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Executives

Hank Herrmann - Chairman and CEO

Mike Avery - President

Tom Butch - Chief Marketing Officer

Dan Connealy - CFO

Mike Strohm - COO

Phil Sanders - CIO

Nicole McIntosh - VP, IR

Analysts

Jeff Hopson - Stifel Nicolaus

Cynthia Mayer - Banc of America - Merrill Lynch

Bill Katz - Citigroup

Michael Kim - Sandler O’Neill

Robert Lee - KBW

Daniel Fannon - Jefferies

Craig Siegenthaler - Credit Suisse

Mac Sykes - Gabieli & Company

Marc Irizarry - Goldman Sachs

Roger Freeman - Barclays

Waddell & Reed Financial, Inc. (WDR) Q1 2012 Earnings Call Transcript April 30, 2012 10:00 AM ET

Operator

Good morning. My name is Tabitha and I will be your conference operator today. At this time I would like to welcome everyone to the Waddell & Reed Financial First Quarter 2012 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

I will now turn the call over to Mr. Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed. Please go ahead sir.

Hank Herrmann

With me today are Mike Avery, President; Tom Butch, our Chief Marketing Officer; Dan Connealy, Chief Financial Officer; Mike Strohm, our Chief Operations Officer; Phil Sanders, Chief Investment Officer; and Nicole McIntosh, our VP of Investor Relations. Nicole would you read the forward-looking statements, 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 could 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 todays call including a copy of today’s press release as well as supplemental schedule has been posted on our website at Waddell.com under the Corporate tab.

Hank Herrmann

The year is off to a solid start, and the stock market rally obviously provided a strong tailwind for our results. The US economy is showing additional signs of improvement, but the financial crisis in Europe, slowing growth in China and election issues here continue to create uncertainty.

Specifics from the ICI shows great [key inflows] for our industry in what historically has been a seasonally strong quarter. In contrast we experienced solid net flows in all three channels during the quarter. Earnings of $0.55 rose 17% compared to the previous quarter.

Operating income of 73 million rose 15% sequentially and our operating margin is 23%, represented a 190 basis points sequential improvement. Assets under management rose 13% to 94 billion, a quarter ended record high.

Redemption rates continue to improve but remained somewhat elevated in retail channels. Thus far in April, we have seen some moderation in flows. They are positives but less so in the first quarter. I would characterize flows as tepid at the present time.

Looking at the contribution of each channel; advisors had sales of 1 billion and in flows of 158 million. Productivity rose again and now stands at an average of about 41,000 per advisor, a new high.

Our wholesale channel had gross sales of 4.4 billion and inflows of 970 million. Our flagship Asset Strategy Fund remains our top selling product, but several other funds are making important contributions.

We reckon that growing balance in our wholesale sale roughly a third of the sales were as a strategy in a third world fixed income products. We believe this balance provides a strong platform for ongoing growth.

Our institutional channel had sales of 652 million and inflows of a 175 million. The outlook here remains quite favorable. Institutional assets currently stand at a record high of 12 billion.

Our long-term investment performance remained solid with 78% of our fund and 86% of assets outperforming their benchmarked on a five year basis. Shorter term performance has 47% of our funds and 67% of our assets feeding the benchmark for 12 months. First quarter relative performance had two-thirds of assets above benchmark median.

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

Question-and-Answer Session

Operator

(Operator Instruction). Your first question comes from the line of Jeff Hopson with Stifel.

Jeff Hopson - Stifel Nicolaus

Any capacity issues in regards to the high yield product, and in regards to the flows or sales in April, any change or any further commentary of equity versus fixed income. For Tom, anything new in terms of product; may be on the radar screen that you’d like to focus or are focusing or that up till now you haven’t really seen much traction yet.

Hank Herrmann

Let me go first on the high income fund. At the present time, I don’t think capacity is a constraint. We are beefing up our analytical support staff on that product and we are in the process of [firing] at least one additional person. Looking at AUMs, I’ve seen several funds that continue to perform very well that have assets that are double our size. So I think it’s a nice problem I have, but we are not constrained at the present time.

With the second question was mostly about tepid flows commentary. I am going to let Tom deal with both the question.

Tom Butch

Hi Jeff, if you look at April there’s no one thing that stands out. I would call it a fairly modest downshift across the funds and I think a little bit of the flattening in the markets just caused a pause in sentiments. But nothing really stands out on a gross sales basis.

On a net sales basis, we saw elevated outflows in global natural resources fund owing to its being removed from [mono] portfolio at one of our broker dealer partners. With April behind us we think that is as well.

Relative to product emphasis, we’ve always said that we’ve been in a good position of having more good product than we can reasonably get to at one point in time and if we look at the breathes to which Hank alluded in the third fixed to third asset strategy, it’s hurt everything else.

There’s ample opportunity wherever the train comes in to the station. The one thing I wouldn’t point out is that we have two funds in registration; right now one is a modification of an existing product another a new product, those should be ready to go to market early in June, and we expect good emphasis on those as the year progresses.

Operator

Your next question comes from the line of Cynthia Mayer with Banc of America - Merrill Lynch.

Cynthia Mayer - Banc of America - Merrill Lynch

Maybe if you could talk a little about expenses in the quarter. Looked like the G&A was down and you mentioned ad spending and legal. And I am wondering what your are expecting for ad spending for the year. And then just on the comp what if that was may be stuff that won’t repeat. I think there was severance and some seasonal payroll.

Tom Butch

I can take the ad and then have Dan answer the rest Cynthia. Ad spending in aggregate in the wholesale side of the business which was the largest by far, part of it last year will be - as we got through the year, roughly two-thirds of what it was last year. You didn’t see much in the first quarter it will be concentrated in the second and fourth quarters.

Dan Connealy

As far as the G&A that ad spend plus some smaller legal and consulting fees were really the major difference there. With regards to comp, yes there was in aggregate about $1 million worth of items in the first quarter that aren’t expected to be repeated. Severance was the biggest part of that.

We are projecting that comp in the second quarter will be somewhere between 43 and 44, probably with the accent on the 44. So that’s what we’ve seen now. Did that cover it Cynthia.

Cynthia Mayer - Banc of America - Merrill Lynch

Just one more expense question was just on the indirect spending in advisors channel. I think you had previously mentioned you had 1.5 million per quarter for compliance tech through 2Q 2012. Is that still what you expect, and if so would you expect indirect to fall in 3Q.

Dan Connealy

Well we would hope it would moderate in 3Q. It would depend if this could be curtailed crisply at the end of the second quarter which is planned right now. So, that’s it what we are planning at the moment. Indirect in the wholesale side was kept fairly low this quarter, somewhere it was just a better timing.

Cynthia Mayer - Banc of America - Merrill Lynch

If I can just one question on the flow, it sounds like you are a little more positive than usual on the institutional type bond. It looked like one of two big mandates got funded this quarter that you’ve won but not funded and can you let us know sort of what style those are in and what strategy is it that’s selling better that usual.

Dan Connealy

It was in several different locations that core products won a fair amount of money from a foreign government entity. We also picked up some money in our mid-cap growth product unfortunately that flowed in to retail but we will be coming back and say institutional was a convenience issue. We also had been picking up meaning additional money in the Asset Strategy fund through insurance distribution.

Based on what I am seeing in the pipeline in terms of conversations we are having with the potential clients or consultants, I would say the outlook for our core products continues to look pretty darn good as the strategy looks pretty darn good; midcap pretty darn good.

So three or four products that are getting a lot of emphasis at the current time. Numbers are good, people can explain what they do and that sort of thing. It’s a lump business, we had a pretty strong growth sales quarter. We had some outflows out of (inaudible) which is kind of been a bit of a story for the last few quarters, and so net was obviously expectable, but I think that’s the potential to do better as we go along.

Operator

Your next question comes from the line of Bill Katz with Citigroup.

Bill Katz - Citigroup

Just coming back in the wholesale channel, looks like the direct expenses were rather flat despite pretty good pickup in assets. I am just sort of curious, Dan I heard you on the indirect side. But can you talk about just on the outlook perspective, how the dynamics of that line might array relative to what the asset growth.

Dan Connealy

Well in that particular quarter, we did have some smaller accrual adjustments that turned out to be favorable. One quarter they will go one way sometimes the next. But we are not seeing a great change in the dynamics in the wholesale flow other than sales of certain shares do not have the probably one fee that would be in that line and doesn’t have the shareholders fee, and related expense, but no very large trends that I would say.

Bill Katz - Citigroup

Can you quantify how much was reversed this quarter.

Dan Connealy

A few hundred thousand.

Bill Katz - Citigroup

You mentioned that one of the (inaudible) got pulled from one of the platform. Can you talk about the reasons why and how much elsewhere potentially could be at risk if any.

Tom Butch

Bill that is specifically performance related substantially, and I think also in that particular instance it was a move away from resource in genera. So it was sort of a one-two things. I don’t really have any further insight on any other potential similar situations.

Bill Katz - Citigroup

Just in terms of the advertising, just seems like curious that you pulled back in the first quarter given the retirement season if you will. So is there been a shift, just structurally how you think about ad spend as a platform given the mix of the business at this point.

Tom Butch

The first year that we really had a substantial sustained year long program we just sort of caught our breadth in Q1, evaluated what we had done, and I don’t wish we are not completely dark in the market but we are not full up either, and so we’ll restart with more bigger in the second quarter.

Operator

Your next question comes from the line of Michael Kim with Sandler O’Neill.

Michael Kim - Sandler O’Neill

First just focusing on asset strategy; can you just talk about the dynamic of the funds strong relative performance more recently versus still lackluster risk appetite across the industry and how you see that playing out for flows going forward.

Tom Butch

I can take a cut at the flow question and the Mike might want to comment on structural issues on the fund. Mike if you look at the flow situation, we first started experiencing outflows in the fund in September 2011, and if you look across the quarter January through March, the redemptions for the negative net flows is probably more accurate.

We are very front rated in the quarter, and so for each of the three months of the quarter we saw a diminution of the negative net flow sequentially, and we’ve seen that carry through in April as well, which will likely be the smallest outflow since the outflows began in September.

So, while there is an equity aversion in open end product, we seemed to be getting to a point where that may appear to be close to running its core if you don’t know what’s going to happen going forward. But if you just look at the math over the last many months, the trend is moving in a positive direct.

Mike Avery

Michael this is Mike Avery. I would just say that we continue to have a large exposure to equities in the portfolio, we ended the year and continue to have right around 80% of the fund invested in equities. The mix is similar to what we’ve discussed in the past. We still have a large position in gold bullion, some fixed income exposure and a little cash.

I would say that the only dynamic that may effect flows is that contrary to the pressure that we were getting in the second half of last year to have a larger hedge on the equity position, we didn’t succumb to that pressure because of the pricing of hedging instruments which would have resulted in a severe negative absolute return for the fund in 2011.

By carrying that philosophy in to the beginning of the year, meaning a very minor hedge on our equity position, I think it’s helped us capture a good part of equity performance across markets where we are invested.

Michael Kim - Sandler O’Neill

A question for Dan; assuming normalized market backdrop going forward and relative returns home steady from here. Can you just talk about the trajectory for comp expense through the remainder of the year, so maybe a step down this quarter as seasonal trends normalize and then looking after the back half of the year, would that sort of mostly be dependent on investment performance. Is that sort of a good way to characterize it?

Dan Connealy

Yes, it would Mike. That’s a major that would occur as the year progresses and we have a better of the likely performance throughout the whole year. There are typically adjustments made to comp mainly portfolio manager bonus comp. So, you are correct, that would be the thing to be looking at later on and we are not looking at major hires or things that would fall in that.

We will have some temporary employee’s fall of the list in the third quarter or at least by the end. So it’s that process of [repapering] the accounts. But that’s not a lot of money.

Operator

Your next question comes from the line of Robert Lee with KBW.

Robert Lee - KBW

This is may be a question more for Tom, but I guess Hank too. But a couple of things on the distribution front; first, I know you had your normal seasonal drop-offs in the advisor account. But going from here forward, I know you haven’t really been focused on your numbers there, but you had about a 50, 60 advisors increased year-over-year. Should we be thinking that going forward that’s kind of the level of modest year-over-year increase you are thinking about or targeting.

Tom Butch

Simply said being modest is the right word. I don’t know 50 plus, 50 minus is the right metric for this year. We are off to a little of a slower start in recruiting on the classic or traditional side. If your question really is are you in a place where you are not as focused on sheer number of headcount that you collect and then sign up for loosing a lot of it that is correct. Again I don’t know 50 is the right number, but I think its sort of a plus minus situation.

Robert Lee - KBW

May be in the wholesale channel on the institutional channel, can you talk a little bit about where you think you are right now with your staffing and structure there. I know you said no major hires, but over the years as you’ve expanded, you’ve incrementally been adding people. What’s the strategy in wholesale, do you think it’s time to start going after different segments of the market and how are you thinking of staffing that part of the business.

Tom Butch

That’s a great question. As far as staffing if you look at Ivy relative to other tier one firm that’s a group we believe we compete. We are late on wholesalers relative to them. That was substantially the fact that most of them have been in the wholesale business a whole lot longer than we have, and so as a result our productivity per wholesaler remains at the upper end of the business.

So we’ve already said from the very time that we made the Ivy purchase that we would hire in to opportunities, but ahead of it, we’d continue to do that I would suspect over the next many years till we get to a place where we close the gap between ourselves and the other tier one players.

Attaching a number to that is really imprecise. If the market were to continue in its relatively posture so far this year we would consider in the second half of the year adding a handful but certainly not a hiring spree, but I think handful at a time over the years both would be the likely way we would go at it.

Relative to markets, we certainly have good positions at every material distributor in the business, but A, we can improve those substantially, and there are a couple of the largest distributors where we are very nascent in our effort in attaching significant importance to that effort.

So deeper penetration at existing firms and the ability to get much further along in firms where we are still really in the relative infancy of what we are doing. Relative to other kinds of markets certainly in the DCIO space we’ve put some resource against that this year. The variable annuity world we’ve had some really good success and think that those are likely replicable elsewhere as well, and I think also making sure that we make the most of the product platform that we have and thoughtfully and incrementally expand that based on our core investing ethos and the opportunities that presents us are the three things I would say are top of mind when we look the next couple of years.

Operator

Your next question comes from the line of Daniel Fannon with Jefferies & Co.

Daniel Fannon - Jefferies

Just a follow-up on the Asset Strategy fund, and you certainly talked about the net side of the business. Just want to characterize, is that more that redemption rate have been slowing in terms flows while the gross sales have generally been consistent at the start of the year.

Tom Butch

If you look at each of the first three months of this year, January on a gross sales basis was better than December; February better than January and March better than February. And it does not appear as though that sequential trend will continue in April, just to put down on it as well. So it was both things happening at once. In the quarter sales were getting better in each month, redemptions were tamping in each month.

Daniel Fannon - Jefferies

What’s the mix of institutional versus retail now in that fund.

Tom Butch

Overwhelmingly retail.

Dan Connealy

[18-20].

Daniel Fannon - Jefferies

One last question here, in the press release you just highlighted success and the DB is also the fine contribution markets or potential success there. Can you discuss kind of the products that are driving either those conversations or wins, is it more fixed income or specific at the product level.

Hank Herrmann

Sure I understood the question. Ask me again.

Daniel Fannon - Jefferies

There was noted in the press release that you guys are highlighting fixed asset in the potential, the fine benefit as well as the fine contribution markets or channels and I am wondering if that’s been driven more by your fixed income products or certain equity products or just the whole suite.

Hank Herrmann

Primarily equity products. [Midcap] grows, that’s the strategy for them.

Operator

Your next question comes from the line of Craig Siegenthaler from Credit Suisse.

Craig Siegenthaler - Credit Suisse

You answered all my questions, I have one left. You really have good flow diversity now, really driven by three funds, asset strategy, high income, midcap. If I want to focus on kind of the up and coming, the next set of funds which ones would you advise us to look at.

Tom Butch

Tell me where the markets going to a certain extent. The funds have been working this year in addition to those that you talked about. If you are municipal high income and internal core equity, science and technology predominantly that’s on a gross basis. On a net basis you will see a lot of those plus our balanced products.

I also indicated that we have two funds in registration right now, both of which will get significant marketing efforts once they are launched over the following 12 months. So, part of it is where the market is and I think the most important thing to appreciate is that within that (inaudible) it gives us the opportunity to participate wherever the market’s going.

Part of it is being ahead of whatever trends we can be based on the insights of our investment professionals and going to market with some forward-looking things as well. And over time with that strategy with high income we were early to those stores. So, whenever we have the capacity to do that, we do that as well.

I know it’s particularly satisfying answer but it’s the real answer in that. I can’t tell you other than what I just said, where the wheel stops next.

Craig Siegenthaler - Credit Suisse

Got it. Just one follow-up on compensation expense. The variable component of comp has really moved around a lot, especially the last three quarters. What is the potential for that? And I know relative fund performance is a big driver A1 levels and other driver but what is the range of that in the second half of this year. You gave us pretty good color on the second quarter, but may be help us think about that more in the second half of this year.

Tom Butch

I think that’s a question being directed to me no to Dan, and answer is. You tell me what the performance is going to be and how they are going to rack up relative to their peers, and I can give you an answer. Remember and I think I’ve explained this in the past. If a portfolio manager really rings the bell, their bonuses can be tripled and more.

I can’t tell who is going to ring the bell in April on the basis or the way the things are going. At the present time, we are as I pointed out, we are doing okay in performance not grades. I think the way we accruing expenses in anticipation the bonus is about in line with performance. So, at the moment I don’t know that there would be any material change.

At the end of September, at the end of June if there is a material change we’ll have to look at it. What makes some of these things a little more complicated is simply that the breadth of returns in most of the mandates, between the guys at the top and the guys at the bottom is not that wide. So in a month or two you could have a material change either from the top to the bottom or the bottom to the top.

Bonuses are for portfolio managers and analyst tied closely to one thing, performance. May be that’s makes us a little bit different than other, but it’s a meritocracy and if they deliver they get compensated.

Operator

Your next question comes from the line of Mac Sykes with Gabieli & Company.

Mac Sykes - Gabieli & Company

A question for Mike; how would you respond to the shareholder of Ivy that asks about the effects of the potential US fiscal cliff at the end of this year, and then why would Ivy be a better vehicle to own now given the uncertain outlook versus a more traditional global allocation bond which is the higher component of fixed income.

Hank Herrmann

State your question again more, say it differently.

Mac Sykes - Gabieli & Company

I was just curious to get your comments on how you thought the effect of the potential US fiscal cliff would impact markets at the end of the year, and then given that we continue to be in this investor pessimism on certain outlook, why would that be a better fund owned versus a traditional global allocation fund which has a higher fixed income component.

Mike Avery

Well, I would say that the asset strategy fund has the flexibility to be in different asset classes. We are not constrained to be in any of the major categories as some of our competitors are.

If you look closely at the competitors in the flexible global out category, you will see that many of those even though they are slotted there tend to operate within bands or tend to operated within constraints that limit their ability to go too far away from a lot of cases where they currently are today.

So I would say that the flexibility of (inaudible) the fund by virtue that we can move to a more posture either by changing the allocation in asset classes and or using hedging strategies as a way to minimize a downturn in one or more asset classes is a good reason to consider the fund and there is a reason that has helped our shareholders for a long period of time and continues to allow us to collect new assets in to the fund.

With regards to your first questions, I think that you are right that there is a so called fiscal cliff that the market has been talking about for sometime. So by virtue of the fact that it’s been discussed for a while, probably minimizes the impact as we get closer to the end of the year.

The outcome will be dependent upon who is in the next administration; whether or not the Republicans can retain cumulative substantial position with in Congress and how they react to the idea of having to raise the dead ceiling, having to renew the Bush tax cuts and a couple of other measure that you refer to is the key problem.

I don’t remember off the top of my head what the absolute dollar amount is, but its an amount that about 4% or 5% of US GDP, so it significant. My expectation is that given the seriousness of the issue, particularly, relative to the size of the total economy that regardless who is sitting in the next administration and how a Congress changes that is too big certainly to ignore and that it will addressed by (inaudible) Congress who will not want to have as part of their legacy the blame for sending the US economy potentially in to a recession if these measure are not either enacted upon or will go over at the end of the year. So I would expect quite frankly a minimal impact to the markets on that specific issue.

Operator

Your next question comes from the line of Marc Irizarry with Goldman Sachs.

Marc Irizarry - Goldman Sachs

Dan and Tom if you have color on this appreciate it. Looks like our lower advertising cost this quarter certainly were helpful for keeping the cost at bay. But when you look at the next couple of quarters and just think about it may be slower, may be slowing paces in to April. How should we think about advertising cost on both the wholesale channel in particular.

Dan Connealy

Tom has already said the we will be starting backup to have advertising cost continuing in that campaign in the second quarter, so it should be higher. The other thing affecting G&A would be - whether or not a lawsuit that’s just pending in a very busy court gets moving, and its hard to predict that.

Operator

You have a follow-up question from the line of Cynthia Mayer with Banc of America - Merrill Lynch.

Cynthia Mayer - Banc of America - Merrill Lynch

Just a couple if its okay. One is just on the distribution revenues in the advisor channel you mentioned in the press release higher asset allocation fees or asset allocation products. And I am just wondering if you could remind us what the total assets of those are now and how those fees compared to other fees.

Dan Connealy

Well I am sorry I don’t have that number, speaking specifically of the MAP product. It may carry a fee of 130 rather than the normal (inaudible). So that’s more that goes in to the grid and we keep a part of that. So its helpful both to our profits and also to the advisors productivity. And there’s been quite a push in the area of MAP because of the fact that in the process of selling that product you do put the shareholder in a sleeve depending on their investment outlook. So you don’t have to repay for that account because you have just done it. So that’s been an attraction plus it’s a good product for our clients and for our advisors.

Cynthia Mayer - Banc of America - Merrill Lynch

Is that a more seasonal product than any other, so that it would be higher in 1Q.

Tom Butch

No, its very consistent. We think it’s roughly 6 billion in those products which is, if I am doing my math right, it’s something like 17% of assets in the channel, but its percentage of sales is consider a bit higher than that.

Cynthia Mayer - Banc of America - Merrill Lynch

Then just trickling back to the institutional channel for one more, what’s the outlook on (inaudible) because it seems like the performance on the US large cap growth has now got a one year, a good five year, only the three year seems lagging, and I am wondering is sort of the lack of flows there because they are paying more attention to three year or they are not buying US equity at all or are they buying something else for US equity.

Dan Connealy

Good question. I’ve been struggling, we are trying to find the answer. The performance has been better, and I think that’s been helpful and I had anticipated a slowing. There was some of that, there’s also been some inflows a little bit stronger that I would have guessed in to that product. So it’s been going both ways.

I think the answer is, there are several different channels within (inaudible) and some of them are a little more macro focused than they are worried about currencies and that affects the way things go, others just are reach out specific and they have a different prospective. There’s a little bit of a hot cold. My experience says, if performance improves the flows improves. Best I could do for now Cynthia.

Operator

You have a follow-up question from the line of Bill Katz with Citigroup.

Bill Katz - Citigroup

Just go back in to the tax rate, how more of a shield do you have given the sale of your prior affiliate to the extent to offset the gains.

Dan Connealy

Right now as it stands 6 million in gross capital gains remain. So, that’s what’s keeping us from a normalized tax rate.

Bill Katz - Citigroup

Second question you mentioned that flow has decelerated month-to-month largely due to the G&R fund being pulled. But then I thought you also said something about asset strategy fund. It might have been equity, it might have been asset strategy it wasn’t clear to me in terms of the flow dynamics in to April.

So I am just trying to understand and may be step back and just talk about the sequential decline in flows one more time. Apologize for going back.

Tom Butch

I think what I said on asset strategy is the net flow in April was the least negative they had been since [outflows] began in September. I think relative to April generally on a gross basis, what I said was sales flowed across the board as the markets flowed. On a net basis that was hindered by the G&R factor I discussed.

Operator

Your next question comes from the line of Roger Freeman, Barclays.

Roger Freeman - Barclays

On the institutional flows, the one of the two funds that you had mentioned last quarter, did you say that the other one is close to funding or can you talk more about do you have any sizeable mandates close to funding in [institutional].

Dan Connealy

There’s still that’s yet to fund. Until they fund, they don’t fund is the way they handle it.

Roger Freeman - Barclays

On the advisors, you mentioned that the traditional advisors recruiting got off to a slow start this year. On the breakaway or independents that you’ve been targeting with the Choice platform, can you talk to how the traction is there?

Tom Butch

Yeah thanks for asking, that’s what we call our Choice channel, which includes both advisors whom we have hired from other broker dealers and to a lesser extent certain (inaudible) who have chosen to avail themselves to that operating platform. At quarter end we had a 159 advisors on that channel an a 108 of those were recruited. That compares with a 149 at the prior quarter end.

We added 17 to the channel in the first quarter, but regrettably lost 8. We are getting to a place where we are maturing and that’s happening a little bit. Assets jumped from 2.9 billion at the end of the year last year to 3.4 billion. So we saw an acceleration in our moving the books of these advisors over their platform.

Roger Freeman - Barclays

On the ones you’ve lost and I know it’s not many, but is there any recurring theme as to why is it anything had to do with functionality or otherwise.

Tom Butch

It’s hard to identify, each one is unique. There’s hasn’t been any sort of essential cause that I can really tell you. Some haven’t been able to bring their book over as they had anticipated, but there no sort of recurring thing.

Operator

At this time there are no questions. I will now turn it back over to the presenters for further remarks.

Hank Herrmann

I just want to put clarity on ad expense since that’s been a question that’s come up several different ways. On the baseline number for 2011 it was 4 million and I am guessing at some place between 2.5 million and 3 million. This year, I would say, half of the difference on a year-over-year probably came in the first quarter.

Other then that we appreciate your time very much; look forward to talking to you in three months. Please take care.

Operator

That does conclude today's Waddell & Reed Financial first quarter 2012 conference call. You may now disconnect.

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