Broker-Dealers

Waddell & Reed will no longer lease office space for many of its brokers

Firm is boosting adviser payout to compensate for increased office expenses and investing savings in enahcements such as new technology.

Waddell & Reed Inc. will no longer lease office space for most of its 1,074 independent contractor brokers and advisers, requiring them to find and relocate to their own offices by the end of 2020.

Most of the firm’s brokers and advisers currently lease office space from Waddell & Reed, meaning they now must find new offices for themselves, most likely at a higher price. Other independent contractor brokers and advisers at firms such as LPL Financial or Raymond James Financial Services Inc. typically pay for their own office space, so the change puts Waddell & Reed more in line with the rest of the industry.

Right now, about 60% of the firm’s advisers lease space from Waddell & Reed, according to Shawn Mihal, the brokerage firm’s president. In total, close to 100 offices will close by 2020, he said.

Waddell & Reed at the same time said it was offering a carrot to advisers and boosting compensation payout rates to as high as 94%, close to the top of the scale for an independent broker-dealer. According to a filing with the Securities and Exchange Commission, the firm expects to add $16 million to $18 million in new costs because of the higher payouts to advisers.

Waddell & Reed is also offering a forgivable loan to advisers who move from a firm-leased office to their own space, Mr. Mihal said.

One adviser said that the increase in payout fell short of covering additional future costs.

“The payout jump does not compensate,” said the adviser, who asked not to be named.

Another adviser, who was made available for an interview with InvestmentNews by Waddell & Reed, said she was excited about the changes.

“Real estate is something that freaks everyone out,” said Cheryl Marquez, who has been registered with Waddell & Reed for 30 years and whose practice has $250 million in managed money. “My knee-jerk reaction was, ‘oh no.’ I like being around other people, my peers and the camaraderie. But now I get to customize the design of the office and am talking to other advisers to share the space and offset the costs.”

Meanwhile, the firm is also cutting support jobs at some of its offices, while offering some employees the opportunity to work in similar positions in the firm’s home office in Overland Park, Kan., Mr. Mihal said.

The firm expects that “a small number of employees will be displaced,” Mr. Mihal said. He did not give specific numbers of employees, including administrative staff, facing job cuts or the amount of money the firm expects to see in cost savings after it shuts down its real estate.

Mr. Mihal said the savings from office space leases will be used for “strategic growth for the future, and we are investing more in technology and the [pay] grid” for advisers.

“We’re putting a support model in place that’s high touch for advisers,” he said. He added that the firm will continue to expand its technology platform, which includes eMoney and Envestnet, along with its investment product lineup.

Waddell & Reed has been overhauling its business for some time. Until a few years ago, the broker-dealer’s business model relied primarily on its brokers and advisers selling the parent company’s proprietary, actively managed mutual funds. Thomas Butch, the former head of Waddell & Reed Financial Advisors, left the company a year ago and was replaced by Mr. Mihal.

The firm has been culling lower-producing brokers and advisers. For the 12 months ended in September, Waddell & Reed lost 407 reps and advisers, a decline of 27.5% from the previous year.

Management at the firm this year has said that it was focused on retaining high-performing financial advisers, but some large teams also left over the summer.

“We have strong relationships with many of our advisers,” said Mr. Mihal, adding that the firm realized it would see a reduction in its number of advisers as it recently worked its way through the changes.

In the past, the firm relied on a business model of recruiting a large number of advisers annually, only to see a similar number leave for a competitor, he said. Many large brokerage firms are moving away from that way of doing business, which is expensive.

At the moment, the firm has positions for six new recruiters, Mr. Mihal said.

“We’ve been working to change that model and worked to make improvements and hang on to advisers with a higher range of production,” he said.