In Practice February 24, 2011

Schwab Finds Hybrid Practices Growing in Popularity

A report from Charles Schwab evaluates the pros and cons of combining a traditional brokerage business and fee-based advisory business.
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The report, “Understanding the Hybrid Practice – Considerations for Advisors in Transition,” said there are two models for a hybrid practice–the ‘semi-captive’ model, in which an adviser joins a corporate registered investment adviser (RIA) of an independent broker/dealer and the ‘dually registered’ model, in which an adviser starts or joins an independent RIA. The report focuses on trends driving growth in the hybrid market segment, strategic considerations of choosing a hybrid practice model, and the economics of being a hybrid adviser, according to Schwab. 

In 2010, Schwab Advisor Services saw 163 advisory teams transition to independence, representing $12.6 billion in assets under management. A growing number of advisers in transition to the independent RIA model are coming from the independent B/D channel as they seek greater flexibility, the report noted. Schwab saw a 45% increase in the number of teams transitioning to independence from B/D firms in 2010 compared to 2009.

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The report includes interviews from advisers who have transitioned to a hybrid model. Some of their reasons for doing so include:

  • A broader set of offerings for clients with differing needs, such as clients in an asset de-accumulation phase with more need for guaranteed income products
  • An expanded selection of alternative investments, structured products, and private placements
  • Access to different client segments such as corporate retirement plans that need brokerage products
  • Preservation of income streams from legacy brokerage business
  • Flexibility of products and services provided to clients in a rapidly changing industry
  • Ability to grow by attracting other hybrid advisers in transition to join their firm

The report also discusses five key areas of an adviser’s practice that should be considered before making any changes to a business model:

  • Overall business objectives and value proposition – What is the firm’s mission and philosophy and who are the core clients it will serve?
  • Investment philosophy – What kind of investment products does the firm need to provide in order to execute its investment philosophy and serve its clients’ needs?
  • Infrastructure and systems – What are the firm’s needs in terms of systems and technology, such as CRM, performance reporting, asset allocation, rebalancing, trade order management, and data input and reconciliation?
  • Compliance and regulation – Based on the hybrid model the adviser chooses, how will the firm be regulated? Independent RIAs are currently regulated by the Securities and Exchange Commission (SEC) or states, while IBD advisers are currently regulated by FINRA with the SEC and states having some regulatory jurisdiction.
  • Firm economics – What are the adviser’s needs and preferences around equity ownership; income preservation, income mix and income goals; and the level of personal time and effort to meet business goals?

The hybrid report is the latest publication in the Schwab Market Knowledge Tools series, an ongoing program of industry research reports, white papers, and guides.

Diversions February 24, 2011

I’ll Have a Latte, One Sugar, and No Hacker, Please

Open Wi-Fi networks, available at many cafes, airports, and other public places, have become more susceptible to cyber “hijacking” than ever before. 
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Eric Butler was merely trying to prove a point when he created “Firesheep” last year, as he’s told several media outlets. He saw how loosely-guarded many Web sites were, and how easy it would be for a hacker to do some damage to an individual’s account on any number of profile-driven sites (think Facebook, Twitter, Amazon, etc.). He created this easy-to-use hacker program to simply encourage Web sites to beef up their security.

In the meantime, more than a million people have downloaded the program, according to The New York Times.

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So what is it, exactly? Firesheep is a program that can be downloaded for free and “attached” to Mozilla Firefox, a popular Internet browser.  According to Steven Hoffer, a contributor to AOL News: “Firesheep works by collecting information from Internet “cookies” — the temporary Internet file containing your username and password that a website like Facebook or Twitter will send back to a computer so users can enjoy the Web site without logging in each time they click on a new a page. Firesheep simply sends a notification each time a new user name and password is available, and entering their Facebook account is just a double-click away.”

It may sound complicated for some–but it is alarmingly simple for many.

Butler has stood by his invention. “Websites have a responsibility to protect the people who depend on their services,” he wrote in his blog. “They’ve been ignoring this responsibility for too long, and it’s time for everyone to demand a more secure Web. My hope is that Firesheep will help the users win.”

And there is a solution. Web sites, specifically account-driven sites that require usernames and passwords, need to be designed using “https” code instead of the standard “http.” This design adds layers of encryption to all the pages on a site, beyond the log-in page (which is usually the only part of a site to be encrypted). A site that has “https” code throughout its pages will have a URL address that starts with https:// instead of http://.   

Some sites are making the changes, but not all, and not fast enough. Gmail, Google’s e-mail service, has “https” code from the log-in page to any other part of the site. Facebook, on the other hand, is “rolling out” its “https” code in phases, according to PCWorld. So far, users have to opt-in to having the more secure code activated when using a public Wi-Fi network. Some worry that using “https” code throughout a Web site would slow it down too noticeably.

Whether you see an “https” or “http” URL address on the site you’re using–open Wi-Fi networks are no longer as convenient–or safe–as the public hoped they would be.

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