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Edited Transcript of SEIC earnings conference call or presentation 24-Apr-19 8:30pm GMT

Q1 2019 SEI Investments Co Earnings Call

OAKS Apr 25, 2019 (Thomson StreetEvents) -- Edited Transcript of SEI Investments Co earnings conference call or presentation Wednesday, April 24, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alfred P. West

SEI Investments Company - Chairman & CEO

* Dennis J. McGonigle

SEI Investments Company - CFO & Executive VP

* Kathy C. Heilig

SEI Investments Company - CAO & Controller

* Paul Francis Klauder

SEI Investments Management Corporation - Senior VP & MD of Institutional Group

* Stephen G. Meyer

SEI Investments Company - Executive VP & Head of Global Wealth Management Services

* Wayne Montgomery Withrow

SEI Investments Company - Executive VP & Head of Independent Advisor Solutions

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Conference Call Participants

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* Christopher Charles Shutler

William Blair & Company L.L.C., Research Division - Research Analyst

* Christopher Roy Donat

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Glenn Edward Greene

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Josh Schwartz

* Patrick Joseph O'Shaughnessy

Raymond James & Associates, Inc., Research Division - Research Analyst

* Robert Andrew Lee

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* Thomas Craig McCrohan

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Analyst

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Presentation

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Operator [1]

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And ladies and gentlemen, we do appreciate your patience, and welcome to the SEI First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Chairman and CEO, Al West. Please go ahead, sir.

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Alfred P. West, SEI Investments Company - Chairman & CEO [2]

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Thank you, and welcome, everybody. All of our segment leaders are here on the call as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller.

I'll start by recapping the first quarter 2019, and then I'll turn it over to Dennis to cover LSV and the investment in new business segment. After that, each of the business segment leaders will comment on the results for their segments. Then finally, Kathy Heilig will provide you with some important company-wide statistics. As usual, we will field questions at the end of each report.

And so let me start with the first quarter 2019. First quarter earnings decreased by 18% from a year ago. Diluted earnings per share for the first quarter of $0.73 represents a 15% drop from the $0.86 reported for the first quarter of 2018. We also reported a 1% decrease in revenue from first quarter 2018 to first quarter 2019. These deficits in earnings and revenues from 2018 to 2019 are mostly due to the carryover effect of the downturn in the capital markets during the fourth quarter 2018.

Also contributing to deficits is an increase in our tax rate from first quarter 2018 to first quarter 2019. Dennis will elaborate on these effects.

Now also, during the first quarter of 2019, our noncash asset balances under management increased by $12.7 billion. At the same time, LSV assets under management increased by $7 billion. These increases in AUM were primarily due to market appreciation, and we'll feel the effects of these increases next quarter.

In addition, during the first quarter 2019, we repurchased approximately 1.7 million shares of SEI's stock at an average price of $51.47 per share. That translates to $88.8 million of stock repurchases during the quarter.

Finally, in the first quarter, as part of the investments we make to create growth, we capitalized approximately $9.7 million of the SWP development and amortized approximately $11.7 million of previously capitalized SWP and IMS development.

Our first quarter 2019 sales events net of client losses totaled approximately $6.2 million and are expected to generate net annualized recurring revenues of approximately $1.2 million. Clearly, we are not satisfied with this quarter's sales results, which were primarily affected by the continued rollover of institutional business away from U.S. corporate DB plans.

Now as a company, we have very active sales teams and a lot of activity. We're confident that with our current sales pipeline, we should regain our sales events throughout the rest of the year. Our unit heads will speak to their specific sales results.

Now this concludes my formal remarks, so I will turn it over to Dennis to give you an update on LSV and the investment in our new business segment. I'll then turn it over to the other business segments. Thank you, Dennis.

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Dennis J. McGonigle, SEI Investments Company - CFO & Executive VP [3]

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Thank, Al. Good afternoon, everyone. I'll cover the first quarter results for the investments in new business segment and discuss the results of LSV Asset Management. During the first quarter 2019, the investments in new business segment continued its focus on the ultrahigh net worth investor segment through our private wealth management group and additional research initiatives, including the hosting area.

During the quarter, the investments in new business segment incurred a loss of $2.9 million, which compared to a loss of $3.2 million during the first quarter 2018. This improvement reflects the growth of our private wealth management business offset by other areas of investment.

Regarding LSV. Our earnings from LSV represent our approximate 39% ownership interest during the first quarter. LSV contributed $37.3 million in income to SEI during the quarter. This compares to a contribution of $40.6 million in income during the first quarter of 2018.

Assets during the fourth quarter (sic) [first quarter] grew approximately $7 billion. LSV experienced net negative cash flow during the quarter of approximately $350 million, which was offset by market appreciation. Revenue for LSV was approximately $120.9 million, and performance fees were minimal.

Our effective tax rate for the quarter was 22%. And as you'll recall, our tax rate last year for the first quarter was 11% and for fourth quarter 2018 was 19%. So that tax benefit we picked up is not carrying over year-to-year now or quarter-to-quarter. An item of note for the company during the quarter. We recorded severance expense of approximately $4 million. This is all reflected in corporate overhead. I will now take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question will come from the line of Chris Donat with Sandler O'Neill.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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Just one clarification question on your balance sheet. There's a new line item here for operating lease right-of-use assets. Could you just give us a little explanation of what that is?

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Alfred P. West, SEI Investments Company - Chairman & CEO [3]

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Well, it's a new accounting rule that went effective January 1. Really, every company has to deal with this. For a lot of companies, it'll be a fairly complex rule. For us, it's fairly straightforward. It represents the liabilities on our future lease agreements on our facilities that we rent. And so the new accounting rule requires you to put those liabilities and then the asset related to those liabilities on your balance sheet. That's kind of a layman's quick explanation. So we'll file the Q tomorrow, and there'll be more information in the footnote to the Q. But you're going to see that across kind of all your clients or all your -- all the firms you cover.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [4]

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Yes. Understood. And then if I -- at the risk of asking a forward-looking question on expenses. As we think about the -- I'll see what the answer is, but I'll ask the question.

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Alfred P. West, SEI Investments Company - Chairman & CEO [5]

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(inaudible).

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [6]

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If I look at the 279 -- $297 million of expenses for the quarter and back out $4 million of severance, is that a reasonable way to think of the quarterly run rate? Is there anything significant you'd expect, positive or negative, coming forward here?

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Dennis J. McGonigle, SEI Investments Company - CFO & Executive VP [7]

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No, I think -- well, one thing. Some of the severance we incurred this quarter, we really won't actually even start to feel the run rate, but expense benefit, until late next quarter, and I'd say, really, fully in the third quarter. So that'll help us going forward a little bit on the expense side. At the same time, we have new things we want to get moving on and continue to, in some cases, accelerate. So that will -- some of that will get offset by some of the newer things we're working on. I think as a baseline, this quarter's, when you back out that severance numbers, it's pretty good. We -- I think that -- I hate to pat ourselves on the back on occasion, but we did a pretty good job of kind of containing things coming out of fourth quarter in the first quarter. Those quarter-to-quarter comparisons are pretty good. Maybe, even go back to third quarter, before we -- before any of us really foresaw what December was going to bring, even that comparison is pretty good. So I feel like it's a good run rate going forward. We're -- but we're certainly not going to not do something that we think is strategically valuable to us and is going to present future opportunity, regardless of the expense impact.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [8]

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Okay. And then just lastly. As I think about comp though, with a low level of sales events, you're not going to be accruing compensation for much on the sales side, right?

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Dennis J. McGonigle, SEI Investments Company - CFO & Executive VP [9]

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Correct. So I mean, one thing that we hope we'll have is expense pressure from sales competition, and we certainly expect to have that. That's kind of the one variable.

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Operator [10]

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(Operator Instructions) And speakers, currently, we -- one moment, speaker. We'll go directly to line of Josh Schwartz.

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Josh Schwartz, [11]

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Yes. So the report said as well our sales events for the quarter were down. There's new sales activities, which are robust, not reflected in the quarter. Just wanted to know if you can talk about were these sales events that closed in April? Or it just seems to contradict a little bit what was said sort of later that -- Alfred West said that he said it should translate, but then sort of this -- the first paragraph mentioned sort of this positive event that happened after the quarter end. So if sort of there's some breakdown on what was -- what you guys meant by that?

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Dennis J. McGonigle, SEI Investments Company - CFO & Executive VP [12]

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Yes. I think, I mean, the macro comment on sales is that the sales event -- the net sales numbers we published in our earnings release, that's reflective of first quarter's sales activity. And Al's comment on robustness is really about the -- our pipelines are really strong, and that first quarter really isn't reflective of the level of sales activity we're engaged in nor is it reflective of the size of the opportunities that we have available to us that we feel pretty good about. Now each of the unit heads will speak to their specific business lines around that topic. But that's the kind of delineation between that -- those 2 comments. Does that clarify things?

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Josh Schwartz, [13]

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Yes, sure. That's good.

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Operator [14]

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(Operator Instructions) And speakers, no questions in queue at this time. Please do continue.

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Presentation

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Alfred P. West, SEI Investments Company - Chairman & CEO [1]

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Thank you, Dennis. I'm now going to turn it over to Steve Meyer to discuss our private banking segment. Steve?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [2]

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Thank you, Al. For the first quarter 2019, revenues for the segment totaled $118.3 million, which was down 3.2% as compared to our revenue in the first quarter of 2018. This year-over-year revenue decrease was due primarily to lower onetime revenues, revenue associated with lost clients, along with the decline in our asset management revenues. Our quarterly profit for this segment of $7.3 million decreased $2.7 million as compared to the first quarter of 2018. This decrease is mainly driven by our decline in asset management and estimated fee onetimes. Our first quarter profit is flat as compared to our profit in the fourth quarter of 2018.

And turning to sales activity. For the quarter, we closed $1.2 million in gross processing recurring sales events and $3.2 million in onetime events. During the first quarter, we signed an SWP agreement with Hills Bank and Trust. An SEI client since 2013, Hills Bank and Trust is scheduled to migrate their existing book of business, currently on Trust 3000 to the SEI Wealth Platform in the first half of 2020.

While our sales results are not as robust as we would have liked in the quarter, we continue to see strong market activity, and our pipeline is strong and growing. We feel optimistic about the growth opportunities we have ahead of us.

On April 1, we achieved a significant milestone by successfully converting our 39th SEI Wealth Platform client, TIAA Bank. A long-time SEI client since 2001, TIAA migrated all their business on Trust 3000 to the platform as part of the firm's commitment to employ a cutting-edge technology infrastructure that meets present and future needs and delivers a seamless client and employee wealth management experience.

This conversion is significant for SEI for a couple of reasons. First, TIAA becomes one of our largest clients processing on the SEI Wealth Platform. Second, the conversion of this large client will help us scale our U.S. service, operations and technology infrastructure even further. The conversion went very well, and we are looking forward to a long-term relationship with this valued client partner and the opportunity to expand our relationship with them.

Our asset management distribution business experienced slightly positive cash flows as of March 31. During the quarter, our AMD business signed 2 new strategic partners in the U.S. While one of these partners will be consuming our managed account solutions, both of these relationships are new to our Manager Research platform.

As an update on our wealth platform backlog, our total signed but not installed backlog for SWP is approximately $33.3 million in net new recurring revenue.

Now for the long-awaited update on Wells Fargo. All of our conversion activity continues, and we continue to work closely with Wells on this project. During this quarter, we worked with Wells to finalize dates for the SWP implementation. Wells has finalized the implementation dates and has divided the implementation into 4 tranches. The plan is to install the initial phase of accounts targeted for May of 2021, followed by the next phase in November of 2021. This will represent approximately 25% of the accounts. The remainder of the business will be implemented in May of 2022 and October of 2022. So all accounts are targeted to be implemented on the SWP by the end of 2022.

As we look to the rest of the year, as a reminder, our areas of focus for 2019 are, first, growing our business globally; second, monetize our investment in SWP; third, implement our backlog of sold yet to be installed clients; and fourth, expand our markets and solutions to provide further growth.

We will continue to focus on these main themes of growth, while navigating the headwinds we mentioned on our last quarter's earnings call, primarily the headwinds of previously announced lost business, which -- the remainder of which will migrate out over the remainder of the year. We will manage our expenses judiciously as we continue to forge forward with our growth initiatives.

That concludes my prepared remarks, and I will now turn it over for any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go directly to line of Glenn Greene with Oppenheimer.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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So just on the Wells Fargo. That's helpful to get the timing and clarity on that. Is there any change in the scope of the work that you're going to be doing with Wells? Or it's kind of what you thought it would be from the get go, and just now we've got clarity on the timing?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [3]

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I'd say as far as the book of business, it's what we believed and what we thought it was going to be. I think it's just -- there's a little bit difference in how the tranches will convert and obviously the timing is finalized. The only other thing that might impact is I think everyone has probably seen that Wells is selling a part of their business, the retirement business. Those accounts are on our Trust 3000 system right now. And obviously, Principal has bought them. So there is a chance that they would come off, but we are engaged with Principal right now talking about potentially extending with them, but that's early in the process.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Is Principal an existing client?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [5]

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They are not.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [6]

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They are not. And then the broad commentary at the beginning from Al, and Dennis was asked the question as well about the sales activity and sort of being disappointed in the sales activity in the quarter, but kind of robust activity. Does that sort of hold for private banking and trust as well? And that we should start to see an improvement in sales activity over coming quarters?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [7]

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Yes. So I would say we're disappointed. The level of activity does not measure the results. But in this game, the results matter. So we're disappointed with that. But I would say with the activity I see, I would expect a higher level of sales going forward.

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Glenn Edward Greene, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [8]

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And any meaningful client losses that impacted overall net sales results in the quarter?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [9]

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No.

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Operator [10]

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And next in queue, we'll go to line of Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [11]

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Couple of quick questions. First, and I apologize, the new sales events, did I have the numbers right, is it $2.5 million total, but $2.3 million of that is onetime?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [12]

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No. It's $1.2 million was growth. $3.2 million was onetime. If you look at our net recurring, it's relatively flat. And if you look at net recurring with the onetime, it would be around $2.93 million.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [13]

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Okay, great. Okay. I guess, the question I have is -- maybe is more on the, well, say, HSBC. I mean, I guess, earlier, this -- a month or so ago, it looked like they hired Aladdin for a bunch of their global -- for some of their global wealth management platform. So just kind of curious how that does or doesn't affect the relationship in the U.K. or some of the asset management programs you distribute through HSBC.

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [14]

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Thanks, Rob. It doesn't affect it at all. As a matter of fact, we were well aware of them looking at Aladdin. We utilize the Aladdin risk system in our own asset management area. We actually sat with HSBC and helped them through the process. This is a feature functionality product that they're using for their risk side, which has no impact to us, either on the asset management side or the processing side.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [15]

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Great. And then maybe, if I could, one last question. In the quarter, I mean, it looks like the expenses came down a pretty decent amount from where they have been trending, at least, over the past year or so. Is there anything within the quarter, maybe it was just the slower sales events or anything in the quarter that we should be thinking that this is kind of the right -- the proper run rate to kind of set from here for expenses in the Private Bank segment? And then -- or is there any kind of onetime-ish benefits?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [16]

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So I'd say a couple things. One, to Dennis' comment. I think, we all did a pretty good job looking at the headwinds we had ahead of us and managing expenses across the company, and I think that's most reflective of what you're seeing. Second, yes, obviously, there is lower sales comp. But I would say, echoing Dennis' comment again, I'm hoping that number for sales comp increases dramatically for the rest of the year. That would be my hope.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [17]

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So this is a good enough kind of setting a run rate type of number, the onetime...

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [18]

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Yes. I'd say so, Rob. Remember what I always say, I know you guys don't like it, I don't manage expenses quarter-to-quarter. We're looking at the headwinds. But obviously, as we grow this business, and that is my primary focus, growing the business. While we have to manage the expenses during headwinds, while my focus is on growth, if I see investment we have to do or an uptick expense to prepare us for growth, I will do that. So while I'd say, it's a good run rate for now, looking ahead, I would not be surprised that as we grow and I see the need for an investment, I would make that expense or add that expense.

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Operator [19]

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Next we'll go to line of Chris Shutler with William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [20]

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So Steve, you've had, I think, at least a few months now at the helm of the Private Banks business. Just any kind of bigger-picture updates on strategic direction, where you'd go to market, et cetera, versus how you've talked about historically?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [21]

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Chris, I don't think there's any -- I'm not going to change the story yet. I'm still getting my arms around the business, while I'm certainly more up to speed than I was back in November. Our focus, and I've been saying this as we've had meetings along the way, continues to be on growth. And I think we have a great team of people. We have a great technology and a great solution. I think we have a terrific client base and a terrific prospect base. And now we have to go execute on it. I am looking at everything across how we sell the messaging, and I think we have a very good story and a good approach to the market. I think there are ways we can make it easier for people to do business with us, whether that be componentizing the system in some regard or having more of a lean-in strategy. That could be a part of it. But I think that will all start to unveil itself as we go through the year.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [22]

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Okay. On the Department of Interior contract. Is that officially no longer with SEI?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [23]

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No, it's still with us.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [24]

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It is still with you. Do have a conversion date?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [25]

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We do. And I'd say that the initial thought is that this will come off during the remainder of the year. At least, that's what the current plan is.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [26]

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Okay. Let's see. And then on the Trust 3000 side, in terms of attrition, anything to point out in terms of, not in the current quarter, but future quarters, clients at risk, that kind of thing that we should be aware of?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [27]

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No. Chris, what I'd say is, obviously, if we had a loss or a termination, we would certainly, as we have in the past, like we do with [LSP], let you know about it, and it will be reflected in our sales events. But what I'd also say is we go through this process, with Trust 3000, and as we look to move those clients and sell them into SWP, while our intent and our hope is that we will move 100% of them over, as history has pointed out, that probably will not be the case, either due to a strategic fit or financial fit, SWP might not be the answer for them. But what I would say with that is none of the clients in that realm are in the double-digit significant million dollar range. That would just be inaccurate to say that. I'd say that we are engaged with all of our clients, and our hope is that the majority of them will move over to SWP.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [28]

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Okay. That's helpful. I guess, lastly, on that Steve, just any thoughts on kind of forcing the issue a little bit more around moving Trust 3000 clients to SWP. Is that in discussion at this point?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [29]

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Well, that's one option, but that's not the primary option I'm looking at. What I'm looking at right now is how do we retain these clients and grow them. As I've said before, we have a number of platforms across our wealth, technology and processing businesses here that I think could satisfy the needs of many of these customers. While SWP, I think, is the fit for most of our Trust 3000 clients, there could be other options for them. I think before we go to the point of, "Hey, we're going to have a forced march," I think we would exhaust all of the opportunities to service those clients. And if you look back, it kind of relates a little bit to your previous question. We've actually had some Trust 3000 clients over the past several years de-convert off only to come back. So that system, while it's not SWP, it still is a very strong, mature and solid system in the industry. So I think it would be very premature of us right now to say it's a forced march time.

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Operator [30]

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Next we'll go to line of Tom McCrohan with Mizuho.

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Thomas Craig McCrohan, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Analyst [31]

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Just a quick question on the new -- 2 new asset manager distribution partners. Can you give us a little more color and background on them?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [32]

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Well, Tom, we really don't like to get into specific clients. There's a possibility we might put out a press release on them on their expansion. But needless to say, we're happy that we've expanded our solution set with them and very happy that we've expanded in -- them into our Manager Research platform, which is one of our new platforms that we've identified as part of our future growth.

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Thomas Craig McCrohan, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Analyst [33]

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And have you disclosed how much revenues in the segment is from asset management distribution?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [34]

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Yes.

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Thomas Craig McCrohan, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Analyst [35]

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Okay. And can you give us an update on how that's going to be trending in your expectations for next couple of years in terms of increasing a portion of the mix and kind of growth rates?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [36]

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Well, our hope is that the investment processing will continue to grow along with our asset management. As far as sitting and giving kind of a forward-looking view of how that will split, that's -- I'm not going to do that, Tom.

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Operator [37]

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Next we'll go to Patrick O'Shaughnessy with Raymond James.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [38]

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Curious if you can give us an update on if there are any Trust 3000 recontracts during the quarter? And then more broadly, how is that competitive landscape looking like? Obviously, for a few quarters there, you had a low-cost alternative that was trying to come in and pick off some of those Trust 3000 clients, and it seems like maybe that has ebbed a little bit here.

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [39]

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So there were no Trust 3000 recontracts during the quarter. That just -- the only significance behind that was there were just no recontracts during the quarter. There are probably less than 10 contracts that are up this year, but we are obviously engaged with them fully. And far as competitive landscape. The competitive landscape stays the same. I'd say we've been more successful in fighting back on the low-cost alternative, but that's not to say they've gone away, they're still there. So there are still people out there that are trying to win business via price.

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Operator [40]

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We currently have no additional questions in queue at this time, please do continue.

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Presentation

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Alfred P. West, SEI Investments Company - Chairman & CEO [1]

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Thank you, Steve. Our next segment is Investment Managers, and Steve will also discuss this segment. Steve?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [2]

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Thanks, Al. For the first quarter of 2019, revenues for this segment totaled $104.6 million, which was $7.8 million or 8% higher as compared to our revenue in the first quarter of 2018. This year-over-year revenue increase was due primarily to net new client fundings and existing client expansion. Our quarterly profit for this segment of $35.6 million was $2.1 million or 6.2% higher as compared to the first quarter of 2018.

Third-party asset balances at the end of the first quarter of 2019 were $586 billion or 6.4% higher as compared to the asset balances at the end of the fourth quarter of 2018. This was due to an increase in assets due to net new client fundings of $18.1 billion as well as market appreciation of $15.6 billion.

And turning to market activity. During the first quarter 2019, we had a strong sales quarter with net new business events totaling $10 million in recurring revenues as well as recontracts of $4.8 million in recurring revenues. Most importantly, these sales were diverse and spanned our entire business and included both new-name business and expansion of existing wallet share with current clients. These events included the following highlights: successful wallet share expansion across existing alternative clients, with new events concentrated in private debt and credit business lines; in our traditional market unit, a significant middle-office service mandate with a $25 billion West Coast manager. This mandate was won in a competitive process, in which all of our major competitors participated. In Europe, we continue to win new mandates from both existing and new clients related to funds domiciled in Ireland and Luxembourg, particularly private equity and private credit strategies. We continue to make progress promoting our regulatory platform with existing clients, in particular, regulatory reporting and investor tax compliance. We continue to see strong demand for our solutions in the market and continue to expand our markets and solutions to stay ahead of our clients' emerging needs and to provide sustainable growth. Our pipeline remains strong, and we are optimistic of our continued growth opportunities.

That concludes my prepared remarks, and I'll now turn it over for any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will return back to line of Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [2]

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Steve, I can't let you go with that. The standard question of the one but not yet converted backlog.

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [3]

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Backlog?

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [4]

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Yes.

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [5]

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So the backlog at 3/31/'19 was $37 million. We actually had a good implementation quarter. And actually, it was a record as far as deals sold in Q1, 50% of them already converted during the quarter. I think one of the major reasons for that was, as I mentioned, we had a pretty solid cross-selling and wallet share expansion and obviously, that revenue comes in quicker, which is good news than new sales.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [6]

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And I'm just curious, I mean, if we think maybe not just this quarter, but over, say, the past year, since you acquired the family office business, I mean, is there any way to kind of give me some sense of scale of what that's contributed to the -- your new business sales? I mean, if last year, your total new business was -- I'm not sure where it was, let's say, it was $50 million or so, that's accounting for 1/4 of it or 1/2? Just trying to get a sense -- the magnitude of the kind of contribution?

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [7]

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I'd say it's ongoing right now. It's in the 10% to 15% of our sales, but we're obviously looking to grow that.

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Operator [8]

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Next we'll go to Chris Shutler with William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [9]

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Steve, my question was answered.

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Operator [10]

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And speaker, currently we have no additional questions in queue at this time, please do continue.

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Presentation

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Alfred P. West, SEI Investments Company - Chairman & CEO [1]

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Thank you, Steve. Our next segment is Investment Advisors. Wayne Withrow will cover this segment.

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Wayne Montgomery Withrow, SEI Investments Company - Executive VP & Head of Independent Advisor Solutions [2]

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Thank you, Al. In the first quarter of 2019, we focused on rebuilding the momentum we lost in the December market correction and worked hard to control expenses in this revenue environment. The first quarter, however, is significant in that it marks completion of the migration of our advisers onto the SEI Wealth Platform.

First quarter revenues totaled almost $95 million. These revenues were down slightly more than $4 million from the first quarter of last year. This decrease was driven primarily by 3 factors: first, the 2019 balances reflected a significant shift in the money market products compared to last year's first quarter. The bright side of this shift is that we stand to benefit when the money market balances find their way back into equity and fixed income products, something we began to see in March.

In addition, both our average assets under management and our average basis points earned on assets were down. This latter point was primarily due to higher money market balances and to a lesser degree, the growth of our lower-fee ETF portfolios. Expenses were essentially flat compared to the first quarter of last year, but were down over $1 million from the fourth quarter. Many factors contributed to this decrease, but a large portion of the savings arose from a decrease in technology spending.

Our profit declined a little over $4 million from last year's first quarter, directly following our decreased revenue. Assets under management were $65.6 billion at March 31, an increase of $1.1 billion from March 31, 2018. The increase was driven by market appreciation offset, in part, by negative net cash flow. Of note is that while our point-to-point AUM increased, our average assets under management, which is how we earn revenue, actually decreased as compared to the first quarter of last year. This reflects lower starting valuations in the quarter following the market decline in last year's fourth quarter.

During the first quarter, our net cash flow was a negative $448 million. Distraction's caused by the migration and pressure from lower-cost (inaudible) product continued to put pressure on cash flow. We recruited 95 new advisers during the quarter, an increase over the 87 we recruited in the fourth quarter. Our pipeline of new advisers remains active.

With respect to the SEI Wealth Platform, we have completed the multiyear effort to migrate all of our clients onto the new platform. We now turn to helping advisers benefit from the new features of the platform and refocusing our sales force on attracting both SEI and non-SEI assets from our existing advisers. We also intend to step up our efforts to recruit new advisers to our best-of-breed platform.

In summary, the first quarter reflected the hole we found ourselves in following the market declines of the fourth quarter and the impact on sales focus caused by the migration. However, the bigger story is that our migration is complete and this sets up our future. I welcome any questions you have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go to line of Robert Lee with KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [2]

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Just kind of curious, and I'm sure it's hard to be too precise, but with the sales force being able to shift towards more adviser acquisition, so to speak, what's kind of the typical from -- is there any kind of typical time frame from when you first kind of engage in this, call it, serious discussions to when an adviser actually starts kind of taking on your products or moving to your platform? Is it typically like a 6-month process, a year? I'm just trying to get a sense of, maybe, with the refocus of the sales force, when we can start seeing that be reflected in, say, the adviser count.

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Wayne Montgomery Withrow, SEI Investments Company - Executive VP & Head of Independent Advisor Solutions [3]

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Yes. I would say generally the sales cycle is about 3 to 9 months. And I think it accelerates. Once we get an adviser on the platform, they might start out slowly and then they accelerate through the process.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [4]

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Okay. And then I guess, maybe as a follow-up. Now that you've got everyone on the platform, and I'm assuming as part of the marketing -- well, as you mentioned, now you can focus on getting non-SEI assets on platform. Could you kind of give us a sense of at least based on maybe preliminary discussions kind of what's involved? It would seem to be a much more complex thing to get someone to move all their assets over maybe because they've got to shift books of business and get approvals and whatnot. So how are you thinking about those assets kind of coming into the fold? Is that something we're going to -- maybe we'll see in 2020 or 2021 and -- because it just takes so much lead time? What's the right way to think of that?

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Wayne Montgomery Withrow, SEI Investments Company - Executive VP & Head of Independent Advisor Solutions [5]

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Yes. I think you're going to see it accelerating throughout this year to a point where it may be meaningful next year.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [6]

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Okay. And I would assume that would not show up in your AUM figure. Obviously, decent revenue. It won't be in the AUM number?

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Wayne Montgomery Withrow, SEI Investments Company - Executive VP & Head of Independent Advisor Solutions [7]

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It is not in the AUM number.

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Operator [8]

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Next we will turn back to line of Patrick O'Shaughnessy with Raymond James.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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Apologies, I had myself on mute. So Wayne, can you talk about some of the specific steps that you're taking to reinvigorate your sales? So is it as simple as maybe your sales people were spending 25% or 50% of their time kind of handled in doing the conversion and now they can spend 100% of their time trying to get back out there closing sales?

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Wayne Montgomery Withrow, SEI Investments Company - Executive VP & Head of Independent Advisor Solutions [10]

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Yes. I think it's a combination of handholding during the conversion. And I think it's also -- as the advisers migrate, just like with any new application, there is a learning curve and disruption caused by that. And when the clients are disrupted, they call the -- either their service person or their sales person, and they say, "I'm having this issue, can you work with me on it?" And it maybe -- a lot of time, it's a training issue. "Can you help me through how I am supposed to do this?" So instead of talking about, "Hey, do you have any cases?" we can go and gather new assets. They're talking about I don't understand how online disbursements work despite the fact that we train them as hard as we can.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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Got it. Okay. That makes sense. And then kind of a bigger-picture question. There's been a lot of M&A activity in the general space. Obviously, Orion has been pretty busy. Investment has been pretty busy. How well do you feel like your solution set is stacking up against some of your competitors, who have been pretty busy on M&A front?

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Wayne Montgomery Withrow, SEI Investments Company - Executive VP & Head of Independent Advisor Solutions [12]

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Yes. I think our solution stacks up really -- very well against them. And what makes us very different is we are an end-to-end solution. So we include all the aspects of the platform an adviser needs to run their business, integrate it and -- in one place. And what's significant is with a single point of accountability. So you can talk about Orion if you want, and -- which is a great platform, and we integrate to Orion. But if you have a problem, and you have an Orion, in their client portal, do you call Schwab? Or do you call Orion? I mean, if you have a problem with performance measurement, do you call your performance measurement vendor? If you have a problem with your rebalancing software, do you call your rebalancing vendor? Or your fee vendor? How does that work? Well, all that is integrated into one place. And with us, you give us a call, and we can't say it's somebody else's fault.

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Alfred P. West, SEI Investments Company - Chairman & CEO [13]

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(inaudible)

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Operator [14]

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And next in queue, we'll go to the line of Chris Shutler with William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [15]

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Just 2 questions. One is on the fee rate, which is down about 2.5 basis points over the last 2 quarters. Sounds like a lot of that is money market. So should we expect a bounce back?

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Wayne Montgomery Withrow, SEI Investments Company - Executive VP & Head of Independent Advisor Solutions [16]

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Yes.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [17]

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Okay.

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Wayne Montgomery Withrow, SEI Investments Company - Executive VP & Head of Independent Advisor Solutions [18]

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That a good answer?

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [19]

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Yes, that's what I figured. Just wanted to be clear. And then the other one was just on the SWP, the fact that you're through the conversion process. Is it fair to think that some of the resources which were used in your business in that conversion will be redeployed into Private Banks?

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Wayne Montgomery Withrow, SEI Investments Company - Executive VP & Head of Independent Advisor Solutions [20]

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Well, if Steve had his way, yes. I think that we have an extremely talented and well-trained workforce. And we are one company here, and we're going to utilize those resources to promote what's in the best interest of the company. So I think that, that comment may be fair.

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Operator [21]

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And speaker, currently we have no additional questions in queue. Please do continue.

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Presentation

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Alfred P. West, SEI Investments Company - Chairman & CEO [1]

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Thank you, Wayne. Our final segment today is the Institutional Investors segment. Paul Klauder will report on this segment. Paul?

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Paul Francis Klauder, SEI Investments Management Corporation - Senior VP & MD of Institutional Group [2]

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Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the first quarter of 2019. First quarter revenues of $80.1 million decreased 6% compared to the first quarter of 2018. First quarter operating profits of $41.4 million decreased 7% compared to the first quarter of 2018.

Operating margin for the quarter was 51.6%. Both revenues and operating profits were impacted by negative client fundings, currency translation, capital markets and onetime revenue recorded in Q1 2018. Quarter end asset balances of $88.9 billion reflect a $3.7 billion decrease compared to the first quarter of 2018. This decrease is driven by negative client fundings and currency translations. Net fundings were negative $3 billion for the quarter. This included approximately $3.6 billion in losses, which was primarily driven by 2 large defined benefit clients. The DB activity was the result of the continued turnover of this business across the industry through DB planned closures and terminations as well as some clients that turned to passive management.

The unfunded new client backlog at quarter end was $350 million. New client signings for the quarter were $600 million. This was primarily diversified across new clients in endowment and foundations and U.K. Fiduciary Management. Our new business focus on longer-term asset pools across all global markets are paying dividends for the business, and our sales pipeline is strong. Thank you very much, and I'm happy to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go to the line of Robert Lee, KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [2]

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Just real quickly, I think you've, Paul, been mentioning that -- in this segment, that I think you suggested that maybe, and correct me if I'm wrong, over time, you're thinking that a high 40s margin is probably more sustainable. Am I thinking of that correctly? Or is -- because you've been running 51-plus this quarter. Last year was around 51% for the year, expenses are down. So how are you thinking about expenses and margins in this, given the top line pressure?

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Paul Francis Klauder, SEI Investments Management Corporation - Senior VP & MD of Institutional Group [3]

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Yes. Like all the other business leaders said, I think we did a very good job of managing expenses in Q1. One component of that is sales comp, and I, like my colleagues, want to pay more sales comp going forward. So that, as you know, is directly tied to more revenue events. So we're optimistic that, that's going to happen in future quarters. I think in fairness to the margins, long term, yes, they're probably in the mid- to high 40%, but that really kind of depends on our ability to continue to grow and offer profits and their ability to continue to consume alternative investments and continue to distinguish our offering, which is very distinguished in the marketplace. The other thing we'll look at is whether looking at properties or any other ways for us to get in an incremental market that we're not in, whether that would be accretive to the business. And that might have some margin impact. Nothing's on the table right now, but anything that kind of continues to differentiate our capabilities and our offerings, I think, we'll put on the table and evaluate that.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [4]

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And maybe as a follow-up. I mean, despite all the pricing pressures in the traditional business, I mean, at least fee raise remain pretty stable within a narrow band. And I know you've talked a bit in the past about how foundations, endowments, some of the newer targeted segments have higher fees because they do more alternatives. So if we think of this current quarter, I know you had 3 -- some big withdrawals from large DB clients, maybe there was some -- maybe some of that offset -- or from new foundations or other clients. How should we think of kind of the revenue tradeoff between those? I mean, are you getting enough wins in the higher-fee clients to kind of at least offset as you think about the revenue attrition from the bigger clients?

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Paul Francis Klauder, SEI Investments Management Corporation - Senior VP & MD of Institutional Group [5]

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Yes. So the weighted average profitability, the [600] coming in, is higher than the $3.6 billion going out from a percentage perspective, but the magnitude, obviously, with losing $3.6 billion is painful. And we -- that was just kind of tied to 2 large investors that both are at the end of their life cycle and one European investor that decided to go to passive management. So I think that loss is definitely an exception as far as the magnitude. But what we see coming in the door to the extent that it's a not-for-profit, and their consumption rate is definitely equal to or higher than what is going out the door. Now we do have a reality that we have some longer-term clients that might be at a 5-year anniversary or a 10-year anniversary that might actually go out to bid. We're pretty successful in retaining them when they go out to bid, but there might be some discussions that we have to do just because the competitive environment now is different than when we won them 5 or 10 years ago.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [6]

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And are there any kind of large known kind of mandate losses coming? Or is that -- I'm assuming, that would be netted within your backlog. But I'm just kind of thinking if there's anything large that we should be aware of over the next quarter or 2?

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Paul Francis Klauder, SEI Investments Management Corporation - Senior VP & MD of Institutional Group [7]

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Not that I'm aware of, and I'm good at knocking on the wood all day long.

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Operator [8]

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And next in queue, we'll go line of Chris Shutler with William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [9]

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Just one quick one. Just the -- could you just remind us how much of the AUM and/or revenue in your business comes from DB plans?

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Paul Francis Klauder, SEI Investments Management Corporation - Senior VP & MD of Institutional Group [10]

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AUM is probably about $38 billion, and revenue is probably 42%, 43%, somewhere in that range. Not all the DB plans are on a path for termination, but if you just lumped all the DB plans together, that's what it would be.

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Operator [11]

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And next in queue, we'll go to line of Patrick O'Shaughnessy, Raymond James.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [12]

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So building off of your previous comments, given some of the structural challenges that face this business and then presumably face some of your competitors as well, do you think there is opportunity for industry consolidation here to kind of rationalize some of the economics and gain more scale? Or do you think it's going to kind of stay with the current landscape?

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Paul Francis Klauder, SEI Investments Management Corporation - Senior VP & MD of Institutional Group [13]

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Yes, I think there is definitely consolidation, and that can come with just mergers and acquisitions, but also, if you look at it right now, if you look at any directory, there is 85 different firms that provide OCIO services, some of those firms are not going to make it. They just are not going to be able to have the staying power for investment in people and technology and infrastructure to be able to make a profitable turn at this -- in this concept. It's easy to say you are an OCIO firm. It's hard to actually do it and operate it and operationalize it. So we are one of the largest as you know, and the investments we've made have been significant. We think that when we have clients that go through a proper due diligence, when we bring them to SEI, when we show them those capabilities vis-à-vis other firms, we really distinguish ourselves. So I can't imagine if we wake up 10 years from now -- because OCIO is going to grow, from a dollar capture perspective, there'll still be 85 firms that are going to be in existence.

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Operator [14]

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Speakers, currently we have no additional questions in queue. Please do continue.

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Presentation

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Alfred P. West, SEI Investments Company - Chairman & CEO [1]

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Thank you, Paul. I would now like Kathy Heilig to give you a few company-wide statistics.

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Kathy C. Heilig, SEI Investments Company - CAO & Controller [2]

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Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter. First quarter cash flow from operations was $59.9 million or $0.38 per share. And the first quarter free cash flow was $42.6 million. The capital expenditures for the quarter, excluding capitalized software, were $7.3 million, which does include some of -- about half of it is for expansion of our new facilities. And we project the remaining capital expenditures to be about $57 million, which does include $41 million related to the facility expansion. As noted in the release, the tax rate for the first quarter was 22.1%. The annual tax rate for 2018 was 17.6%. And our effective tax rate could fluctuate as a result of the timing of stock option exercises.

We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks and that the financial information presented in our release and on this call is unaudited. In some cases, you can identify forward-looking statements by terminologies such as may, well, expect, believe and continue or appear. Our forward-looking statements include our expectations as to revenue that we believe will be generated by sales events that occurred during the quarter, the timing of client migrations and implementations, the benefits we will derive from our investments [in new] organizations, our ability to manage our expectations and scale our offerings, the demand for our products, the benefits we will derive as our clients shift investments among asset classes, the strength of our pipeline's and growth opportunities and our ability to execute on and the success of our strategic objectives.

You should not place undue reliance on our forward-looking statements as they are based upon the current beliefs and expectations of our management and subject to significant risks and uncertainties, many of which are beyond our control and are subject to change. Although we believe the assumptions upon which we base our forward-looking statements are reasonable, they could be inaccurate. Some of the risks and important factors that could cause actual results to differ from those described in our forward-looking statements can be found in the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2018, that was filed with the SEC.

And now please feel free to ask any other questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go to line of Chris Donat with Sandler O'Neill.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [2]

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Wanted to go back one issue Steve. And as we think about Wells Fargo and also TIAA and basically any client where you're migrating from Trust 3000 to SWP, how should we think about the revenue progression because it seems like you will continue to generate revenue from the Trust 3000 component. I assume there is also revenue tied to migration, and then once the migration ends, is there a dropoff as you convert to SWP? I mean, we know you converted 39 clients, so haven't seen dramatic things in the revenue line so far, but just help us think about it.

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Stephen G. Meyer, SEI Investments Company - Executive VP & Head of Global Wealth Management Services [3]

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So I'd say couple things. As we talked about in the past, typically, the differential that we've looked at and targeted between Trust 3000 and SWP from recurring revenue is in the 20% to 30% range. Now obviously, as they're going through the process, many of them have onetime's conversion implementation fees. That would drop off, obviously, as they go to SWP, but then there would be that 20% to 30% target increase. But also some of these have custom development and some projects that continue on, and that would continue some of the onetimes. But I think maybe, in general, what I'd say is think about it as Trust 3000 fee plus implementation moving to SWP with a 20% to 30% increase.

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Operator [4]

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And speaker, currently we have no additional questions in queue. Please do continue.

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Alfred P. West, SEI Investments Company - Chairman & CEO [5]

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Thank you. So ladies and gentlemen, while sales were below our standards in the first quarter, I remain encouraged by the direction our businesses are taking and the progress we are making. While we face short-term headwinds, we believe that the recent changes we have made to our organization along with the investments we are making will help us benefit from all the changes taking place in our industry. That concludes our presentation. Have a good day, and thank you very much for attending.

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Operator [6]

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Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and using the AT&T teleconferencing center. You may now disconnect.