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With ‘Project Evolution’ complete, Waddell & Reed IBD pivots to growth

Financial advisor Cheryl Marquez says her independent broker-dealer of 30 years deserves a closer look from an industry that may have missed what’s going on at Waddell & Reed.

“We're going to be that hidden gem,” says the San Francisco Bay Area-based Marquez, the chairwoman of the IBD’s 2018 president’s council for its top advisors. “We're not what you think. When people start to figure that out, I think that’s going to be a very big draw.”

The IBD’s fund company parent — as well as headlines about its shrinking advisor headcount — complicate its overhaul, Marquez admits. Recruiter Jon Henschen also says Waddell & Reed’s efforts to retain assets from departing advisors make it more of a captive firm than an indie.

Cheryl Marquez, Waddell & Reed

But the camaraderie and community of Waddell & Reed has kept Marquez in the fold, she says. She praises leadership for the launch of a centralized advisor desktop, a new coaching and practice management program and personalized home-office support for the most productive teams.

The IBD is moving on from the “starting point” of a transformation it began in 2016 called Project E (for “evolution”) with an eye toward competing on the recruiting and M&A trails, according to President Shawn Mihal. The unit has also changed its name for purposes of Waddell & Reed’s organizational structure from the BD to the wealth management division.

“There has been a substantial amount of change in the industry,” Mihal says. “We felt that was an important component to show who we are and the direction that we're going.”

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March 11

Another modification to the 80-year-old suburban Kansas City fund company’s quarterly reports: Waddell & Reed no longer provides separate figures for its 1,367 total advisors and registered advisor associates.

In the prior quarter, the company had listed 75% of the 1,403-strong group — 1,060 representatives — as advisors, but publicly traded firms vary in their specificity on headcounts. Productivity requirements have also led more reps to become licensed associates, Mihal says.

With a mandated floor of $150,000 in annual production coming into effect in 2021, the IBD's headcount has fallen by a net 720 advisors in the past two years. But average trailing 12-month revenue per advisor jumped 40% year-over-year in the first quarter to $400,000, an upper-echelon figure for an IBD.

The parent firm has also displayed a notable mixture of figures Wall Street is tracking closely. Its funds sustained net outflows of $10.4 billion in 2018, compared to $11.4 billion in 2017 and $25.3 billion a year earlier, according to Waddell & Reed’s annual report.

Outflows are slowing after their initial spike following the departure of portfolio manager Michael Avery in 2016. The parent firm also agreed in 2018 to pay $24.8 million to settle shareholder and company employee 401(k) participant lawsuits, the annual report states.

On the other hand, the IBD has added $30 million to yearly annual pretax income through cost reductions like its plan to close more than 130 branch offices by 2021. Advisors will operate from personal offices on a boosted compensation grid the company began paying in January.

Another notable shift took effect in April, when Waddell & Reed added four more unaffiliated families with 51 mutual funds to a growing advisory program and made Envestnet its fourth outside strategist partner. Mihal sees a “strong correlation” between Wall Street and advisor satisfaction, he says.

“We're very much focused on the things that we're doing that are aligned to growth,” Mihal says, citing “the next iterations of technology” and “how we create value for advisors” as key areas.

Waddell & Reed 2016 revenue from IBD
Waddell & Reed 2018 IBD revenue

He also describes a pivot from training new entrants toward recruiting experienced advisors with about $200,000 and above in annual production. However, the firm may struggle to reel in big independent-minded recruits, Henschen says.

The IBD has a reputation for being “hostile and heavy-handed” in trying to retain their clients’ assets when reps leave, according to the veteran recruiter. Henschen also questions why the firm can’t extend its bulked-up service for top producers to all of its advisors.

“They still act very much captive and fight to keep those assets there. That hasn't changed,” Henschen says. “That's really the sign of an independent broker-dealer — you're free and clear to go wherever. If you're hindered in that endeavor, they're really not independent.”

Waddell & Reed spokesman Roger Hoadley said in an emailed statement that the firm is a member of the Broker Protocol and acts in accordance with its rules if an advisor decides to go.

“As independent advisors, Waddell & Reed advisors have the flexibility to choose the firm where they place their business and the independence to transfer their client relationships to another firm,” Hoadley said, adding that the firm does ensure “clients are promptly informed about changes to their accounts to allow them to make timely and informed choices.”

Marquez has spent her entire career with the firm after they hired her the month before she turned 22, she says. She and her business partner are relocating their Campbell, California-based practice — which now has $350 million in client assets — to a new office by the end of June.

They had yet to settle on a client-facing name for the practice as they packed for the move to the new facility earlier this month. She and the 11 other president’s council advisors also participated in the pilot of the firm’s “diamond” service for top producers.

A “fast-paced” team that’s one of the largest at the IBD, Marquez’s practice no longer needs to waste part of the day “spending time chasing down answers” from the home office, Marquez says. The top 75 advisors will get personalized services by the end of the year.

On May 20, the firm opened the centralized advisor desktop WaddellONE under the Thomson Reuters-affiliated data and infrastructure firm Refinitiv. The new desktop combines existing tools with market data, news and research in the same location for all advisors.

Waddell & Reed also sent six coaches to travel to advisors’ offices for sessions on technology, marketing, succession, practice acquisition and other areas of specialty under another program it calls Great Practice Solutions or GPS. At least 14 home-office employees also work on GPS.

“I wouldn't be where I am today, had it not been for the early version, the baby version of what we've got now,” Marquez says, noting she made the president’s council months after receiving practice management training from the firm in 2007 and has been on it every year since.

“We're moving in the right direction,” she says. She calls the steps taken by leadership “absolutely crucial” for the firm’s development. “They have really been thoughtful about, how do we continue to evolve this, and how do we make this be what it needs to be?”

With all the changes coming into effect this year, Waddell & Reed’s IBD can pivot toward recruiting pickups and even potential acquisitions amid the record consolidation shaping the highly competitive sector, Mihal says.

“We feel like we've got the structure in the place. We are absolutely focused on growth,” he says. “We are actively looking for opportunities in that acquisition space as a rapid accelerant to that growth.”

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