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Waddell & Reed IBD still aiming toward ‘inflection point’

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Waddell & Reed's wealth management business is primed to compete with leading firms — as shown by its rising advisory AUM, more external fund families and new technology, says CEO Phil Sanders.

The Overland Park, Kansas-based asset manager and broker-dealer has embraced these three goals and much more in executing a multiyear transformation of its wealth management business. Its advisor headcount and BD revenue still ticked down in the third quarter, though.

In a call with analysts, Sanders and Shawn Mihal, president of the retail wealth management unit, said they expect the firm to start growing as early as next year. The latest of many tech upgrades came earlier this year with a new centralized advisor desktop under Refinitiv.

“It has now been over two years since we began the process of opening the architecture within our wealth management business, transforming technology, products and our service delivery model to where we are today, well positioned to compete as a leading wealth management firm,” Sanders said in prepared remarks.

“As we move closer to an inflection point in our wealth management business and reestablish more favorable growth metrics in terms of advisor count and assets under administration,” he continued, “we expect this to exert a stabilizing influence in our overall operating model and further position our company as a diversified financial services franchise.”

Lower 12b-1 fees and commissionable sales outpaced the partially offsetting fee-based revenue in the wealth management unit. A 6% year-over-year increase in advisory fee revenue to $73.4 million wasn’t enough to avert missing the topline metric from the year-ago period by $678,000.

The number of advisors and licensed associates also came in 6% lower than the same time last year, at a headcount of 1,344. Still, it represents at least the sixth straight quarter that attrition has fallen — and Mihal says the firm is recruiting more productive advisors than it did in the past.

“We're continuing to see steady progress, as we've been building out our full recruiting capabilities. And we've been staffing up our recruiting department over the last few months and the pipeline has been building,” Mihal said. He added that executives “intend on hitting an inflection point from a growth perspective” by next year.

On the plus side, advisor productivity maintained its upward slant of recent years. The overall number of advisors has thinned due to the firm's recent new requirements for each affiliated representative. But average trailing 12-month revenue per advisor surged by 20% year-over-year to $422,000 in the third quarter.

Advisory assets under management also rose by 6% year-over-year to $25.1 billion, though total client assets still slipped by 2% to $57.1 billion due to outflows in brokerage accounts. Of the firm’s nine advisory programs, three launched in the past two years, Sanders noted.

Waddell & Reed advisors can now choose among 5,000 mutual funds from 100 families, along with ETFs and other popular products. In addition to an integration with Riskalyze’s risk analysis software, the firm launched a mobile app for its new advisor platform in the third quarter.

Some 68% of client assets remain invested in affiliated funds, though, according to Mihal, who says he expects the concentration to keep falling. The firm boosted its compensation grid in January and expects to close its last 100 branches for independent offices by the end of 2020.

Despite the wealth management unit’s array of changes and some encouraging signs, the parent firm’s earnings tumbled by 29% year-over-year to $33.1 million. Its non-GAAP earnings per share of $0.46 still surpassed analysts’ expectations by 7 cents.

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