A giant is awakening in the hybrid RIA market

In a pronounced shift away from its traditional focus on fee-only RIAs, Schwab Advisor Services plans a major push to win more business from hybrid advisors.

The San Francisco-based custodian is budgeting to spend larger sums in 2010 and 2011 for technology that better supports registered investment advisors who sell some commission-based products as brokers, according to the company. Its executives to declined to specify how much they plan to spend.

Schwab already works with 100 different independent broker-dealers [and 30 of them primarily] on behalf of around 1,900 hybrid RIAs it serves. Those advisors are about 30% of Schwab’s total.

The company now believes that it can take its integration with those broker-dealers to a higher level. The result may be a system that attracts a greater number of hybrid RIAs to its platform.

Build the connectivity

“We’ll continue to build the connectivity that will make it better,” says Bernie Clark, senior vice president of sales and relationship management for Schwab Advisor Services. “We’re really embracing the open architecture opportunity” in terms of people and money.

In the past, Clark and other Schwab executives have emphasized that Schwab’s primary interests lay in winning the accounts of fee-only RIAs.

The company once planned to form a deeper partnership with Cambridge Investment Research, an IBD with $30 billion of assets from hybrids in Fairfield, Iowa, but later decided against it. Schwab did not comment on it decision.

Though Clark didn’t say what has altered his company’s vision, analysts say that hybrids are on the rise. See: 5 reasons why the hybrid model may be a bigger deal than ever. Existing hybrids are making greater use of their brokerage licenses to buy alternative investments and variable annuities.

Hybrid growth is apparent from these
statistics provided by Cerulli Associates

Brokers leaving wirehouses also like the model because it allows them to transition with a minimum of disruption.

Schwab’s move follows the development of integrated platforms by Pershing, Fidelity, Raymond James and LPL. These companies have long seen the advantages of giving breakaway brokers a flexible platform.

Improving connectivity between Schwab and IBDs could find takers among advisors, according to Matthew McGinness, managing principal of Best Practice Research in San Diego.

“Schwab’s focus on connectivity with respect to data is significant,” McGinness says. “Making it easier for IBDs to comply with Reg 94-44 and for financial advisors to consolidate data for reporting and tracking purposes has become critical since the launch of integrated platforms by Pershing, Fidelity, and LPL.”

The aim of Schwab’s new technology — unlike that of many top competitors — will be to connect hybrid RIAs to a wide range of IBDs, according to Schwab spokewoman Alison Wertheim.

Not force fit

“We’re going to make connections but not force-fit anyone,” she says.

McGinness says that offering this open architecture has advantages that may outweigh the drawbacks of operating on more than one system for many advisors.

“Advisors certainly gain efficiency through the common operational platforms provided by Pershing, Fidelity, and LPL,” he says. “But at the same time, demand for unbundling among both independent financial advisors of all stripes — who want the flexibility to continually seek out the best solutions available for a particular aspect of their businesses — suggests that firms that are flexible in connecting with other vendors have an advantage in serving a market that has never felt comfortable being tied to any one provider.”

Clark says that he no longer believes that the integrated platforms of Fidelity Investments and others offer the leg up that they are purported to have.

“I think their offering looks identical to us today,” he says.

Advisors are still dealing with separate entities and receiving separate statements when they work with these custodians, Clark adds.

Two asset custodians with associated clearing operations are Fidelity Institutional Wealth Services and Pershing Advisor Solutions, which are connected to National Financial Services and Pershing LLC, respectively.

Pershing declined to comment for this story through a spokesman.

Proof of the efficacy

Michael Durbin, president of Fidelity’s RIA custody business, says that the proof of the efficacy of Fidelity’s hybrid offering is his company’s success in attracting and serving dually registered advisors to the platform. Reports show Fidelity attracting 180 breakaway brokers this year, an amount that is greater than those advertised by competitors.

“This is an advantage that we have,” he says.

Tom Nally of TD Ameritrade Institutional shares Schwab’s viewpoint and says that Fidelity’s offering is not superior to what Schwab and his own company can provide.

“Bernie [Clark] is spot on,” he says. “Fidelity’s vision was to create an integrated [system]. But National Financial operates on one system and RIAs on a very different system.

In 2008, Fidelity branded the combined offering of National Financial Services and Fidelity Institutional Wealth Services — calling it HybridOne.

The company is phasing out that brand because it’s one more brand than the company wants to support, according to an earlier interview with Charles Goldman, who oversees all advisory platforms for Fidelity. See: Fidelity is bidding its HybridOne brand farewell

Overall effort

The new emphasis on building a better integrated platform for hybrid RIAs is part of an overall effort at Schwab to build technology that enables advisors to embrace open architecture – a theme that the company will be talking more about in the near future.

“We’re really embracing the open architecture opportunity in terms of people and money,” Clark says.

Schwab has an opportunity to distinguish itself if indeed it accomplishes that retooling, McGinness says.

Raise the bar

“If Schwab also invests in establishing connections with the major financial planning, CRM and other vendors used by independent advisors, they will raise the bar once again for custodial firms.”

Schwab will focus some of its initial efforts on open architecture at making better connections with turnkey asset management programs, Clark says. He mentioned connections with Fortigent’s unified managed accounts as one example.