What is a Hybrid Advisor?
Traditionally, there’s been a big difference between a broker-dealer and a registered investment advisor. Anyone with the title of a registered investment advisor (sometimes called a fee-only advisor) has a fiduciary duty to their clients. Fiduciary duty means that the advisor is required to act in the best interest of the parties they’re serving. Broker-dealers are held to a lower standard. They’re required to present clients with suitable products, but that isn’t the same as presenting the best possible option. This standard can mean that it’s okay for them to recommend the best product for them, not their clients. Broker-dealers earn their money based on commissions. They may put clients in investments that pay them better as long as it is considered “suitable” for the client.
Today, these distinctions are collapsing. Something called a hybrid registered investment advisor has emerged. These advisors can also be called dual-registered or fee-based advisors. A hybrid advisor is meant to represent both the firm that they work for and their clients. The hybrid distinction can make a big difference to someone’s earning potential. Hybrid registered investment advisors can earn money from commissions from the investment products they use in addition to earning money from fees paid by clients.
While fee-based services may sound the same as fee-only services – because a fee is charged – they are not the same service. Hybrid “advisors” typically charge a fee based on assets under management (AUM), but then also receive other forms of compensation from the sale of investment products to you. In fact, many fee-based “advisors” went to a fee-type model for their business as a way to increase their compensation. Although investment professionals that work on a fee-based basis frequently charge lower fees for their work than a fee-only advisor, don’t be deceived: Their total compensation is often much more than that of a fee-only advisor due to other compensation they receive from selling investments to you.
Savvy clients have often looked for registered investment advisors instead of broker-dealers because they want their interests to be placed first. The new hybrid distinction can make it a bit harder for people to find the right advisory firm for them. Communication and careful reading of all disclosures are two things that have become much more important than ever before. Also, don’t be afraid to ask questions of any financial advisor. Ask them if they would sign a Fiduciary Oath. You can tell a lot by their response. If they are eager or willing to sign it, you can feel more comfortable than if they say no or try to deflect the question.