Stockbrokers are salespeople, and investment advisors are fiduciaries—and never the twain shall meet.
Actually, they have met, and the result is the so-called hybrid advisor.
This hybrid model has several advantages for both the investor and the advisor.
Investment professionals registered as brokers with the Financial Industry Regulatory Authority and as investment advisors with the Securities and Exchange Commission or a state securities regulator are the fastest-growing breed of financial advisors in the industry, according to data from research firm Cerulli Associates.
Hybrid advisors—Cerulli calls them "dually registered advisors"—wear two hats. They operate as investment advisors, typically charging fees for some clients, and as securities brokers, typically charging commissions for others.
As registered investment advisors, they have a fiduciary duty to always act in the best interests of their clients. As brokers, they only have to make sure they recommend investments that are "suitable" for clients.
By Cerulli's latest count, at the end of 2013, there were 24,825 such advisors managing more than $1.1 trillion in assets. The annual growth in assets managed by hybrids between 2008 and 2013 was 14.4 percent, just under standalone RIAs. Headcount over that period has grown by 9 percent annually—making it the fastest-growing segment of the market by far.
"The RIA and dually registered advisor channels are the only ones that had a positive annual growth rate in advisor numbers over the last five years," said Kenton Shirk, associate director at Cerulli Associates. "The growth is mostly from attracting advisors out of other channels."
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Shirk expects that growth rates in both channels could continue rising as advisors migrate from brokerage service models to fee-based fiduciary relationships.
From an advisor perspective, the hybrid model has several advantages. For one, it allows them to continue serving clients who prefer paying commissions rather than fees, and to continue using products that they're familiar with. It also doesn't force advisors going the independent RIA route to walk away from commission business that may be a significant part of their revenue.
There can be a big penalty for advisors moving to a standalone RIA model, according to some industry experts. To that point, if an advisor drops their broker-dealer status, they could be walking away from a pile of money in trailing commissions.
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Hybrid advisors can also still use a broker-dealer to help with the administration and operations of their practices. For advisors coming out of brokerage environments, that can be a very big deal.
"A lot of advisors want to be independent, but they don't want to run their own businesses," said Peter Dorsey, a managing director with TD Ameritrade Institutional, which serves as custodian for growing numbers of hybrid advisors. "The hybrid model makes the transition to independence easier."
From the investors' point of view, hybrid advisors arguably provide more options. They can offer a fee-based financial-planning relationship but still have access to other commission-based investments.
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It's been widely discussed that the product solutions available to RIAs are not as robust as that of broker-dealers. Consumers get good advice from RIAs, but there can be limitations on the implementation side, agree industry experts.
The hybrid model was initially seen as a way station for brokers on the path to becoming a fee-based RIA, but many hybrid advisors now appear happy where they are. "It remains to be seen what these advisors will decide to do, but we see evidence of permanence to the hybrid model," said Shirk at Cerulli Associates.
He said that while most hybrids favor holding assets in the RIA side of their business, only about a quarter of those surveyed said they planned to drop their affiliation with a broker-dealer.
That may change as their RIA practices become larger and as new investment products are created for fee-based advisory platforms.
Purists on the RIA side of the debate, however, see the hybrid model as a stepping stone for the industry on its way to fiduciary responsibility. "The industry is in transition from people selling stuff to providing advice," said Stephen Winks, chairman of PCT Publishing and founder of the Society of Senior Consultants.
"The hybrid advisor is an intermediate state and a temporary phenomenon. Eventually, advice and fiduciary duty will prevail," he said.
Indeed, regulation may largely determine how the industry evolves.
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New fiduciary regulations could pose problems for hybrid advisors and their clients.
The recently issued proposal from the Department of Labor for regulating advisors to retirement accounts is "unworkable," according to broker-dealer industry groups.
While commission compensation and fiduciary status don't have to be mutually exclusive, there's a good chance that brokers and hybrid advisors will have to make changes to their business practices—particularly if the SEC creates a uniform fiduciary standard for all advisors to retail investors.
While the flexibility that RIAs get from an affiliation with a broker-dealer arguably gives investors more and better options, wearing two hats in an industry converging around the notion of fiduciary responsibility may be untenable in the long run.
For the time being, that probably won't stop the ranks of hybrid advisors from continuing to grow.
—By Andrew Osterland, special to CNBC.com
