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The Financial Industry Regulatory Authority plans to issue a proposal that would free broker-dealers from keeping track and maintaining liability for registered investment advisor business — a huge win for hybrid BDs — but they’d also be forced to take a hit to fee revenues.

FINRA’s Board approved at its December meeting the publication of a regulatory notice seeking comment on changes to its rule on outside business activities that seeks to streamline BDs’ obligations by “generally excluding from FINRA’s rule on a registered person’s personal investments and work performed on behalf of a firm’s affiliate,” and eliminate supervisory obligations for non-broker-dealer outside activities, including investment advisory activities at an unaffiliated third-party advisor.

No date for release of the regulatory notice has been announced by FINRA.

FINRA’s plan is a “good-news, bad-news story,” said Jon Henschen of BD recruiting firm Henchen & Associates. The good part is that broker-dealers “will no longer have to track and most importantly have liability for RIA business.”

The bad news: “The motive for taking a percentage payout on the RIAs advisory business will go away, leaving them only a profit center from commissions and trail business if the advisory assets are held away” at firms like TD Ameritrade and Schwab.

Henschen explained that numerous hybrid firms “take a payout haircut anywhere from grid (90%) to perhaps 95% to 97% for supervision,” but FINRA’s plan would require them to take no haircut so they would only make revenue on commission product.

“I refer to this as the crumbs model,” Henschen said, “because oftentimes advisors with this model have $100 million to $300 million of advisory revenue and perhaps $100,000 to $300,000 of commission and trails so the BD would be making money only on the crumbs part of the advisors overall revenue (commission and trail).”

The handful of broker-dealers “that currently take no haircut on RIA business would no longer have a niche that is unique that sets them apart from the crowd,” he added.

Broker-dealers like Commonwealth and Raymond James allow advisors to have their own RIA, “but they must custody those advisory assets via the BDs’ clearing arrangement and are not allowed to hold those assets at outside custodians like Schwab or TD Ameritrade,” Henschen said.

“Will they be required to now pay 100% payout to these outside RIAs’ advisors on their advisory portion but still earn revenue from administration fee markups, third-party money manager markups and ticket charge markups as well as other miscellaneous brokerage account fees?”

Advisors that have their own RIA “are already under the fiduciary standard and are supervised by the state or the SEC, so having a broker-dealer needing to supervise them as well was redundant and also made the broker-dealer a deep-pocket target for frivolous litigation,” Henschen continued.

Henschen said that he’s gotten numerous broker-dealer complaints about “compliance problems that happened on the RIA side[and] fell to the broker-dealer — resulting in large fines.”

Companies like TD, Schwab & IWS have enjoyed broker-dealers paying these litigation fines rather than them, so this change would remove broker-dealers’ deep-pocket fall-guy status.