Regulatory pressure is driving advisors to consider theattractions of the registered investment advisor or RIA as a business model.

Even though its fate is uncertain, with delay and repeal loomingin the background, the Department of Labor’s fiduciary rule hasbeen pushing advisors to reevaluate their business models and whichproducts they might focus on in the future.

According to the “Cerulli Edge—U.S. Monthly Product Trends Edition,February 2017” report, not only has the rule “acted as acatalyst for advisors, broker/dealers … and asset managers toreexamine their business models, simplify their cost structures,and minimize risk exposure,” it’s also caused “industrystakeholders” to operate “with a heightened sense of regulatoryrisk” and as a result be more likely to be aware of cost andliability.

With advisors becoming more comfortable operating in a fee-basedenvironment, and taking on fiduciary duty, the report adds thatthey could be more likely to consider the RIA channel.

Nearly half of all advisors, it finds—47 percent—believe thatthe RIA business model will become more appealing in the wake ofimplementation of the conflict of interest rule.

Advisors are becoming more interested in lower-cost vehicles,such as ETFs and passive investment products, thanks to thoseproducts’ ability to lower client costs and also relieve concernsabout violating fiduciary duty with unreasonable compensation.

As a result, 45 percent of advisors plan to increase use of ETFsas a result of the rule, and 31 percent of advisors expect to usemore passive investment products.

The rule is also boosting interest in fee-based compensationstructures intended to eliminate conflicts of interest and leveladvisor compensation, with 64 percent of B/D advisors planning tomove more of their business toward fee-based advisory, so thatthey’re in a better position for compliance with the fiduciary ruleif it is indeed implemented.

When it comes to the RIA channel. nearly all independent RIAs(97.8 percent) and hybrid RIAs (88.6 percent) are already operatingwithin a fee-based revenue structure where at least 50 percent oftheir revenue is from advisory fees.

Among all channels, the report finds that independent RIas areusing passive strategies to the greatest degree. On average, RIAsallocate 48 percent of their clients’ portfolios to passiveinvestments, while only 29 percent of all advisors and 23 percentof wirehouse advisors do so.

Wirehouses are already struggling to replace headcount outflowsthrough recruitment from other channels, the report says, andindependent BDs could also find themselves “losing their largest,most valuable teams to the RIA channel because these practicesoften operate fairly autonomously.”

As advisor practices grow and implement more sophisticatedinfrastructure, advisors could find themselves questioning theirneed for BDs and the resulting reduced payout. Advisors expect thistrend to accelerate as a result of regulatory changes.