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Waddell & Reed Financial Inc. (NYSE:WDR)

Q3 2009 Earnings Call

October 27, 2009 10:00 am ET

Executives

Hank Herrmann – Chief Executive Officer

Nicole McIntosh – Director, Investor Relations

Dan Connealy – Chief Financial Officer

Tom Butch – Chief Marketing Officer

Mike Avery – Chief Investment Officer

Mike Strohm – Chief Operating Officer

Analysts

Roger Freeman - Barclays Capital

Craig Siegenthaler – Credit Suisse

William Katz – Buckingham Research

Michael Kim – Sandler, O'Neill & Partners

Jeff Hopson – Stifel Nicolaus & Co.

Robert Lee – Keefe Bruyette & Woods

Cynthia Mayer – Bank of America Merrill Lynch

[Max Sikes – Gabella and Company]

Marc Irizarry – Goldman Sachs

Operator

Welcome to the Waddell & Reed Financial Third Quarter Earnings conference call. (Operator Instructions). I would now like to turn the conference over to Hank Herrmann, Chief Executive Officer of Waddell & Reed.

Hank Herrmann

With me today are Tom Butch, our Chief Marketing Officer, Mike Strohm, our Chief Operating Officer, Dan Connealy, our Chief Financial Officer, Mike Avery, our Chief Investment Officer, and Nicole McIntosh, our Director of Investment Relations. Nicole, would you read the forward-looking statement, please.

Nicole McIntosh

During this call, some of our comments and responses will include forward-looking statements. While we believe these statements to be reasonable based on information that is currently available to us, actual results can materially differ from those expressed or implied due to a number of factors, including but not limited to, those referenced in our public filing with the Securities and Exchange Commission.

We assume no duty to update any forward-looking statements. Materials relevant to today's call, including a copy of the press release, as well as supplemental schedules have been posted on our website at www.waddell.com under the corporate tab.

Hank Herrmann

Earlier today we announced the third quarter results. Among the highlights were some of the following. Net income approve 43% after the tax benefit associated with loss carry forwards compared with the second quarter. Excluding that carry forward benefit net income approved 34%.

Our operating margin reached 22.4% due to a combination of capital expense control and strong asset growth. Our goal disclosed at the beginning of this year was to return to a 20% operating margin by the fourth quarter. Market action obviously impacted quite positively. Assets under management and the wholesale channel are now greater than those of the advisors channel.

Across both retail distribution channels, gross sales remain solid lead positive. Growth as an organic rate superior to most, if not all, of our publicly traded peers. Our annualized organic growth through September was 18.5% while the industry using the same calculation [long only] growth was 6%.

Our assets under management reached $64.5 billion at the end of the quarter, only 8% lower than the peak levels of $70 billion at the end of June 2008. We believe this recovery is the best among publicly traded peers. At present, our assets under management stand at approximately $67 billion. As of last Friday, October advisor and wholesale channels are both experiencing strong gross and net sales in line with September's very strong run rates.

Performance of our funds remain solid with 80% of our assets under management receiving a rank in either four or five for Morning Star. Our assets under management are down 8% from the '08 peak. The average of our peers is down 18% from the peak. We believe we are number two in retail net lows.

Now looking at individual parts of our business, the advisors channel saw gross sales improve sequentially and flows were positive. By quarterly gross sales have not returned to last year's best levels, the channel 7.6% redemption rate continues to deliver exceptional asset retention, which equates to strong profitability.

The wholesale channel saw continued strength in sales as our investment products remain in high demand. Meaningful daily traction persists in the number of funds outside of the assets strategy fund, which continues to be in great demand. Gross sale in the institutional channel were lower during the quarter. This is due to a combination of lower demand for U.S. large cap equity products by [Pictet] and say clients in the still frozen defined benefits space.

Redemptions continue at [Pictet] largely due to weak dollar and soft short-term performance. Of note, during the fourth quarter was the placement of asset strategy as an option within a major insurer's investment platform. This sub advisory arrangement already is yielding meaningful positive daily sales.

In line with this observation, several other important relationships are pending and are expected to be closed or finalized soon.

Finally, let me address the potential impact of year-end bonuses. As I mentioned during our second quarter earnings call, if the financial markets continue to cooperate investment performance remains solid, we will have to revisit our accruals for annual bonuses. Given the markets volatility, I stated at that time I intended to address the issue in the fourth quarter, not before. We did increase accruals modestly in the third quarter.

As a reminder, executive and management bonuses are paid in December and linked to the companies overall performance, while investment staff bonuses are paid in March. We will have a much clearer sense of bonus levels at year-end. For now, I'll ballpark this way. Bonuses likely won't be as high as 2007, nor as low as 2008.

Operator, at this time I would like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Roger Freeman - Barclays Capital.

Roger Freeman - Barclays Capital

Just a few questions here. I guess first, Hank, just a larger comment on sort of what you're seeing in the channel. I guess maybe particularly advisors rather sort of the state of the retail investors, so your flows have been stronger in fixed income than in equities that's consistent with what we seen throughout sort of funds flow data. But how long I guess do you expect that to persist? I mean what ultimately brings folks back into equity mutual funds in a bigger way?

Hank Herrmann

I'm going to let Tom take a crack at that first and I may come on and follow.

Tom Butch

Your question was, I think, directed principally to the advisors channel and I think what brings those folks back to equities is confidence and time to heal after the market disruption. One of the things that's interesting and pretty predictable relative to our advisors channel is that when the market goes down our investors are a little slower to react to that. You saw that in the second quarter, for instance, of last year.

And when the market rebounds, it takes a little longer for that client base, which is pretty much a middle income and lower mass affluent client base to regain their faith in equities. And so as the months have progressed we've seen a steady monthly progression in their appetite for equities, which is reflected in our sales.

And so it's an opportune time to ask the question in the sense that we over the last couple of weeks had in town here in Kansas City our top advisors from that channel and presently we have our managing principals from that channel who run our division offices. And uniformly their sentiment, which is a reflection of client sentiment, is far more upbeat than at any time this year. So I hope that's responsive to your question.

Roger Freeman - Barclays Capital

Yes, that's helpful. Thanks.

Hank Herrmann

Roger, I would just add that just looking at sequential monthly, the last three months each of the months has been higher than the previous month. August was higher than July, September was higher than August, and my sense is right now October's a tad higher than September.

So that's somewhat encouraging, but we're still a little bit behind what we budgeted. We're beginning to sense to certain amount of improvement and sentiment and hopefully any correction that comes along will result in our clients getting a little bolder. That remains to be seen. But I would reiterate Tom's point that our clients tend to be a little slow to exit and enter.

Roger Freeman - Barclays Capital

Do you have any data around sort of call activity with clients because we've heard from other managers that call center volumes are down considerably year-over-year, which would suggest that investors just haven't been very engaged.

Hank Herrmann

Mike Strohm's got a response, I think.

Mike Strohm

We are experiencing more recently what you're hearing from other firms is our call volume has decreased. I don't remember the percentages but it's very noticeable. And the call duration has also decreased. A measure of reduced anxiety I think is the point.

Roger Freeman - Barclays Capital

Then I guess just on a couple of the funds, so asset allocation, I mean, just looking at some of the [mutual fund] data, it looks it continues to churn along very well, sort of a similar clip this quarter as last quarter. The Global Natural Resources Fund sales seems to be – or net flows have been falling off. Is that just sort of a function of what we've been seeing in the commodity markets?

Tom Butch

I think those funds remain relatively consistent in their percentage of total sales. I don't think we've experienced a material fallout.

Roger Freeman - Barclays Capital

Okay, and those two, the sales into the wholesale channel, does the 75%, is that accurate for that particular channel as well?

Tom Butch

Yes, the two of those comprised roughly 75% and that's remained highly consistent across this year. But the one thing I would point as sort of an addendum to that answer is we do have good flow activity in a span of other products, including our High Income Fund, our International Core Equity Fund, our Large Cap Growth Fund, our Science and Technology Fund. And what's encouraging about that is the span of asset classes that reflects.

Roger Freeman - Barclays Capital

Actually on the International, just quickly, so you kind of point out though the [Pictet] flow issues and allocation away from U.S. and the international assets. Do you expect that to persist for some time and if so, what plans do you have to introduce many more international product?

Hank Herrmann

I'm not quite sure I follow, could you try that again for me, Roger?

Roger Freeman - Barclays Capital

The question is just around flows, right. International flows, I mean if you look at the mutual fund data again, clearly biased towards equities [as opposed] or biased towards international. It looks like you saw some of that in terms of the [Pictet] outflows. Do you think this is a secular shift that you want to get behind from a new product standpoint?

Hank Herrmann

Well we are behind it. I do think that at least for now it's the secular shift. Unfortunately our business secular shifts don't last that long sometimes. But I do think it's pretty clear that money flows are strong into international. You can see that in the overall industry where equity flows in total are very modest. You have outflows in domestic and inflows in international.

We participate in a number of ways. The very important way that we participate is through the Asset Strategy Fund, which has a very heavy focus on international, particularly emerging. And also in our Pacific Opportunities Fund, our International Growth Fund, our Core Growth Fund – Core Fund, excuse me in International. That's an important part of our flows across the board.

So the one place you don't see it unless you drill down on it, is the important flows we're getting into Asset Strategy Fund, which are tied to the international emerging concept.

Operator

Your next question comes from Craig Siegenthaler - Credit Suisse

Craig Siegenthaler - Credit Suisse

First, just on the improvement of the U&D margin, the underwriting distribution margin, I'm guessing that was due to the fact that sales growth was lower than AM growth in the third quarter. But I'm wondering should we expect this to continue and I know a lot depends on the market. But if we look for AM growth exceed sales growth again in the fourth quarter, do you think we'll get a similar rate of improvement?

Hank Herrmann

I'm going to let Mr. Connealy take a crack at that and then I may come in with an addendum.

Dan Connealy

Craig, we did benefit in this way in this quarter. We adjusted downwards from accruals in the Advisor Funds because we would assume the payout levels in our budget. So as the year has gone on, we were over accrued in some of our payout accruals. So that helped this quarter by about $1 million. And so that was something that was unique to this quarter.

Hank Herrmann

However having said that, I still think that the quarter showed leverage in terms of the fees delivered on assets under management versus fees paid out associated with generating gross sales, and I'm encouraged by that.

Now as you know, we had I would say extraordinary market action benefit in the third quarter, but I feel we're getting to the tipping point here in terms of the size of the assets in the Ivy family and our expenses associated with sales.

Having said that, if all of a sudden sales really take off, I'd be a little red-faced but I think we're starting to show the kind of margin improvement U&D associated with getting scale. I hope that was responsive to your question.

Craig Siegenthaler - Credit Suisse

Yes, and one other question just on the institutional channel, we're trying to judge the [Pictet] impact. And I'm just wondering of the $277 million of institutional sales and the $608 million of redemptions, do you know what [Pictet] contributed to each of those? Was it zero to sales and $200 million to redemptions? I was just looking for that number.

Hank Herrmann

I would say that [Pictet] was important in both regards and 2/3 or so of the outflows were [Pictet] related. We didn't have a lot of new wins but [Pictet] on a gross basis is a flow account and even though we had outflows, we also had inflows. So I'm guessing they were very important both ways and 2/3 of the outflows was [Pictet] being my best guess.

Operator

Your next question comes from William Katz – Buckingham Research

William Katz - Buckingham Research

I was wondering if we could start with the advisor channel and so maybe a question for Tom or yourself, Hank, there seems to be sort of a growing discussion point around fiduciary risk between sort of open versus closed architecture.

Could you sort of talk a little bit about how you see any kind of channel conflict developing in the advisor channel? I understand that that platform is open architecture if you will, but with sales still heavily tilted toward Waddell and Ivy product, just sort of wondering how you're thinking about that in the scheme of sort of the best fit for the client.

Tom Butch

Bill, it's Tom. I don't think it's a matter of open versus closed architecture. I think it's a matter of regulatory oversight. And as you know RAA's are regulated under the 40 Act, which prescribes the fiduciary standard, which essentially says you have to act in the best interest of the client without regard to the financial interest of the broker or the broker's firm. And registered reps operate under a more general standard of suitability.

And I think what you're referring to is the fact that there is discussion and some preliminary legislation afoot that proposes a common standard, which could suggest that registered representatives be subject to the same fiduciary standards are RAA's. It's very early in the discussion phase as we're keeping tabs on this through our trade groups in a span of context and contacts, many of whom are really close to this process.

What I would tell you is that the outcome of this is highly uncertain. The only thing that we're hearing is there appears to be some agreement that a common standard might be useful. And whether that standard is ever adopted and what it would look like are really uncertain. But I think the most important takeaway for you is that based on what we understand at the moment, we don't foresee any of the potential outcomes affecting our business meaningfully.

William Katz - Buckingham Research

Hank, I was scribbling as fast as I possibly could, so I apologize for going back on this, you mentioned that your year-end bonus for the professionals would be set toward the end of the year. But to sort of look the band between '07 and '08 as a guidepost, to look at the comp and total related costs in aggregate for those years and then somewhere in between that, is that the way to think about it? If that is right, I was wondering if you could think about where your margin might be able to go now that you're reaching this tipping point on the wholesale business as you look out into next year.

Hank Herrmann

Well, ultimately your margin is a margin question for the fourth quarter I think, if I heard you right. Is that correct?

William Katz - Buckingham Research

I was really looking for sort of a baseline of comp and does that give you any relief as you look out to next year?

Hank Herrmann

Well, I think based on where on we stand right now bonuses are going to be higher than whatever accrued for. Two, I think we can materially increase bonuses and still have an operating margin north of the 20% number we set as a guide by the fourth quarter. Third, the compensation committee of the board meets in November and it is not wise for CEO's to front run board compensation members.

So it's just awfully difficult for me to be more helpful than that other than I think you can expect there will be an important lift, the company's profitability just improved a great deal and performance remains pretty much solid everywhere you look. Not as exceptional as '07 you must keep that in mind and remember that we look at bonuses on a one and three-year basis for our portfolio managers. As soon as I can do more to add appropriate color I will. I know, of course, that everybody's thinking about this.

Operator

Your next question comes from Michael Kim – Sandler O'Neil.

Michael Kim – Sandler, O'Neill & Partners

Looks like performance for asset strategy kind of picked up here in the third quarter. You guys have historically underperformed in the early stages of a recovery but are there any other shifts in the portfolio that drove a step up in relative returns?

Hank Herrmann

I'm not sure who I want to answer this question. Mr. Avery is responsible for our portfolio and I probably want to hold him back. Maybe I'll let the marketing chief talk about it.

Tom Butch

Michael, could you restate the second part of your question? I apologize.

Michael Kim – Sandler, O'Neill & Partners

Just were there any kind of shifts in the portfolio that may have driven the step-up in relative returns?

Tom Butch

I'm going to send it back to Mike.

Mike Avery

I'm not sure what you're looking at exactly. I think that the Asset Strategy Fund through its tenure has delivered solid performance. Over the last 12 months, let me answer it this way. Over the last 12 months we've made a concerted focus of going from return of to return on. Over 12 months ago we had the portfolio very defensively postured given the circumstances of the market at that time in order to protect the shareholders.

As credit markets improved, we took advantage of that by shifting cash into fixed income securities that were we felt inappropriately priced relative to the fundamentals, and in fact there's been a huge credit spreads have tightened dramatically from this time last year. If you look at credit spreads today, they're in many cases tighter than they were prior to the Lehman crisis and so that helped us and that was a very opportunistic trade within that portfolio.

In addition, we have given our focus of shifting from return of to return on. We have meaningfully increased the equity portion of the portfolio to the point where we're just above 80% of the fund is in equities. We currently don't have a hedge on the portfolio which might act as a drag on performance, so that has helped a little bit. And as Hank mentioned earlier, our focus in the equity portion of that portfolio is squarely centered on the emerging middle class primarily outside of the U.S.

Tom Butch

Michael, if I may, just as an addendum to your question and to Mike's answer. I don't want to overstate this but I can't imagine that there is a shareholder base that understands better a product than the shareholder base of the Asset Strategy Fund. Mike does monthly calls and his partner [Ryan Caldwell] do monthly calls with the shareholder base. They're extremely well attended and I think it's important to assert that near-term movements in the performance of that fund are genuinely not a primary concern of that shareholder base.

They buy the fund because of its flexibility, because of its track record and because of its stated objective of preserving and protecting and also participating on the upside. So I don't think that near-term movements in that fund are received without sized emotion by that shareholder base.

Michael Kim – Sandler, O'Neill & Partners

Then turning to flows, like your flows continue to broaden out away from asset strategy and G&R, I know the other products that you highlighted are still relatively small, but do you expect to get some margin benefit as sales continue to spread out given kind of lower net fee rates for asset strategy and G&R?

Unidentified Corporate Participant

I mean if you just look at it crudely and you look at the other funds that are selling the answer would be yes mathematically.

Hank Herrmann

But if I looked at them all the differential in fees is to the positive, but not materially because you've got Intermediate Bond Fund that's doing very well and the high yield fund I'm not sure that the fee structure is much different on that. You do have higher fees, obviously, on the international portfolio and the science portfolio and the growth portfolio. They're all running about the same in terms of daily flows, maybe actually the two fixed income funds might be a little stronger on a lot of days. That's the best shot I can get you. It's not going to materially change your model, at least for now.

Michael Kim – Sandler, O'Neill & Partners

Finally, aside from comp are there any other areas in terms of expenses that you might anticipate kind of picking up now that asset levels have started to rebuild?

Hank Herrmann

No. I would say that, and this is good news for everybody, I would expect our headcount will go up next year because the firm is growing a great deal and we had a voluntary separation plan a year ago and so we're a little thin in places and so that's a discussion for next year. But I doubt very much it will be extraordinary it will just be back to normal, and I would also expect that most firms would be telling you the same thing.

Operator

Your next question comes from Jeff Hopson – Stifel Nicolaus.

Jeff Hopson – Stifel Nicolaus & Company

Maybe I could just hit on that expense or spending issue I guess a little bit more for 2010? Specifically for Tom I guess, what are your thoughts on wholesaler levels ongoing promotions? And then the Asset Strategy Fund sounds like there's some pending potential adds to platforms, etc. Can you give us the context of kind of why those decisions are being made, potentially being made? I guess what I am asking is, is it because of this being a little more alternative product or why do you think you're finally getting some traction with that fund on platforms?

Tom Butch

Jeff to go in order, we will be adding some wholesalers next year and some internal wholesalers. We have a group of people who this year are hybrid wholesalers, meaning that they spend about half their time as internal wholesalers inside and the other half out in the market. Those folks will go out fully into the market next year. So that will add six wholesalers externally and we will restock that hybrid desk with another six.

What we do there is we tend to bring some of our best internal people as a career step into the hybrid position and we've had good success moving people off the desk to hybrid and then ultimately to full external wholesalers. So the wholesaler count will probably increase by six next year.

On the internal side we'll probably hire 15 or so people to get that back to a one-to-one relationship between the internal and external wholesalers. Also, one of the things is that we have three levels of wholesalers now. We have hybrids and junior wholesalers and then full wholesalers and the pay scale goes according to that progression.

To answer your second question, yes, I think that the alternative space, if you will, is being recognized as something of greater import on a whole span of platforms. Asset allocation platforms are now finding a new category for that, if you will, and putting say 10% of models into that. And I think a lot of it candidly has to do with the track record and the publicity and the industry word of mouth, if you will, around the asset strategy product that is creating specific demand for that.

And so we've placed that fund in the last year on two major insurers shelves and actually Ohio National, which is an insurance partner of ours, has become a top ten distributor of ours, principally on the strength of that and one other product.

This newer relationship with Jackson National had a small initial allocation but is getting substantial daily flow. And I just think that that whole notion of funds which have greater investment latitude, and in our case have a track record of doing what they say they are going to do, are going to be increasingly important on all these shelves.

Jeff Hopson – Stifel Nicolaus & Company

Would that extend then to 401k's? Any thoughts there?

Tom Butch

We haven't seen it on the investment only 401k space to the degree we have others at this point.

Jeff Hopson – Stifel Nicolaus & Company

Then if I could follow up on the expense issue. This year you had kind of a little bit of a different wholesaling compensation model with various motivations. Any thoughts on next year and what that might mean for, I guess, underwriting margins?

Tom Butch

We're early in that process. We like the framework established this year, which is production-based bonus points and bonus based on factors that we think to be important relative to the enterprise. We'll probably keep that. I don't see that changing materially.

Operator

Your next question comes from Robert Lee – KBW.

Robert Lee – Keefe Bruyette & Woods

I have a question I guess probably for Tom, could you give us some color on kind of the penetration in the wholesale channel in terms of maybe if there's anything you can provide in talking about your ability to branch out the number of distributors who sell your products. Have you seen kind of the number of brokers or financial advisors who are dropping tickets, kind of increase and to what degree are you seeing your other sales come from people who already had good experience with asset strategy or global natural resources?

Tom Butch

Those are all great questions. What I would say is we have good diversity in the span of our major distributors. We started the Ivy Enterprise as a wire house driven sales organization. And if you were to look at our top ten, all the major wires would be represented there?

But I think we have good diversity among what would be the other five, including an independent, and insurer, a regional and a couple of other independents and then supermarkets. So I think we're well penetrated in most of the largest distributors. There are an exception or two to that and next year, particularly that hybrid group I talked about, will be directed specifically towards penetrating those couple firms.

Relative to the experience people have had in a couple of our products and the likely hood that creates for them giving us sales in other products, you know there was a survey done by [Casina] earlier this year, which is one of the leading research firms, and the Ivy funds rated number one among what they said was the largest advisor survey ever done in terms of advisers who plan to increase their sales with us next year. That is among all mutual fund companies, ours was the firm that ranked number one with advisors in terms of their likelihood to do more business with us.

In terms of diversification among existing advisors, that's critically important and the work that we've done on asset strategy and global natural resources has obviously opened the door to other relationships. In terms of ticket droppers, we track that with pretty good care and that number has continued to increase solidly over the last couple years really, forever.

Robert Lee – Keefe Bruyette & Woods

Maybe a follow-up question for Hank. Similar to what we're hearing at other places, it seems that you mentioned your institutional pipeline is still I guess solid, but it seems like it is taking a longer than usual amount of time to see that convert into new business.

Are you thinking that as you look ahead to 2010 that this is going to be kind of a first quarter, second quarter maybe people will finally be making decisions and, for lack of a better way for putting it, the floodgates will open or something or do you think this is really something that's going to grind out for an extended period of time?

Hank Herrmann

Boy, I wish I had knowledge to the right answers to that question. I think it's certainly been on my mind and the institutional marketing organization. I sit on an outside board and on the investment committee of that board, and maybe it's just a one act play here and I should be careful about extrapolating my experience. But what I've seen is a lot of uncertainty and hesitancy and once the market started to strengthen a decision to stick with what they had on the hope that they would recover and to postpone rebalancing decisions.

However, all of the troubled managers of '07 and '08 are still in the headlights. There is a lot of skepticism, at the same time there's a sense of lets be patient and not jump into the fire from the frying pan. So, what I'm thinking is if the market were to start to act a little differently, maybe grind as opposed to stream steadily higher, we might start to see reallocations. But that's the best answer I can give you, Rob.

Operator

Your next question is from Cynthia Mayer – Bank of America Merrill Lynch.

Cynthia Mayer – Bank of America Merrill Lynch

I guess just to follow up on institutional for a minute, I think historically you guys have sold a large cap growth in DB and I'm just wondering if there's any chance of widening that out?

Hank Herrmann

Well, there is and we're certainly looking at small cap, mid cap as two examples of that. And then as an increased thought and focus on an international product and it may be that we'll be rolling out – well, we're already working on international core product where the record is quite good. And again as I've said to you a number of times, you've got portfolio managers that can effectively tell a story.

Cynthia Mayer – Bank of America Merrill Lynch

In terms of [Pictet], can you let us know what the total [Pictet] assets are at this point?

Hank Herrmann

Hold on for a second I think we can pull it out. Nicole's got it here right next to me, hold on. It's basically 1.8 billion.

Cynthia Mayer – Band of America Merrill Lynch

Okay and how influential are the managers within [Pictet] in terms of asset allocation there? So that if, I seem to recall in the past that there have been times that they felt it was a good time to buy U.S. large cap growth. If they felt that again, if for instance they had a view about the dollar, how influential do you think they would be in terms of the flows or is it really a client driven process?

Hank Herrmann

Well, they have a tremendous amount of assets and at least 1/3, I think, would be in some sort of an asset allocation plan. Then the other 2/3, I think, they wouldn't have as much control over. So, but they can move around a substantial amount of assets in their decision to rebalance.

Cynthia Mayer – Band of America Merrill Lynch

So, have they changed the asset allocation then in the that third piece of the U.S. large cap growth?

Hank Herrmann

I honestly don't know off the top of my head. I don't believe so. We recently finished a almost three week tour of Europe along with [Pictet] talking to brokers and clients. I don't think we would have done that or attempted that or gone through the agony of it actually, if it were expected that they were going to reallocate.

Cynthia Mayer – Band of America Merrill Lynch

Then I guess the question just to touch on share repurchase. It looks like your level of share repurchase was pretty steady versus 2Q. Do you have any thoughts there? Is your thought still to just offset the share allocations or how opportunistic are you feeling?

Hank Herrmann

We always try to be a little opportunistic sometimes we do it a little better than other times. And you know it's still basically a focus on offsetting the restrictive share grant impact.

Cynthia Mayer – Band of America Merrill Lynch

Just one more follow-up on comp. I seem to recall in some years in the past that you've made bonus adjustments both in the fourth quarter and the first quarter. Its sounds like this year you're thinking primarily the fourth quarter. Is that right or is there any thought of spreading it out?

Hank Herrmann

No, I think it's essentially right. We'll try to get it all squared away in the fourth quarter. Having said that, if the portfolio manager is an analyst, bonus is in the first quarter and Mr. Avery and I have a deep respect for the hurting cat's kind of problem associated with certain bonuses for our leading portfolio managers.

Cynthia Mayer – Band of America Merrill Lynch

I guess last question just on the number of advisors I noticed was up a bit and what's the outlook there? Are you still thinking about the seasonal patterns that you guys have had in the past?

Tom Butch

I think that the seasonal patterns will likely be similar to the past, yes.

Cynthia Mayer – Band of America Merrill Lynch

Do you have a target for sort of year-over-year growth?

Tom Butch

What we said is low to mid single digits is what we would expect. One thing that we're contemplating right now is production versus headcount and the trade off of the two of those. So that could have some impact in the future, but I don't think it would disrupt the historical patterns meaningfully.

Cynthia Mayer – Band of America Merrill Lynch

Any color on recruiting more experienced advisors?

Tom Butch

Sure. We have about 55 experienced advisors whom we have brought in. The activity remains very strong. We have probably a couple hundred candidate profiles. The movement of those people here has not been – the movement of their books of business has taken some time.

And so getting them back into solid production has taken a little longer than we would have liked and we're still working at perfecting our transition processes to get them here and productive a little more quickly. But the value proposition that we take to market has, we think, been validated and we're very committed to continuing that effort.

Operator

Your next question comes from [Max Sikes – Gabella and Company].

[Max Sikes - Gabella and Company]

On the institutional follow-up, Hank, I know you have a pension plan at Waddell and Reed maybe you could just give me a sense of given the fact that we have lowered discount rates, lower equity values, do you get a sense that there will be a little bit more of a bubble for corporate contributions next year in terms of pension plans, and then how will the impact of say will the movement to [DC] be.

And I guess my last question would be how that impact Waddell would? So I guess what I'm sort of looking for is should we expect any sort of non-normalization of the contributions next year and how that would impact you?

Hank Herrmann

I'll let Mr. Connealy respond.

Dan Connealy

Well, I don't think we're planning on any great change in that we continue to participate in those [DB] plans. And I don't know that our clientele is going to be a microcosm of what you're seeing in the industry, which is more and more companies doing away with their [DB] plans or freezing them. And so that's shifting more to the [DC] side.

Operator

Your next question comes from Marc Irizarry – Goldman Sachs.

Marc Irizarry – Goldman Sachs

Hank, just a question on the institutional channel just to beat this dead horse a little further. The sales rate obviously $277 million much lower than the [spend]. You talked about the pipeline being more robust. Is that something that we could expect to see sort of get back to higher levels and subsequent quarters? And then also what's happened with asset strategy in terms of getting that RFP activity for asset strategy or search activity? Is that sort to come here? Thanks.

Hank Herrmann

Well, certainly there's a lot in sort of the backlog in the [DB] side of the business, but as I said earlier and as we said in the release or in the Q I've forgotten where, the market essentially is frozen. There's a lack of decisiveness there and boards are trying to figure out whether or not to immunize, I can't get my arms around all of it.

We have good product, the consultants supporting our process, the strength of our organization, if the market opens up we're going to do better in [DB]. I believe that. We do have several other things that are pending that we will include inside of our institutional category that could be meaningful, including Asset Strategy Fund and other products. I just don't know.

The [Pictet] situation is highly, in my opinion right now, connected mostly to concern about the dollar in Europe. My own opinion is that the dollar pressure is getting over done and it could be that there's a trend change as people begin to recognize that we're not going to see a whole bunch of interest rate increases outside the U.S., which I think is one of the arguments against the dollar currently.

But again, I don't see a big rally in the dollar and I've got my fingers crossed I certainly don't anticipate a big decline either. So I'm hopeful that the outflows of [Pictet] slow down. But I'm not thinking that we'll see any meaningful changes to the inflow side until the picture clarifies. I don't know if that was responsive to your question but if not take another shot.

Marc Irizarry – Goldman Sachs

No, that's helpful and also for asset strategy are you actually any closer to getting that product out there?

Hank Herrmann

The answer is yes, we're closer. We have one product, we've got another one pending and we're doing more marketing of that product into the institutional channel, [Ryan Caldwell] I believe did presentation about a week ago, and so the interest is growing. If there's an issue it's capacity. In order to close business you need portfolio managers to help tell the story and they're running in six different directions because of the amount of activity that's going on in the retail channel.

Marc Irizarry – Goldman Sachs

Then just in terms of bigger industry picture question. We're seeing a lot of consolidation on the retail for the retail channel and you guys obviously are nudging your way onto shelves, more so maybe than the competition, but we've also seen a lot of asset managers consolidate recently. What's your view on your role in consolidation in this space?

Hank Herrmann

I'm not sure. I could read that several ways. Why don't you restate it for me?

Marc Irizarry – Goldman Sachs

The acquisitions or would you be interested in partnering up with someone to secure an even more stable place on the shelf?

Hank Herrmann

As to the latter part of that, at the moment I don't see that as a need in our case. We're pretty solidly positioned with all the majors. Our challenge is to expand upon that but I don't think transactions would be the way to get that done. And as I've maintained for a long, long time I think we're in a position to be a growing independent participant in the mutual fund industry and I think that's been manifested. There's a lot of disruption and I think there continues to be opportunity for us to gain shares.

Operator

(Operator Instructions) Your next question is a follow-up from Roger Freeman – Barclay's Capital.

Roger Freeman - Barclay's Capital

Just two follow ups. I guess one is on the advisors I think you said you have 55 of the more experienced ones now. How does that compare to last quarter? I think you were around 50 then, so you have five increased?

Tom Butch

I'm sorry I don't have that right in front of me.

Roger Freeman - Barclay's Capital

I guess the question I was going to ask off that and maybe without having the actual numbers it seems like maybe given your comments on trying to speed up the productivity ramp that you've slowed down the adds on that front?

Tom Butch

No. The activity out in the field is still strong and I think you might be referring to 50 last quarter as being the total figure. I referenced the 50, just to clarify, the 55 is the number of people whom we have recruited from the outside. So that 20 Waddell & Reed advisors who joined the platform so we have 74 people on the platform in total. So the number that you may be referring to 50 may have included both last time around.

I think there has been a bit of a slowing per your point in response to our trying to perfect the internal systems but activity is still going on at a pretty good clip and recruiting is still going on, and we fully expect to continue to bring people successfully onto the platform.

Roger Freeman - Barclay's Capital

What are the bottlenecks on productivity [run] if you had to throw one or two out?

Tom Butch

I think the process of ACAP positions over is something that we're still perfecting that's the principal thing bringing electronically the position of one broker deal the prior broker deal of ours and it's principally that.

Roger Freeman - Barclay's Capital

And for those who have gotten ramped up, what's been the feedback and I guess in particular are there any concerns about any limitations, like I believe you can't do equity options trades on the platform maybe some other limitations? Has that come up at all or are they generally pretty pleased?

Tom Butch

Well, it has come up from time to time but that's something we try to identify in the recruiting process such that by the time they're here they have a complete understanding of what we will and will not hold on the platform.

And so that should be a front rather than a back end piece of the efforts in such that by the time they made a decision to come here they have great clarity around that. So if somebody has a knockout decision based on a particular product type that we're not prepared to support that should happen very early in the process.

The feedback from the people is I think once they're through the ACAP process has been really quite constructive. We had 16 of them in here last week to immerse them in our investment management capabilities and just to get a lot of feedback from them. And pretty uniformly the comments and I had conversations in pretty good detail with all of them. Pretty much the comments were uniformly quite positive and some of the folks are very interested in helping us recruit others to the platform.

Roger Freeman - Barclay's Capital

What are you seeing in terms of sort of cross-sell to existing advisors. You talked about the 20 or so that have sort up converted. Is that picking up pace or are they seeing folks coming in and interested more so than you thought or about what you thought they'd be.

Tom Butch

I'm sorry I'm missing what your question's asking.

Roger Freeman - Barclay's Capital

Basically the upsell to existing advisors to the full service platform is their interest level above or in line with what you had expected because we had a discussion at one point about whether these folks coming in from the outside would ultimately entice others internally to step up.

Tom Butch

Frankly where agnostic as to what platform the existing Waddell and Reed advisors choose. Remember that this platform was put in place for two places; A, for those with existing with Waddell and Reed advisors who wanted a more full service platform it was to sort of cement them within our organization and give them no reason to seek that elsewhere, and B, was to be able to recruit from outside. And so whether they chose to be in the existing operating infrastructure or transfer to this is wholly their decision. We don't push them one way or another.

Roger Freeman - Barclay's Capital

Last questions is shifting asset strategy. I was wondering if you could just describe a little bit about how that fund is structured. It's obviously gaining providence within the total platform what's the investment process like there. I mean we all know [Ryan] and I forget the other person who is running that fund but how many PM's are below and are they sort of split by asset class? Can you give us – I'm trying to figure out how much of it is sort of dependant on those two.

Mike Avery

Well the other person you referred to is me. As a newcomer to following the fund I take it, what you should you appreciate is that in my dual role as the Chief Investment Officer our process revolves around brining into the thought process the entire group of portfolio managers and analyst.

You're obviously new at this so Hank Herrmann leads a morning meeting every day that lasts an hour or so, so that everybody has a chance to go around the room and give their views on global, social, political, economic developments and then we talk about the implications for sectors, industries and then down to the security level. And what [Ryan] and I do is bring that all into the decision making process as it obtains to the Asset Strategy Fund.

This fund is somewhat different in that we do have the flexibility to be in all the major asset classes, which gives us the opportunity to go across all the expertise in the investment management division. So our process is reflective of the entire investment management team.

Operator

You're next question comes from William Katz – Buckingham Research.

William Katz – Buckingham Research

Just two follow ups. One, Hank I apologize or Dan on this one I should know this been following stock for awhile, but the accrual for the professional staff is that done in the fourth quarter or is that sort of a two-step function in terms of thinking of the accounting? And the second question I have is you talked about sort of the outflows of [Pictet] but then the offset might be the Asset Strategy Fund on the other side. Could you talk about the revenue yield dynamics between those two funds?

Hank Herrmann

Well first on the accrual for bonuses. The accruals are made throughout the year. It's our process to evaluate and what those accruals would be that gets heightened as the year goes on. Your next question was about the mix?

William Katz Buckingham Research

Yes, just the yield differential between what you're losing at [Pictet] versus what you might be gaining in the Asset Strategy Fund.

Hank Herrmann

[Pictet] is pretty darn competitive and so at the fees on [Pictet] are below the fee levels on asset strategy.

Operator

At this time there are no further questions.

Hank Herrmann

Well, we appreciate the questions this morning and look forward to speaking to all by end of the fourth quarter. Take care.

Operator

This concludes today's conference call you may now disconnect.

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Source: Waddell & Reed Financial Inc. Q3 2009 Earnings Call Transcript
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