WADDELL & REED REPLACES ‘FREE’ WITH ‘FEES’: PLANS WILL COST CLIENTS UP TO $250, A SWITCH FROM FORMER COMMISSION-ONLY STRUCTURE

Waddell & Reed Inc. soon will begin charging customers for financial plans, a move that may presage bigger changes for the 60-year-old investment company as it prepares to go public.

The Overland Park, Kan., company’s 2,100 affiliated financial planners until now have provided planning services for free, depending mainly on commissions from sales of mutual funds for their pay.

The company distributes its 25 mutual funds exclusively through its captive sales force, lodged in 179 offices around the country and serving primarily middle-income investors.

Waddell & Reed has been feeling the same pressures to grant its reps more independence and flexibility that are pinching many of its competitors. The company has responded by boosting the salary for new recruits from $2,500 over their first three months to $12,000 over their first six months. Company officials hope to increase the sales force by 10% annually.

TO CHARGE OR NOT TO CHARGE

In addition, executives are mulling whether to give reps the option to charge asset-based fees instead of relying on commissions. Still, “we haven’t moved to an asset-based compensation structure, and we have no plans to do it immediately,” says Robert L. Hechler, Waddell & Reed’s president.

Last year the company ditched its outmoded software, developed in-house, for a system devised by Financial Profiles Inc. in Carlsbad, Calif. It also provided its planners with asset-allocation software from CDA/Wiesenberger in Rockville, Md.

The eye-catching graphics on the new financial plans come at a price, of course, so the company plans to charge investors up to $250 a plan. Those wanting advice in only one or two areas – retirement planning or college financing, for example – will be charged $75 to $100 a module.

Waddell & Reed has introduced the fees in several markets and expects to impose them companywide by early spring.

“As we’ve introduced it in the last 60 days, we’re getting less negative response in terms of charging the fee once they see th
em,” says Mr. Hechler, speaking of customers’ reactions to the new plan format.

Torchmark Corp., the Birmingham, Ala., insurance concern that owns Waddell & Reed, filed recently with the Securities and Exchange Commission to spin it off in an initial public offering. The firm intends to raise up to $586 million before underwriting fees. Torchmark, which will retain about 80% of Waddell & Reed after the offering, plans to transfer the rest of its stake to shareholders late this year in a tax-free distribution.

Most of the company’s advisers have met state licensing requirements and are now registered investment advisers. The registration campaign is part of company efforts to prod advisers into expanding their client base beyond the friends and acquaintances that typically account for most of their business, says Steven Huffines, an analyst with Chicago-based Everen Securities Corp.

THE GOAL IS GROWTH

Also under consideration are alternative distribution channels for Waddell & Reed’s mutual funds, in particular through alliances in which Waddell & Reed advisers would set up offices at community banks.

The company’s funds, marketed under the Waddell & Reed and United brands, boast more than $20 billion in assets but have been growing more slowly than the rest of the industry, according to Financial Research Corp. in Boston.

Waddell & Reed also may offer a new class of United Fund shares with back-end sales charges in addition to the family’s existing front-end load funds, Mr. Hechler says. The Waddell & Reed funds have back-end fees.