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Two IBDs, big changes: How Avantax and Waddell & Reed are taking similar steps

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One independent broker-dealer undergoing big changes is already showing strong growth, while another says it has positioned itself to expand in the future.

After Blucora’s acquisition of 1st Global last year and a series of new relationships with custodians and other vendors, the IBD formerly known as HD Vest boosted its annual revenue by more than a third to $508 million in 2019. The Irving, Texas-based parent of Avantax Wealth Management disclosed its fourth-quarter earnings Feb. 19.

In contrast, Overland Park, Kansas-based Waddell & Reed — which reported its fourth-quarter earnings earlier in the month — brought in 1% less wealth management underwriting and distribution revenue last year to drop to $464.6 million. Waddell & Reed’s IBD has left its legacy model of serving as the distribution channel for the firm’s affiliated fund lineup.

Although Avantax’s own internal evolution revolves around the 1st Global deal and the pending acquisition of an employee-advisor RIA for $160 million, it and Wadell & Reed share falling advisor headcounts, rising productivity levels and new fintech investments in common.

Waddell & Reed sees rosier returns ahead, CEO Philip Sanders said on a call with analysts.

“With the transformation of our wealth manager, we are now in a position to grow that business for the first time in years,” Sanders said, according to a transcript by the investing website Seeking Alpha. He added that a “thriving” IBD and an “institutional-caliber asset manager” should add up to “a more stable operating model with better long-term growth prospects.”

Avantax’s prospects climbed after the firm merged two major tax-focused IBDs last year and agreed last month to purchase HK Financial Services. The incoming firm’s 27 planning consultant advisors and roughly 75 other employees provide outsourced wealth management services to accounting practices, along with 401(k) recordkeeping and administration.

Only a small number of HK Financial’s advisors have securities registrations that will transfer to Avantax from broker-dealer ProEquities after the expected closure in the first quarter, according to Blucora. Avantax’s headcount has been falling in recent years under modest productivity requirements.

The advisor influx from 1st Global pushed up the number of Avantax advisors by a net 672 representatives to 4,225 in the second quarter of 2019. Since then, headcount has tapered off by 241 advisors, falling to 3,984 at the end of the year.

On an earnings call, analysts asked Blucora Chief Business Operations and Development Officer Todd Mackay about the figures.

Headcount numbers are “in line and ahead of what we mapped out” when the firm made the 1st Global deal, Mackay said. He declined to predict future headcounts, saying the number “always flows in and out” based on season, recruiting and tax pros’ shifts to wealth management.

Blucora CEO Chris Walters, in his first call since assuming the role last month, noted that 60 new advisors affiliated with Avantax in the fourth quarter. Walters also said that after HK Financial’s $4.5 billion in client assets migrates to Avantax’s platforms, the wealth management unit’s total count will have jumped by nearly 80% from the end of 2018 to more than $75 billion.

Some 100 ex-1st Global advisors are also part of the 900 Avantax reps already using the tax-smart investing software launched in 2019. The automated platform includes capital gains analysis and tax-loss harvesting. A third module for Social Security planning is in beta testing.

The firm found $6.5 million in cost savings by combining HD Vest and 1st Global, which is double what it expected by the end of the year, according to Blucora’s earnings.

Avantax has adopted 1st Global’s approach of providing “segmented groups of advisors with enhanced service and operational support through small dedicated teams,” Walters said.

“We also rolled out a robust action plan to enhance our operations and service metrics to improve the advisor experience,” he said, noting successes in integrations across its platforms. “The initiative has been well received by advisors,” Walters added.

For 2019, a year marked by the 1st Global deal, Blucora’s wealth management unit earned $68.3 million in income on $508 million in revenue — 29% above 2018. Average 12-month, advisor-driven revenue also grew by more than 20% from the previous year to $111,300.

Like Blucora moving to a new building in Coppell, Texas, from east and west campuses in the DFW Metroplex, Waddell & Reed is relocating its headquarters this year to a new office in Downtown Kansas City, Missouri, from the Kansas suburbs. In an additional similarity with Blucora, it’s enforcing new minimum advisor productivity levels that have trimmed its headcount.

In response to an analyst’s questions about potential M&A deals for the wealth management business, Waddell & Reed CFO Ben Clouse said on the call that his firm, too, is “certainly looking in that space” for opportunities to drive scale.

The firm’s advisor and licensed associate headcount fell by 5% year-over-year in the fourth quarter to 1,327 reps. The force has “largely” stabilized, CEO Sanders said in prepared remarks. He added that the firm has “boosted our recruiting efforts nationally and has an expanded national recruiting team in place.”

Shawn Mihal, head of the IBD, later elaborated after an analyst’s question.

“We're putting more of an emphasis on recruiting with increasing the recruiting activities through that national market that we've created as well as through the comprehensive packages, which we feel are very competitive for attracting advisors to Waddell & Reed,” Mihal said. “We believe, with that happening, we will start to see some shifts in 2020 with increasing the headcount.”

In the tech realm, Sanders described the firm’s progress on its business administration software for advisors. In January, the firm started a pilot for Salesforce-integrated data to go along with the bulked-up reporting, analytics and simplified business processing it launched last year. Waddell & Reed also ramped up a new advisor desktop and expanded the selection of outside funds on its platform.

The IBD’s assets under administration grew by 17% year-over-year in the fourth quarter to $60.1 billion, including a 27% bump in advisory AUM to $26.9 billion. Average 12-month revenue per advisor soared by 28% from the year-ago period to $438,000. The firm doesn’t break out specific IBD earnings, and Clouse declined to say whether the unit is profitable.

The parent firm’s net income for the year tumbled by 37% to $115 million. Waddell & Reed recorded $24 million in non-cash asset impairment charges relating to the headquarters move and eliminating its internal air travel, as well as correcting for a new pension liability valuation. The firm is receiving $91 million worth of local property and earnings tax abatements from Kansas City and incentives from Missouri to move from Kansas.

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