The Securities and Exchange Commission ordered Waddell & Reed to pay close to $776,000 over alleged failures to prevent reverse churning in a wrap fee investment advisory program.
Waddell & Reed — whose wealth management business was acquired by LPL last year — allegedly failed to ensure that the program, known as MAPLatitude, was appropriate for clients who didn’t trade frequently, according to an administrative proceeding document published on Monday.
Clients in wrap fee programs pay a fee covering all advisory services and trading costs, but clients who trade infrequently may be better off paying commissions in a non-wrap fee or brokerage account, the SEC says. Waddell & Reed at some point had warned of the potentially higher fees in the program, disclosures indicate.
Old client brochures for the program, issued several years prior to the LPL acquisition, show that the company acknowledged that certain investors could save on fees by using brokerage accounts when they qualify for breakpoint discounts. A review of brochures issued in 2014 also show that the company also noted that the program may not be suitable for clients holding high levels of cash or money market fund reserves. In addition, the SEC says that Waddell & Reed’s policy stated that accounts with fewer than four trades over the preceding eight quarters would be converted to brokerage accounts, the SEC says.
The company’s monitoring system allegedly flagged 737 MAPLatitude accounts that should have been converted, according to the administrative document. But Waddell & Reed failed to make the conversions, leading those investors in those accounts to pay the firm $484,645 in wrap fees, according to the SEC.The SEC also says that the firm lacked written compliance policies and procedures to prevent the alleged violations. LPL acquired Waddell & Reed’s wealth management business for $300 million in April 2021. The arrangement was part of the three-way deal through which Australia’s Macquarie Group acquired the company for $1.7 billion. Macquarie spun out the broker-dealer unit, which at the time had about 1,300 advisors representing about $63 billion in assets, as reported by Financial AdvisorIQ sister title, Ignites, at the time.
Jeffrey Newman is a whistleblower lawyer with the firm Newman & Shapiro. He can be reached at 978-880-4758 or at JNewman@NewmanShapiro.com