 and $100 million and operate in fewer than 15 states; they must files with their states instead of the SEC. In addition, advisors are required to fill out a much more extensive ADV form this year – which some advisors have said will cost them thousands more. (See: Now, the SEC wants you to be a writer, too?.)

The implications aren’t lost on the firms like Cambridge and Commonwealth, which have made a business model out of serving hybrid advisors by allowing RIAs to maintain their relationships with other custodians while using their broker-dealers for transactions. As more advisors move under the IBD’s RIA umbrellas, the IBDs continue to capture transaction revenue from the advisor , and can also charge higher fees because of the compliance services they are providing. See: Nine things I learned as an RIA infiltrator in an IBD world.

For instance, Cambridge takes a certain percentage of the advisors’ financial planning fees. If advisors run their own RIA, then the advisors keep all of the financial planning fee revenues.

Schwarz said that 60% of Cambridge’s revenues now come from the fee side.

See: Pershing warns IBDs to embrace hybrid business model or risk being marginalized.

H2. Which advisors are folding back in?

Even long-time advisors are bailing out of the independent RIA model.

Advisor Mike Berry, of Colorado West Financial Advisors LLC in Grand Junction, Colo., says giving up his own RIA wasn’t an easy decision initially but he says the costs of hiring lawyers and outside firms to handle mock audits each year were eating away at his profit margins. He started his RIA 25 years ago. His firm manages about $80 million in assets and of that he oversees about $55 million. The firm has about 800 clients whose average assets are about $150,000.

“I always had it in my head that I wanted to maintain my independent RIA so if we left our IBD, we wouldn’t have to go through a new registration process,” he said. “But now we’re pretty happy where we’re at and I’m confident it won’t be a problem.”

Berry anticipates he’ll completely close his firm’s RIA by the end of March and be under Cambridge’s large RIA.

“The costs involved in maintaining the manpower and having to pay for mock audits periodically have made it difficult for the small independent RIA to stay in business and cover his costs and maintain his independence,” he said.

He’s had to answer a few client questions from those who were confused about whether Cambridge would now be managing the money. He’s explained to him that his firm will still manage their assets and there will be few changes.

One less hassle

Advisor Lloyd Painter, 64, of PainterFinancial in Greenville, Ky., estimated spending about $50,000 this year to manage compliance concerns by hiring an attorney. He chose, in stead, to give up the RIA he’s had since 1990. Last year, he disbanded his RIA and rolled into Cambridge. He’s been with Cambridge since 2001. His office manages $50 to $100 million in assets.

“I felt they could do things better than I could,” he said.

Cambridge has a staff of more than 40 in the compliance department handles all queries and questions from the SEC and Finra during an audit.

Schwartz points out that Cambridge is in the midst of undergoing an audit by SEC and FINRA and the company’s compliance office has spent weeks supplying various reports to the two government agencies. But these audits haven’t eaten into advisors’ time.

“They obviously didn’t ask the right questions when they were in Madoff’s office,” he said. “So, there’s a much higher burden (now) and they don’t go by the same cook book.”

Elizabeth’s note: There is fierce competition now arising for hybrids, as companies step up with complex platforms geared to serve them. RIABiz has covered several of these platforms in stories including: Fidelity elevates hybrid offering by giving RIA technology to thousands of IBD reps, A giant is awakening in the hybrid RIA market, and How LPL lured advisors from Raymond James, UBS and Ameriprise to its hybrid RIA platform, our most recent.