Hank Herrmann in 2005 interview: CEO at least ‘til I’m 65

This article originally was published Dec. 4, 2005. Herrmann, 73, plans to retire Aug. 1, 2016, after 45 years at the Overland Park-based mutual fund and money management company, the last 11 as its CEO.

Hank Herrmann has managed money at Waddell & Reed since the nation's bicentennial. He's now charged with managing the company.

In six months since replacing Keith Tucker as chief executive officer, Herrmann has focused attention on the morale and production of Waddell & Reed's 2,443 advisers. Both had suffered during a spate of legal disputes that bedeviled the Overland Park financial services company and its stockholders.

The company's adviser sales force is unique among mutual fund families, and Herrmann considers it Waddell & Reed's ticket to survival as a smaller industry player. He also seeks growth from the company's Ivy Funds, which are sold by brokers outside the company.

Just before Thanksgiving, Herrmann talked about his plans and expectations for the company, and what those mean for customers.

Questions and answers have been edited for length and clarity.

Q. You're an investment guy, usually doing the grilling of CEOs. How's the perspective from the new seat?

A. I have an advantage, because I know in advance what the questions should be.

And I have the advantage of being here lo these many years and certainly have a very hands-on, detailed knowledge of the company's operations. So shame on me if I have someone ask me a question I shouldn't at least be reasonably familiar with.

Q. You came into this job in sort of a pinch when Keith Tucker resigned in May. How long do you plan to remain CEO?

A. I'm going to turn 63 the 8th of December. I expect to be here at least until I'm 65.

Q. What would you say would be Tucker's legacy at Waddell & Reed?

A. The two big contributions that Keith made were getting the company public and getting Waddell & Reed into the broker-dealer distribution channel (with the Ivy Funds).

Q. What do you see different in the way this company will run under Hank Herrmann?

A. At the present time we're going to be doing more of the blocking and tackling kind of thing.

We've made a really significant change in the broker-dealer channel, and now we need to execute that very effectively. We're doing a good job, but there's a lot more to go.

We also need to make sure that we keep the advisers channel comfortable that they're an important part of our long-term plan as well. Both pieces have to be successful.

Q. Recently, American Express spun off Ameriprise, separating the company's money managers from its captive sales force. That leaves Waddell & Reed essentially as the only conjoined twin out there. Does that model still work?

A. It does. Ameriprise, the old IDS, unfortunately for a long period of time had quite poor performance. And salesmen can't be successful selling out of an empty barrel.

Q. Does this model bring something to the company others don't have?

A. Absolutely. The most important part, frankly, is that we can afford to service a part of the market that everyone else is ignoring.

Q. That market being?

A. More of the average middle American of average household income. Most everybody else is targeting upscale.

Q. Waddell & Reed has come through a lot of legal battles. It settled charges by the NASD and state regulators, including Missouri, which actually closed the company's offices in the state for part of one day. How are relations with regulators, and do those need repairs?

A. What I'm comfortable saying is that we're working hard to get the issues behind us.

I'm determined to do whatever I can to prevent any additional bumps in the road. We've bent over backward to settle everything that's out there to be settled.

Q. Is there a settlement strategy with former Waddell & Reed broker Stephen Sawtelle? Twice an arbitration panel awarded him $25 million, and twice he lost when the company appealed in court.

A. There is no new strategy. It may be we're going to have to make a whole new round in front of a new panel. And we'll do that.

Q. What's happening to address top-line growth?

A. We've really put a big effort into trying to put some energy into the sales force. Some of the bumps in the road were not helpful. All of the bumps in the road were not helpful.

We needed to get back out there and let that advisers channel know how important they are to us. In my case, a mea culpa to apologize for the things that made their jobs a little bit more difficult.

I've gone around and tried to, if you will, just remind them that the company is focused on doing what we have to do to help ensure that they're successful. And I think for a period of time there was a little loss of that.

Q. Was it from distraction?

A. Our business is a business of trust. If you're out there and you're building relationships with people on the basis of trust and you're having problems with regulators and so forth, that's not very helpful.

Q. Has morale improved?

A. A great deal.

Q. Is that showing up in the numbers?

A. Yes. I want to make it clear that there has been sequential improvement going on since late spring, early summer, almost on a monthly basis. If I look at gross production, I just continue to see steady progress, and that's what I'm hoping for. No miracles, just steady progress.

Q. How do recent activities help customers?

A. If the advisers channel is not energized, their interaction with the customer base is less. And if they're energized, it's higher, it's better. I think that's the most obvious way these changes are helping. If you're not out there in front of them, are you really helping them?

Q. Waddell & Reed manages $40 billion in customers' money, relatively small by industry standards. Can a company this size survive on its own?

A. I believe it can. We serve a market that's way underserved with a cost structure that allows us to serve that market. As long as the advisers channel is healthy, we have a very defensible niche and we can go on for a long time.

Of course, as you know, we're very profitable. It's not about profit. It's size. Even with $40 billion under management, we have all the scale we need to continue to do well.

We have 50 investment professionals back there, if you just count portfolio managers and analysts. Very deep in experience with a lot of tenure.

We have an underutilized manufacturing facility, the investment group. We could manage a lot more assets. But in the advisers channel, you can't really drive rapid growth. In the broker-dealer channel, you can drive it very substantially. So that Ivy channel has gone from nothing to $6 billion in a fairly short period of time.

Q. These are funds that are managed for the most part by the same group running the Waddell & Reed products?

A. Exactly. The growth leg is the Ivy channel.

Q. We wouldn't serve readers if we didn't ask you about the stock market.

A. You tell me what Alan (Greenspan, chairman of the Federal Reserve) is going to do and tell me what oil is going to do, I'll tell you what the market's going to do. Those are the hang-ups.

The market, as you know, has essentially done nothing since 2000. It's almost historic in terms of the length of time that has gone on without getting any kind of return.

You had a record number of quarters in a row of gross domestic product growth. Corporate profits are probably 50, 60 percent higher than they were in 2000. That translates into a price-earnings ratio being at 14 times next year's earnings estimates, and 14 times, even with today's interest rate structure, just seems too cheap. So my message to long-term players is: The market's cheap, and you'll look back five years from now and be very glad you participated.

The corporate profits forecast in January was 7 percent and corporate profits are up 15 (percent) and it's not all energy. So profits have been much, much better than people thought, yet the S&P 500's gone nowhere.

Q. What's up with that?

A. I think the concern about the Fed, concern about the price of energy. I think those are two big ones.

Q. I'm going to ask you to analyze just one stock, Waddell & Reed.

A: We had a long period of time when we weren't executing nearly as well as we should have been. Profit margins have been deteriorating for several years. Instead of having a slight profit at the point of distribution, profitability at point of distribution went into negative territory.

Q. That's the adviser channel?

A. Right. We had top-line sales growth that wasn't what we'd hoped. Broker productivity deteriorated. There's a long list of things if I were just being the analyst in Hank Herrmann that I would point to and say this company is not firing on all cylinders and needs to do a better job.

The performance part is doing well. The broker-dealer channel is doing well from a point of net and gross sales. The advisers channel is starting to show some signs.

What Wall Street's really going to be looking for is meaningful improvement in profitability and much better net (fund sales) on a quarterly basis. We had our first positive net sales number since probably 2000.

By the way, we should mention that Hank Herrmann has a very substantial financial interest in the company and therefore might not be the most unbiased observer.

Q. But perhaps the most informed?

A. I'd better be.

The Hank Herrmann file

1966: Bachelor's degree in finance, New York University

1971: Joined Waddell & Reed as senior investment analyst for technology

1976-1987: Manager, Waddell & Reed Advisors Vanguard Fund

1983-1989: Manager, Waddell & Reed Advisors New Concepts Fund

1987: Named president and chief investment officer

2005: Named chief executive officer

This story was originally published May 23, 2016 at 4:57 PM with the headline "Hank Herrmann in 2005 interview: CEO at least ‘til I’m 65."