The number of hybrid financial advisory firms--those that charge clients fees and commissions--is expected to continue growing faster than any other kind of advisory firm, according to recent reports.

Since the financial crisis, more commission-only brokers have been converting their practices to those that charge a combination of fees and commissions. More than half the financial advisors who became independent advisors with Schwab Advisor Services in 2009 and 2010 set up a hybrid practice. "An increasing number of advisors transitioning to independence are selecting a hybrid practice model for their business," said Nick Georgis, Schwab Advisor Services vice president. Advisors are choosing a hybrid model because it offers more sources of revenue, as well as more products and services that advisors can offer clients, he said.

"And we see this trend gaining momentum with the number of transitioning advisors choosing the hybrid model increasing about 10% year over year," Georgis added.

Advisors getting paid by commissions but who also want to offer fee services usually consider two hybrid business models: the semi-captive model, in which an advisor becomes an investment advisory representative (IAR) of a corporate RIA of an independent broker-dealer, and the dually registered model, in which an advisor starts or joins an independent RIA firm. Dually registered advisors are registered with both the Financial Industry Regulatory Authority (Finra) as registered reps and with the SEC or states as RIAs.

"Most independent broker-dealers have taken proactive measures to attract the fastest-growing segment in advisory services--the dually registered advisor," says a new Pershing report, The Economics of Constructing a Hybrid Platform.

According to Cerulli Associates, from 2004 to 2009, the number of dually registered advisors--people registered with the Financial Industry Regulatory Authority (Finra) as registered reps and with the SEC or states as RIAs--swelled from 7,120 advisors to 14,160. This nearly 100% increase represented the fastest-growing segment in the advisor industry, says Pershing. And the net headcount at dually registered hybrid firms grew at a compound annual growth rate of 14.7%, nearly three times that of firms with only registered investment advisors (RIAs).

During the same period, headcount in nearly all broker-dealer channels experienced flat to negative growth. The Cerulli report also indicates that this growth is expected to continue for the next several years. Between 2009 and 2014, market share based on advisor headcount is expected to increase at firms with dually registered advisors and firms with only registered investment advisors (RIAs) at the expense of other channels, such as wirehouses, IBDs and insurance and bank broker dealers. Headcount market share at firms with dually registered advisors is expected to increase from 4.2% in 2009 to 7.7% in 2014. During the same period, headcount market share at RIA-only firms is expected to climb from 5.9% to 10.1%. In contrast, other channels are expected to see flat to negative growth in share.

Schwab released a report yesterday, Understanding the Hybrid Practice-Considerations for Advisors in Transition, that outlines the decisions advisors face when evaluating a hybrid practice model.

In 2010, Schwab Advisor Services saw 163 advisory teams transition to independence, representing $12.6 billion is assets under management. Approximately 20% of Schwab's existing RIA client base holds a dual registration.

Overall, the advisors Schwab interviewed for the Understanding the Hybrid Practice report cited multiple reasons for choosing a hybrid practice model, including:

* 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 advisors in transition to join their firm.