Pershing Publishes Study on Hybrid Platforms

“The Economics of Constructing a Hybrid Platform,” developed with Advisor Growth Strategies, LLC, offers broker/dealers (B/Ds) guidance for creating a tactical plan for developing a hybrid platform. The study also looks at the growing trend of advisers to adopt a hybrid business model.

Pershing included case studies of three B/Ds—American Portfolios Financial Services, Summit Brokerage Services, Inc., and Capital Analysts Incorporated—to illustrate different and successful approaches to building a hybrid platform.The study also warns that independent B/Ds who choose to ignore the trend towards advisory and hybrid models may see their growth marginalized.

The study makes the following suggestions:

B/Ds need to develop plans that suit their specific firms. The hybrid model takes a holistic approach to wealth management that leverages solutions from both sides of the business. Firms must understand the needs of the investment professionals they want to service in the future and develop a unique value proposition to attract and retain their business. B/Ds who do not carefully evaluate the hybrid opportunity run the risk of being at a competitive and economic disadvantage.

Compliance oversight must be factored into selection of a hybrid model. B/Ds have oversight responsibility for the actions of an independent registered investment adviser (RIA), even though they do not sponsor an advisory program or may not act as a custodian. By integrating hybrid business into a single technology platform, firms can create efficiencies to more easily manage compliance and simplify oversight.

Efficient, integrated technology is critical to the success of a hybrid model: Entrepreneurial investment professionals will likely prefer their own customized technology and regard the B/Ds’ platform as too homogenous. B/Ds need flexible, open architecture technology platforms with powerful capabilities that will be attractive to advisors and enable firms to integrate easily. A fully integrated platform can lower expenses and create new revenue streams, while simplifying oversight responsibility for all parties.

Varying hybrid models impact economics differently: The risk of introducing a different hybrid model may impact revenue streams with limited opportunity to make up the difference without lowering payouts on the commission business. At minimum, by allowing an investment professional to use his or her own RIA, B/Ds lose the ability to charge a program fee and may be under pressure to raise payouts on the advisory side of their business since the investment professionals are taking on the responsibility of running their own programs.

Hybrid models bring new expense considerations: Revenue is only one side of the equation when thinking through a hybrid platform. There will be increased compliance costs as the B/D is required to monitor the independent RIA, which likely will not be consistent with the firm’s corporate RIA. Investment professionals with their own RIA may also have their own internal technology, policies and procedures that are inconsistent with the broker-dealer.As the number of dually-registered advisers grows, an increased expense burden for the B/D can result.