The hybrid advisor has been hailed by some as a hero who brings investment advice to small investors. From this perspective, it's the best model for a vast population of clients and prospects without a lot of assets who are starved for financial help nonetheless.

Independent RIAs often have steep account minimums that raise barriers and shut smaller clients out. Giant wirehouses also have actively discouraged brokers from bringing small clients.

Into the breach have stepped advisors regulated both as fiduciaries with the SEC (or state regulators) and as advisors with the Financial Industry Regulatory Authority who, according to whatever regulatory umbrella they are working under, can help with both fiduciary advice or “suitable” products. This approach has been touted as one of the best ways to serve those with fewer assets and get them into vehicles they might need, such as insurance—the advisor’s commission notwithstanding. 

But a recent research paper has gone after the dual advisor-hybrid model, taking it to task for a lot of the same fund revenue sharing activity and other conflicts that have plagued the brokerage world.

The paper is called "The Worst of Both Worlds?" Its author, Nicole M. Boyson, a professor of finance at Northeastern University in Boston, argues dually registered advisors end up charging clients more for their help and run into conflicts of interest more often than mere RIAs do.

Moreover, Boyson contends the hybrid approach ends up costing both wealthy clients and retail investors more in fees: High-net-worth clients of hybrid advisors end up paying 1.4% of assets while they pay only 1% to independent RIAs, according to her research. It’s worse for ordinary retail clients: Dual-registered advisors charge them 2.2% of assets, compared with 1.2% of assets charged by independent RIAs, she argues. The conflicts often arise when dual-registrants choose funds from families that have revenue-sharing arrangements.

“Retail fiduciary clients of dual registrants pay higher fees—without an increase in financial planning services—than either dual registrant brokerage clients or clients of independent RIAs,” writes Boyson. “Dual registrants frequently violate regulatory standards. [And they] invest fiduciary client assets in institutional share classes of the same revenue-sharing mutual fund portfolios they offer their brokerage clients.”

Boyson points to inherent conflicts with hybrid advisors who accept revenue sharing arrangements with mutual fund companies or work with brokerage firms that do. While the studies she cites point to conflicts in the brokerage industry, she says that dual-registered advisors suffer from the same problems.

Revenue sharing harms investor welfare, she says. “My result—that revenue sharing funds have worse performance and that revenue sharing advisers charge higher fees—supports this prediction,” she writes. She also says that revenue sharing arrangements push advisors into aggressive marketing so that they can increase the AUM from unsophisticated investors.

“My findings [are] that revenues and AUM are highest for dual registrants receiving revenue sharing payments, and that dual registrants that accept revenue sharing are more likely to advise less sophisticated retail clients provide empirical support,” she writes.

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