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Waddell & Reed’s IBD overhaul boosts advisory assets, cuts lower producers

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The overhaul of Waddell & Reed Financial's broker-dealer unit enters its third year with a focus on helping its top-producing advisors. Now, the firm is setting a new goal of boosting its advisor productivity above $300,000.

Shawn Mihal, the new president of the No. 11 IBD, announced the goal after the Kansas City-area firm released its earnings for the first quarter on Tuesday. Average trailing 12-month revenue per advisor rose 24% year-over-year to $285,000, while the IBD’s headcount dropped 30% to 1,170 advisors.

The IBD has joined competitors including HD Vest Financial Services and Ameriprise in shedding lower producers as part of bids to grow their productivity. Mihal’s target would place the firm well above HD Vest’s current production level of $81,600 but well below Ameriprise’s average of $590,000.

Waddell & Reed’s so-called Project E, which stands for the IBD’s “evolution,” has resulted in a smaller real estate footprint. More than 60 advisors also shifted to support roles as licensed advisor associates in the last quarter alone as the firm implements minimum production requirements, according to Mihal.

“As we continue our path to [becoming] a sustainable and profitable broker-dealer, we are focused on retaining high-performing advisors and seek to further right-size the advisor model,” said Mihal, noting upcoming new technology under a “comprehensive support program for our highest-performing advisors initially.”

Project E, which also included placing advisors under 30 complex managers and bulking up on advisory services, has started to show some results: The IBD took in $392 million in net new advisory assets for the quarter, well above an outflow of $100 million in the year-ago period.

However, Waddell & Reed, best known for its fund products, is still working to save $10 million to $20 million off its annual expenses after slashing some $20 million last year. The firm's asset management business has also lost several longtime portfolio managers, and both the overall firm and its IBD reported outflows in their total assets.

One of the biggest notable losses came from Merrill Lynch, which lost a team managing $1 billion to the independent space.
April 11

CEO Phil Sanders acknowledges that the firm must make some difficult changes in its ongoing transformation.

“We’re basically responding to the evolution of the industry and separating these two businesses,” Sanders said. “Historically, our broker-dealer was essentially an asset gatherer, where we were just basically taking in assets, and the asset management fees supported that business.”

The IBD’s advisory revenue increased 15% year-over-year to $65.5 million, with fee-based production accounting for 56% of its total $116.4 million for the quarter. Tech enhancements around data management and user interface will help its advisory services, Mihal says.

Additionally, a business administration platform will roll out to top performing advisors in the third quarter and expand to all advisors next year. The number of advisor associates at the IBD has also jumped 30% year-over-year to 327.

Over the same span, the number of advisors has fallen by a net 492. Average annual productivity among the 197 departing advisors in the first quarter was only $69,000, Mihal points out. The firm’s recruitment now centers on high-producing, more experienced advisors than in the past, he says.

The IBD has started shuttering some offices with low occupancy or profitability because there are fewer new advisors, according to CFO Ben Clouse. The firm’s new higher payouts have increased its distribution fees, and it expects to pay $4 million to $5 million in severance in the second quarter.

Waddell & Reed may also rethink some changes the company made to prepare for the Department of Labor’s fiduciary rule in light of a March appeals-court ruling vacating the rule. The firm is watching the case and the SEC’s proposed Regulation Best Interest closely to figure out its plans, Mihal says.

With an eye toward “certainly easing the process of our advisors from a business perspective,” he said, the firm is “looking at those most burdensome requirements that were structured out of that rule and how those may be applicable as we move forward.”

The Overland Park, Kansas-based parent firm earned net income of $46.3 million on $297.6 million in revenue for $0.56 earnings per share. The profits grew 37% year-over-year, while EPS expanded by 40% while beating analysts’ forecast of $0.54.

The value of Waddell & Reed’s stock still declined by more than 8% to $18.51 per share after the earnings call. The IBD’s non-advisory asset outflows, which far outweighed the advisory gains, helped fuel an outflow of $1.5 billion from the overall firm, according to analyst Chris Shutler of William Blair.

“We maintain our market perform rating, mainly due to headwinds in the retail broker-dealer channel and the breadth of investment performance challenges,” Shutler wrote in a note to investors.

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