SEC Hits Waddell & Reed for Overcharging Clients in Wrap Fee Programs
According to the Securities and Exchange Commission this week, it has ordered Waddell & Reed, based in Overland Park, Kansas, to pay close to $776,000 over alleged failures to prevent reverse churning in a wrap fee investment advisory program.
From at least January 1, 2015 to July 31, 2021, Waddell & Reed, whose wealth management business was recently acquired by LPL Financial, allegedly failed to ensure that the program, known as MAPLatitude, was appropriate for clients who were infrequent traders, according to public documents on September 19, 2022.
In a wrap fee programs, clients 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, according to the SEC.
Prior to the LPL acquisition, old client brochures for Waddell & Reed’s program reportedly 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 indicates that the company also allegedly noted that the program may not be suitable for clients holding high levels of cash or money market fund reserves.
Further, the SEC says that Waddell & Reed’s policy specifically stated that accounts with fewer than four trades over the preceding eight quarters would be converted to brokerage accounts.
The company’s monitoring system allegedly flagged 737 MAPLatitude accounts that should have been converted, according to the SEC. Waddell & Reed allegedly failed to make the conversions, leading those investors in those accounts to pay the firm $484,645 in wrap fees, according to the regulator.
The SEC noted that the firm purportedly lacked written compliance policies and procedures to prevent the alleged violations.
The firm reportedly agreed to a cease-and-desist order and a censure, as well as to pay disgorgement and prejudgment interest totaling $575,589 plus a $200,000 civil money penalty, without admitting or denying the findings
LPL Financial reportedly acquired Waddell & Reed’s wealth management business for $300 million in April 2021. The company says it discontinued the wrap program in July 2021, after LPL acquired Waddell & Reed.
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Tags: MAPLatitude, Waddell & Reed fine, Waddell & Reed LPL Financial, Waddell & Reed Reverse Churning, Waddell & Reed SEC charges Last modified: March 22, 2023