RIA model more appealing to advisors post-DOL fiduciary rule

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

Even though its fate is uncertain, with delay and repeal looming in the background, the Department of Labor’s fiduciary rule has been pushing advisors to reevaluate their business models and which products 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 a catalyst for advisors, broker/dealers … and asset managers to reexamine their business models, simplify their cost structures, and minimize risk exposure,” it’s also caused “industry stakeholders” to operate “with a heightened sense of regulatory risk” and as a result be more likely to be aware of cost and liability.

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

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

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

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

The rule is also boosting interest in fee-based compensation structures intended to eliminate conflicts of interest and level advisor compensation, with 64 percent of B/D advisors planning to move more of their business toward fee-based advisory, so that they’re in a better position for compliance with the fiduciary rule if 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 operating within a fee-based revenue structure where at least 50 percent of their revenue is from advisory fees.

Among all channels, the report finds that independent RIas are using passive strategies to the greatest degree. On average, RIAs allocate 48 percent of their clients’ portfolios to passive investments, while only 29 percent of all advisors and 23 percent of wirehouse advisors do so.

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

As advisor practices grow and implement more sophisticated infrastructure, advisors could find themselves questioning their need for BDs and the resulting reduced payout. Advisors expect this trend to accelerate as a result of regulatory changes.