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Waddell & Reed IBD advisory assets rise in push toward open architecture

Waddell & Reed Financial’s broker-dealer boosted its advisory programs under a continuing overhaul, but its proprietary fund products still make up around 75% of its assets.

The suburban Kansas City company plans is rolling out new advisory offerings this year and in 2019. Shawn Mihal, president of its IBD, expects some reduction in the proprietary mix under the firm's ongoing evolution, he said on a call with analysts after Waddell & Reed announced third-quarter earnings.

Waddell & Reed head count

The No. 13 IBD lost three teams with $680 million in combined client assets to rivals in one August week, but new minimum production levels under its multi-year reorganization have caused the bulk of its head count reduction. The number of advisors has fallen by more than a quarter year-over-year to 1,074.

Citing the dominance of the affiliated funds, higher “but necessary” technology spending and other factors, William Blair analyst Chris Shutler said in a note that the firm is “still very much in turnaround mode.” Its net income dropped 14% year-over-year to $46.3 million but hit analysts’ expectations.

Slashing up to $40 million from yearly expenses and evolving the IBD represent major parts of the restructuring efforts. Average 12-month trailing revenue per advisor has soared by 46% year-over-year to $350,000, and the IBD’s advisory assets under management have jumped 14% to $23.7 billion.

Outflows from the company’s legacy mutual fund products into a new advisory offering launched with unaffiliated funds in May 2017 have reached $1.5 billion, according to Mihal. The new offering has amassed $4 billion in total AUM — and Mihal says the firm will roll out another advisory product next year.

The IBD has hired three Lean Six Sigma certificants to design the IBD’s business processes and lead its tech implementation, Mihal noted. The team will also select a vendor by the end of the year to develop new business administration software for advisors.

Thirteen of the top 25 companies generated double-digit growth in 2017 as rivals close in on the perennial No. 1 firm.
June 4

Waddell & Reed has “invested substantially into overhauling our technology” with an eye toward improving the tech stack it provides to advisors, Mihal said. The firm’s tech with clearing partner Pershing differ from self-clearing firms like LPL Financial and Ameriprise, he noted.

The IBD understands it’s a competitive recruiting environment, Mihal said, according to a transcript on the investment website Seeking Alpha. “There are some firms that are putting up some sizable dollar amounts to move your practice to one firm or another, so we are certainly combating those headwinds as well,” he said.

The company doesn’t break out revenue for the IBD, but underwriting and distribution fees at the parent company expanded 9% above the year-ago period to $140.3 million on the IBD’s rising asset-based advisory fees. The fee-based revenue has grown by 14% over the same span, to $69.5 million.

A little more than 100 advisors are struggling to meet the firm’s productivity quota, based on Mihal’s discussion of the minimums. The company has set its required floor for advisors at $125,000 — but it allows them five years of service time to reach that level.

The company expects a “continuing leveling off with respect to the overall decline in number of advisors” after the departure of the remaining low producers, Mihal says. He acknowledged the three exits by major teams, but he says the firm is focused on retaining top advisors and recruiting new ones.

“As we're continuing to make investments back into the broker-dealer, the recruiting initiatives do pick up as we continue to press forward,” he said. The IBD plans to move toward “recruiting experienced high-performing advisors that align more to the service model that we've constructed here inside the broker-dealer.”

The advisory product coming in early 2019 could help on that front. The offering will consist of multiple portfolios of mutual funds and ETFs from three different outside managers, Mihal said in prepared remarks. It will also include several outsourced allocation options.

Waddell & Reed’s IBD made further additions to its outside product partners in the third quarter, bringing two new fund families to its platforms and more selections from an existing partner. An independent financial consultant is reviewing all funds with an eye toward more choices, Mihal says.

“Our ongoing goal is to offer advisors access to advisory products that allow them to more effectively service every type of client, from early accumulators all the way through to high-net-worth individuals,” he said.

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