On Advice

What's the next act for Waddell & Reed's advisers?

The B-D's head count has dropped more than 29% over the last year, although the productivity of the remaining advisers improved

May 17, 2018 @ 12:01 pm

By Bruce Kelly

The brokerage industry is frantically remaking itself. Wall Street brokers are leaving the big banks and wirehouses in droves. Independent contractor firms like LPL Financial are binging on acquisitions, while competitors like Securities America Inc. and Commonwealth Financial Network are recruiting like mad.

That brings us to Waddell & Reed Financial Advisors, which reported at the start of the month that hundreds of advisers have left the firm in the past year.

The firm seems stuck in the past. What is the plan for the future of its advisers?

The broker-dealer's business model relies on its brokers and advisers selling the parent company's proprietary, actively managed mutual funds. That seems like a relic from a distant time, when brokers were still smoking cigars and downing martinis at lunch. A far cry from today's adviser, who chomps a salad and Skypes with clients during his midday meal.

As the rest of the industry debates how to create a workable fiduciary standard for brokers and advisers, how will Waddell & Reed evolve?

A subsidiary of the publicly traded holding company, Waddell & Reed Financial Inc., the broker-dealer has seen a significant drop in the number of its brokers and advisers over the past year, with head count decreasing 29.6%. At the end of the first quarter this year, the firm had 1,170 advisers, down 492 from the same time a year earlier.

While the number of Waddell & Reed advisers is on the decline, the productivity of its remaining advisers increased over the same period. Last March, the company reported its advisers on average produced annual revenue of $230,000. Advisers' average annual trailing 12-month fees and commissions increased to $285,000 — a 23.9% gain —- by the end of the first quarter this year, according to the company.

Adding to the questions, Thomas Butch, the longtime head of Waddell & Reed's broker-dealer subsidiary, left the company in November.

Meanwhile, the parent company looks to be in disarray. In April it reported the departures of two senior executives, including its general counsel, and two portfolio managers from its Ivy Funds group also resigned. All were replaced with Waddell & Reed and Ivy Funds veterans.

"With these changes, Waddell & Reed is moving forward with a clear mission to help investors realize their long-term financial goals through superior investment performance, sound advice and exceptional client service," company spokesman Roger Hoadley wrote in an email. "We believe the focus we're demonstrating on values, and the hard choices we're willing to make, is a positive indicator for the long-term strength of our business."

Senior management is well aware of problems facing Waddell & Reed's broker-dealer and its 1,170 advisers, and acknowledge that the firm needs to compete.

The company is "well underway" in its effort of "evolving the broker-dealer to a more competitive model," CEO Philip J. Sanders said during a conference call with analysts May 1 to discuss first-quarter earnings, according to a transcript posted on Seeking Alpha.

Like its competitors, Waddell & Reed wants to focus on its higher producing, more profitable advisers.

"As we continue our path toward a stand-alone profitable broker-dealer, we are focused on retaining high performing advisers and seek to further — seek to further rightsize the adviser model," said Shawn Mihal, president of the broker-dealer and Mr. Butch's replacement, according to the transcript.

"Our strategic goals for the broker-dealer will continue to drive our focus in 2018," Mr. Mihal said. "This includes transitioning to a fully competitive brokerage-centric model, improvements in technology that enable more efficient processes and greater ease of doing business, enhancements to our advisory suite of programs and a comprehensive support program for our highest performing advisors initially."

Mr. Mihal added that the firm is building a "comprehensive service model to provide a speedy and dedicated service to advisers," with a planned introduction to the firm's highest performing advisers during this year's third quarter.

Like the rest of the securities industry, Waddell & Reed is sailing through an unprecedentedly bountiful era. Markets are at record highs. A business-friendly Republican administration is ripping up regulations like the Department of Labor's dead fiduciary rule, which added millions of dollars in expenses to brokerage firms. And the recent corporate tax cut is boosting profits and stock buybacks.

What better time for Mr. Sanders to overhaul Waddell & Reed's broker-dealer?

But he'd better move quickly.

Who knows how long such good times will last?


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