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Waddell & Reed wealth unit adds Riskalyze as IBD’s shifts take shape

One of the country’s oldest mutual fund companies has undertaken the difficult task of making over a wealth management unit once known as its distribution arm.

Waddell & Reed CEO Philip Sanders says the firm’s wealth management overhaul has been “a grind” over the past two years. But the firm has no plans to spin off either its wealth unit or asset manager, he says, citing changes at the 1,350-representative independent broker-dealer.

“It's gradually opening up the architecture by providing better technology, better services, better opportunities, more choices for advisors and clients,” Sanders said in a call with analysts after the company reported second-quarter earnings. “We're at the point now where we think this is an opportunity to actually grow this business.”

Waddell & Reed registered rep count losses

In its latest move updating its tech on par with IBD rivals, the suburban Kansas City firm unveiled an enterprise agreement the following day enabling advisors to use Riskalyze’s risk analysis software. Shifts in the IBD’s business show in the unit’s earnings.

While it doesn’t break out every metric for the wealth management segment, the parent firm’s expenses ticked up 2% year-over-year to $116.5 million in the second quarter due to higher pay for advisors under a new compensation grid effective at the beginning of the year.

At an 8% drop compared to the year-ago period, the unit’s headcount of registered reps shrank at less than half the rate it did in 2018. Productivity requirements have also helped boost average trailing 12-month revenue per advisor by 30% year-over-year to $408,000.

In the second quarter alone, Waddell & Reed’s IBD launched a new centralized advisor desktop powered by Refinitiv, tapped Envestnet as its fourth outside advisory strategist and added 51 third-party mutual funds to a growing advisory program started in 2017.

The firm has also been “building out a more robust recruiting department” in the last several months targeting “more higher-producing, higher-performing advisors” rather than new entrants, said Shawn Mihal, Waddell & Reed’s senior vice president of wealth management.

“Our pipeline is starting to become a little bit more robust as we've gained additional attention from prospective advisors, as we've worked to introduce ourselves out there with regard to a lot of the changes that we've made over the last 18 months,” Mihal said, according to a transcript by Seeking Alpha. “So we are seeing an uptick in the activity.”

The stark figures show that only about one-sixth or fewer of the sector’s financial advisors are women.
August 5

Mihall added that the firm doesn’t expect the full impact of its recruiting efforts to show until the second half of next year. Even with smaller losses than in 2018, the count of producing advisors and registered advisor associates still slipped by a net 122 reps year-over-year.

The parent firm’s decision in June to outsource transactional processing will cost between $4 million and $6 million in restructuring expenses as it cuts about 150 employees, according to CFO Benjamin Clouse. Sanders pledged it would be a seamless change for advisors.

At $116.6 million, the wealth unit’s smaller force took in slightly lower underwriting and distribution fees from the year-ago period. And while the wealth management unit reeled in net new advisory assets of $253 million, the figure represented a 20% reduction year-over-year.

On the other hand, the wealth management segment’s AUM expanded by 8% from the same period a year earlier to $24.8 billion. Total assets under administration also ticked up by 1% year-over-year in the second quarter to $57.4 billion as a result of market appreciation.

About 70% of client assets remain concentrated in affiliated funds, according to Mihal, who notes that the advisory programs with more external products also have some 20% of assets in affiliated funds. An analyst had asked Sanders about M&A possibilities for the firm’s two units.

“Our intent is to grow our wealth manager as well as look for opportunities within asset management to expand capabilities,” Sanders said. “You can see the potential benefits of diversifying and broadening the revenue stream across our organization and reducing the volatility of the operating model.”

The wealth management unit’s integration deal with Riskalyze followed those of more than 150 other BDs that have brought tools like risk assessment, portfolio analytics and retirement maps to their platforms. The firms described the agreement as another step in the IBD’s evolution.

“We're proud to work with Waddell & Reed at this turning point in their business, and I believe our two companies share the same vision to empower and equip advisors with the best technology to let their work and value shine through to the client,” Patrick Hannon, Riskalyze’s managing director of major accounts, said in a statement.

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