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What swayed me to the hybrid cause after an early indoctrination as a 'pure RIA' disciple

The notion that it's just a layover on the way to to a more exalted state of securities-license-dumping, fee-only purity should be reexamined

Thursday, December 13, 2012 – 4:29 AM by Guest Columnist Abby Salameh
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Abby Salameh: I believed that advisors should ... give up their licenses if they wanted to be true to the cause.


Eric

Eric

December 13, 2012 — 6:09 PM

We have met and I was an attendee at one of those going independent workshops.

You mention that you are not sure why pure is often used when referring to RIA’s. The reason “pure” is used is because of the hybrid model. It is used to identify advisors that operate as an RIA 100% of the time as opposed to hybrid advisors that may be acting as an IAR or as a Registered Rep.

Your premise that in order to be a one-stop shop, a firm needs to be a hybrid, is false. Your specific example regarding insurance implies that one cannot give insurance advice unless they are in a hybrid model. This again is false. Many “pure” RIA’s have licensed insured professionals on staff that consult with the client on insurance needs, design the policy, and select the carrier. They may then choose to use an unaffiliated insurance agency to “write” the policy but at this point this is an administrative task. The value added service has been provided by the “pure” RIA. The advantage for the client in this model is that the advice to the client is transparent and minimizes the conflicts of interest that insurance policy commissions can introduce.

Mark

Mark

December 13, 2012 — 7:36 PM

Abby 's perspective and conclusion is based on her experience. Her comments and perspective today are not surprising given her current position at NFP. Abby’s perspective is naive because she has never personally served clients as an investment advisor. She has worked in the industry, but not as an advisor on the front lines serving clients. She is entitled to her opinon, but she has never found herself confronted with the psychological nuances associated with earning a living by selling product for a commission versus charging a fee for service provided. The fee-only model removes the tensions associated with selling product to your clients and earning in many cases substantial income for little effort (let alone with whether the product actually made sense for the client). That’s not to say there are no conflicts for the fee-only advisor, ie., pay off mortgage versus adding money to an investment account for which the advisor charges an annual fee. It’s just that commissioned products are filled with layers of commissions, fee, charges, etc., and ETFs and no-load funds are not. Clearly, the client is better served when there can be no question about whether the investment or insurance recommendation is untainted by a commision to the party making the SALE.

chad.snyder@ebix.com

chad.snyder@ebix.com

December 14, 2012 — 12:45 AM

I find Abby’s argument compelling, but I’m just a CRM salesman, not someone that has ever been an advisor. Nevertheless, I speak with RIAs everyday that used to sell commissioned products, but now only engage in fee-based business, and they sound very much like Mark and Eric — they don’t to want to ever go back to commissions. They have found nirvana.

But I also speak to RIAs that are 80-90 percent fee based, but that still like to offer certain commission-based products. They seem to have found a sweet spot that works for them that will forever keep them in both worlds, although mostly in the fee-world.

Ultimately, it seems to me that a dynamic field like the RIA segment is not going to be defined by any one model. Recently, John Furey told RIAbiz of the “complacency” in the RIA space. I don’t know if that’s the right description, but I do believe that technology, changing demographics, and many other things John suggested, for instance, are quickly resulting in new models in the RIA space and redefining the entire financial landscape.

Consequently, I bet for some, the hybrid model will work best, while for others the pure RIA will always reign supreme. Overall; however, I think the growth of fee-based services is the best thing to happen to the financial services industry in a long time and hybrid advisors are helping with that growth. So I say kudos to both, even if one isn’t as pure as the other.

Kevin

Kevin

December 19, 2012 — 1:39 PM

Ms. Salameh seems to confuse fee-only and fee-based by using them interchangeably in the article. By being a fee-based advisor, she was never “pure” in the first place. Now, her hybrid approach is a second step away from working in the clients’ best interests. Her comments feel like justifications for keeping a client’s money (and commissions) in-house under all circumstances.

Pat

Pat

December 29, 2012 — 2:28 PM

Talking her book. Fee based IS NOT THE SAME THING AS fee only. Helloooooo.

Hybrid is not pure by definition! What is her educational and business experience to present this as fact? Its ludicrous and everyone has been very polite in responding….

Try being the client ( me!) and comprehending the goobledy gook ADV of one of those hybrid firms. Try honestly telling your client why you chose the Met Life Annuity vs the Vanguard/ Jefferson national one available to them for 200 bp less. Try telling them the truth about what you were paid on the Whole Life you sold them when they really ought to have bought term. Is Ms Salemah aware that the UK has banned commissioned sales of retail investment products? I am tired of hearing how the devoted practitioner ( a CFP even as practice standards allow suitable product ) stands above the sway of commissions. The reality is conflicts of interest are HUGE in a hybrid and the disclosures are inadequate in that consumers cannot comprehend them.

This business is based on TRUST. Trust is founded in transparency and the hybrid model is opaque and conflicted by definition. Yes, it comes in varying degrees, some independent firms at least are not hawking their own platforms funds but there remain serious issues with this model.

The world is shifting and consumers are younger and savvier, they will treat investment products as any other and expect to know PRICE. More than that, in our new world of compressed returns we owe clients the best returns available which means lowest embedded fees, revenue sharing, expenses, soft dollars, turnover etc. The exponential drag of excess cost is now a real threat to retirement success and in the hybrid model, unfortunately, the practitioner is not disincentived to minimize these embedded costs. The “one stop shop” is not pure, but rather its bottom line depends on cross selling commissioned product. This is NOT the final destination. UGH!

PS I love white papers by people who work within industry about why their model is the best. Talk about conflicts of interest.

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