Waddell & Reed brokerage focuses on in-house funds

In this age of financial supermarkets, when investors can tradeany of thousands of mutual funds through a single brokerage, Waddell& Reed Financial Services stands out.

The company's nearly 2,400 brokers basically do one thing: sellthe firm's in-house funds. Although they're free to market fundsfrom other groups, most don't. Only 2 percent of Waddell & Reed's1998 fund sales consisted of nonaffiliated investments.

"We're probably the only ones left selling almost exclusively aproprietary line," said Robert Hechler, president and chief executiveofficer of the company, which is based in Overland Park, Kan.Is that a good thing? Not everyone thinks so. The brokerageindustry suffers from several perceived conflicts of interest, andpushing the company brand of mutual funds is one of them."It's a question of how much objectivity and broker independencecustomers may see," said Tom Miltenberger, a principal at St.Louis-based Edwards Jones, a brokerage that offers no proprietaryfunds. "Even brokers may have a concern if a firm wants them to sellthe in-house funds."A 1995 industry report on compensation practices, written by acommittee headed by Merrill Lynch Chairman Daniel Tully, cited apotential conflict of interest when firms pay brokers more to sellproprietary mutual funds than those from unaffiliated families.Hechler says that's not the case with the United or Waddell & Reedfunds, the company's two in-house families."We don't compensate brokers any differently (for sellingcompeting funds), and we don't turn down those orders," said Hechler.So why are Waddell & Reed's brokers so loyal to the firm'sproprietary funds?Hechler says it's a matter of having a strong lineup of fundsand a sufficient number of them. He takes issue with theconventional wisdom that investing in funds offered by multiplecompanies provides better diversification.But that's a controversial point, and it contradicts what manybrokers and do-it-yourself investors are trying to accomplish thesedays by selecting funds from various management groups.There's no denying that Waddell & Reed offers a respectablelineup of investments. The company's United family of funds, whichare sold with a front-end sales charge, date to 1940 and count about$25 billion in assets in 17 portfolios.The smaller, newer Waddell & Reed funds levy back-end ordeferred loads, rather than the front-end charges that typify theirUnited siblings. These six funds count about $2 billion in assetsand debuted in 1992.The company's obvious star is United Income, a conservativestock portfolio with more than $7 billion in assets. The fund ranksNo. 1 of eight equity-income portfolios with 15-year records,according to Lipper Inc. of New York.Russ Wiles is a financial writer and columnist for the ArizonaRepublic and author of the book How Mutual Funds Work (Prentice Hall,$15.95). Direct your questions and comments to Russ Wiles, BusinessNews, The Arizona Republic, Box 1950, Phoenix, Ariz. 85001.;