Boyson's report doesn't address in detail the revenue sharing arrangements between big custodians utlilized by RIAs and mutual fund complexes, arrangements that offer the fund companies preferred placement on their platforms. These deals often include no transaction fees in return for revenue sharing arrangements.
Some giant fund companies like Vanguard have refused to share revenues in order to get preferential shelf space on these platforms. Consquently, both retail and investors and clients of RIAs who choose funds that aren't on the platform are forced to pay a one-time transaction fee. Over time, the cost to the client, especially affluent clients purchasing institutional shares, is lower.
Boyson puts the hybrid model in the context of a successful lawsuit by the Financial Planning Association (FPA) against the SEC to kill the so-called "Merrill Lynch rule," which gave broker-dealers a way to charge asset-based fees without registering as investment advisors. After that landmark case, she writes, brokerages moved their fee-based clients to subsidiaries. Yet despite the shift, the “long-standing relationships between mutual fund families and brokers have survived the transformation of brokers to RIAs.”
“For example,” she writes, “a dual-registered advisor might sell the Class A share of the Oppenheimer Discovery Fund, which pays a 5.50% onetime commission, to brokerage clients, but offer the commission-free Class R5 share of this fund to fee-based RIA clients. These two share classes (A and R5) have different commission structures and eligibility requirements, but have the exact same underlying portfolio assets and manager.”
Boyson’s 65-page probe lands at a time when the hybrid advice business model enjoys increasing popularity. Cerulli Associates last year said the hybrid RIA channel had more than doubled to 8.8% of the entire head count from 4.1% over the past decade. Boyson, using data from the SEC’s Investment Adviser Public Disclosure database, says that regulatory AUM for dual registrants grew from $2.5 trillion to $6.3 trillion from 2003 to 2016 and now accounts for 81% of all regulatory assets in the RIA space.
What About Flexibility?
The paper is going to raise the ire of dual advisors, naturally, who say that their flexibility to either charge on small trades or charge a fee for assets gives them flexibility to do what the clients need. Most clients don’t have $1 million to get started with decent financial advice.
The big broker-dealers view the flexibility as being among their selling points for recruiting. Raymond James has been wooing hybrids, with declining affiliation fees for those advisors who bring over more client AUM. LPL, a notoriously aggressive recruiter, has been offering incentives to have firms join its hybrid OSJs and has noted in the past that hybrid advisors have become a grow part of its advisor infantry.
Several year ago, both LPL and Raymond James also established platforms for fee-only RIAs and they are currently expanding services for these advisors. This hasforced other smallers independent broker-dealers to follow suit.
“In order to execute on a financial plan, clients need more than just investments,” said Benjamin Harrison, a managing director at BNY Mellon Pershing, which offers business products and guidance to dual registrants as well as a custody platform. “There is an insurance component. They could desire a simple bond ladder that may be more efficient in a brokerage account, or [clients] may want access to 529 plans. Some of this may be more easily accomplished in a hybrid or [dually] registered environment.”