MFMN: Waddell & Reed has two different fund groups, the Waddell & Reed Advisors Group of Funds and the W&R Funds. What is the difference between the two groups?
Butch: The Waddell & Reed Advisors Funds are our proprietary fund family. This group of funds is sold almost exclusively through our own proprietary network of 3,000 Waddell & Reed advisers, who predominantly sell Waddell & Reed products.
The W&R Funds were originally created in 1992 as a simple way to offer B-shares. They were then named the "United Funds." We have since renamed them and offer them through non-proprietary intermediaries and third-party channels.
Although there are differences in individual holdings and exposures between the two fund groups, the Advisor Funds group is larger and broader, and the W&R funds are basically clones of some of the original funds. The W&R funds don't have the totalities of strategies that the broader Advisor group has.
MFMN: What makes Waddell & Reed unique?
Butch: We have built our business on proprietary advisers and proprietary products. We are very unusual in that we have our own advisers who sell significant amounts of our products.
MFMN: What's the benefit of being so proprietary?
Butch: It gives our advisers an exclusive relationship with their clients. But it's really more than a marketing story. We support our advisers with products and economic and market commentary. Most know our fund managers personally.
There's also the economic factor. While much of the industry is paying for shelf space, we have our own distribution channel.
MFMN: Who is Waddell & Reed's core audience?
Butch: While we do serve some millionaires, we predominantly serve middle-income investors, who have increasingly been ignored by traditional firms. For that group, we believe mutual funds make perfect sense.
MFMN: What was your mandate when you joined Waddell & Reed in November 1999?
Butch: When I started, I wanted to enhance the marketing culture of the existing business and expand into non-proprietary markets without harming the proprietary franchise.
MFMN: How did you do that?
Butch: We identified those environments where our presence would not conflict, or even create the perception of conflict, with our own advisers.
There are four key areas we have focused on: retirement markets, including the 401(k) world; fee-based products, such as wrap programs where we can offer one or more of our funds using institutional pricing; registered investment advisers through the institutional platforms of major companies; and sub-advisory opportunities.
MFMN: How have those initiatives evolved?
Butch: For most of 2000, we spent time reconstituting ourselves and preparing our back office and operations. We hit the ground running in 2001. We added some large sub-advisory relationships, secured some 401(k) plans and were included in some wraps.
We also built a wholesaling force, with separate teams to focus on each of the four non-proprietary channels. We hired experienced people from the industry to become our channel leadership.
MFMN: How many wholesalers do you have now?
Butch: We have 12 people whose job it is to approach the various third parties and platforms and secure shelf space for us.
MFMN: Is Waddell & Reed content to be both a product sponsor and a distributor?
Butch: Yes. We have seen a dramatic swing in psychology from the triumph of direct selling to the triumph of selling through intermediaries. The pendulum has swung quickly and decisively. In fact, many fund companies have completely abandoned the no-load channel.
Now there are way too many mutual fund products glutting limited distribution avenues. Between 1990 and 2001, the number of load funds increased 800%, while distribution has grown a disproportionate 60%. So, the pendulum has swung back in favor of distribution. That will put an enormous squeeze on product-only manufacturers.
MFMN: Does that rush by others to distribute through intermediaries mean more competition for Waddell & Reed?
Butch: No, I dont think so. We are exceptionally well known for our distribution here in the Midwest region, even though we are not a nationally recognized retail brand. We are competitive as a niche product manufacturer.
MFMN: You entered the 529 college savings market last year with your InvestEd Plan in the State of Arizona. Why was that an important market to tap?
Butch: We are committed to serving Arizona, which is a big market for us. But more importantly, we want to use it to offer the product nationally. It makes sense for us because we sell all of our products in the context of financial planning. This fills the college education space in our financial planning model.
MFMN: What are your expectations for this 529 plan?
Butch: So far, in our first six months, we've accumulated $50 million among some 10,000 accounts. We think this will be a steady grower, and it gives our advisers a reason to go to their clients or find new ones.
MFMN: Have you been advertising the InvestEd Plan?
Butch: We have run some TV ads, but only in the State of Arizona.
MFMN: You also began a strategic relationship with a division of Ameritrade to offer Waddell & Reed private-labeled brokerage accounts for investors buying and selling individual securities. Why?
Butch: Our advisers don't sell individual securities. But we're not so blind that we won't want to help investors who hold securities through rollovers, or inheritance, or want to buy them. We wanted a private-label brokerage service that would keep the center of the client's relationship with Waddell & Reed and not another firm.
MFMN: You have also just introduced a new 401(k) for self-employed individuals. What's the strategic thinking here?
Butch: This is actually a no-brainer. Because so many of our advisers deal with small businesses and owner-only businesses, this is just another way to reach out to that market. It's logical for us to have it.
MFMN: Are there any other new and notable Waddell & Reed initiatives?
Butch: Yes. Last July we debuted the Strategic Portfolio Allocation Program, which was remade from a similar offering from The Legend Group, which Waddell & Reed acquired in 2000. It is an asset allocation program and the very first fee-based product we are offering our advisers. Up until now, we have been strictly commission-based.
The program uses sophisticated models and even artificial intelligence to look forward on different asset classes within this allocation program. When we determine that an asset allocation change is needed, advisers can adjust their clients' portfolios.
MFMN: Separate accounts only make up a small portion of your business now. Are there plans to increase that?
Butch: We are studying the separate account environment and may want to participate in some way.
But most cater to the super wealthy and that hasn't been our audience. Besides, the fee haircut that the industry is willing to accept on separate accounts isp something we are watching closely.
