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Edited Transcript of WDR earnings conference call or presentation 29-Oct-19 2:00pm GMT

Q3 2019 Waddell & Reed Financial Inc Earnings Call

OVERLAND PARK Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Waddell & Reed Financial Inc earnings conference call or presentation Tuesday, October 29, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amy Jo Scupham

Waddell & Reed Financial, Inc. - SVP of Distribution

* Benjamin Russell Clouse

Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer

* Michael John Daley

Waddell & Reed Financial, Inc. - VP, IR

* Philip James Sanders

Waddell & Reed Financial, Inc. - CEO & Director

* Shawn Michael Mihal

Waddell & Reed, Inc. - President & Director

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Conference Call Participants

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* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Jeffrey Drezner

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* John Joseph Dunn

Evercore ISI Institutional Equities, Research Division - Associate

* Kenneth S. Lee

RBC Capital Markets, Research Division - VP of Equity Research

* Macrae Sykes

G. Research, LLC - Research Analyst

* Sameer Murukutla

BofA Merrill Lynch, Research Division - Associate

* William R. Katz

Citigroup Inc, Research Division - MD

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Presentation

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Operator [1]

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Good morning, and welcome to the Waddell & Reed Financial, Inc. Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mike Daley, Vice President, Investor Relations. Please go ahead.

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Michael John Daley, Waddell & Reed Financial, Inc. - VP, IR [2]

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Thank you. On behalf of our management team, I would like to welcome you to our quarterly earnings conference call. Joining me on our call today are Phil Sanders, our CEO; Ben Clouse, our CFO; Brent Bloss, our COO; Dan Hanson, our CIO; Shawn Mihal, President of our Retail Wealth Management Business, Waddell & Reed, Inc.; and Amy Scupham, President of Ivy Distributors, Inc.

Before we begin, I would like to remind you that some of our comments and responses may include forward-looking statements. While we believe these statements to be reasonable based on information that is currently available to us, actual results could materially differ from those expressed or implied due to a number of factors that we reference in our public filings with the SEC. We assume no duty to update any forward-looking statements. Materials relevant to today's call, including a copy of the press release and supplemental schedules, have been posted on the Investor Relations section of our website at ir.waddell.com.

I would now like to turn the call over to Phil.

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [3]

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Thanks, Mike. Good morning, and thanks for joining. During the third quarter, we continued to push forward in the transformational progress we are pursuing as part of our long-term growth strategy, working toward consistent improvement in our performance, productivity and profitability.

Our focus remains on strengthening our investment management capabilities, enhancing our distribution operations and positioning our wealth manager to capitalize on its long-term growth potential, all while maintaining operational efficiency and returning significant capital to shareholders. Ben will discuss the financial details, but at a high level, we reported net income of $33 million or $0.46 per share for the third quarter compared to a $34 million or $0.45 per share during the prior quarter.

Despite the usual ebbs and flows, the investment backdrop did not substantially change over the past 3 months. For the financial markets, thus far in 2019, U.S. large-cap equities have continued to lead the way. S&P 500 returns of over 20% year-to-date represent the best 9-month start in over 2 decades.

For the third quarter, returns were muted with large-cap stocks slightly positive, small-cap stocks slightly negative, and mixed returns globally. In contrast to the muted index level returns for the quarter, volatility has continued to be the story for the year so far, with geopolitical issues including global trade restrictions, recession fears and continued global and domestic political tensions dominating headlines.

Continuing concerns around long-term economic growth were manifested in the bond market as yields on the 10-year bond nearly reached the record lows of 2016. Corporate earnings generally remain healthy and provide a positive backdrop for investors. However, CEO confidence and forecast remain cautious, particularly in light of the continuing trade issues.

Regardless of the environment, as a fundamental research-driven active investment manager, our focus remains on researching businesses, identifying distinct business models and evaluating their prospects for growth. We believe that our long-term fundamental approach is well suited to add value for clients in today's investment environment.

Ben will cover the details on asset flows, which remain challenged during the quarter. While redemptions have continued a multiyear positive trend and improved compared to 2018, sales have remained slow across our complex. Given the geopolitical uncertainties and a weakening global growth outlook, flows across the industry continue to be weighted towards fixed income and money market products at the expense of active equity products. This has been the case throughout 2019.

As you know, sales can be impacted by a number of factors such as investment performance, product relevance, distribution's ability to capture market share and the overall market environment. We are focused on those things that we can control. To that end, we have worked hard over the past couple of years to fortify our investment management resources and realigned our sales infrastructure to more closely align our distribution efforts with the unique needs of our client base.

We have made significant investments across our asset management business to reinforce IVY INVESTMENTS as an institutional caliber platform. Recent industry flow patterns also highlight the need to broaden our asset mix in terms of product relevance, and we are actively looking at a number of ways to address that need.

While the pace of visible progress can be hard to appreciate in the short term, we are confident in our approach and are committed to those actions that position us for long-term success.

Turning to investment performance. We are encouraged by improvements in the trailing 1-, 3- and 5-year performance as measured by the percentage of assets ranked in the top half of their respective Morningstar [universes] . On an equal-weighted basis, 3- and 5-year performance improved modestly. However, 1-year performance slightly declined.

As we noted last quarter, we believe the investments we have made in recent years to enhance our research staff, portfolio management teams, technology and risk management capabilities will ultimately lead to sustained improvements in intermediate and long-term performance.

Next, I want to highlight the progress we have made in our wealth management business, which we believe remains an underappreciated part of our company yet is a key component of our transformation into a more diversified financial services company in the future. We continue to build on our value proposition to financial advisors through enhancements to products, technology and a leading service model.

A core tenet of the transformation of the wealth management business is broadening our product offering, specifically fee-based advisory products. Today, we offer 9 different advisory products, 3 of which launched within the last 2 years. Across those products, Waddell & Reed financial advisors now have access to more than 5,000 mutual funds from over 100 different families in addition to a wide universe of ETFs and other general securities. These products include both, what's known as advisor managed programs and those that use third-party strategists. The strategist program called guided investment strategies offers over 45 different portfolio models from various institutional money managers, including ETF and mutual fund models.

Within the advisor managed programs, advisors have choices between a variety of investment options ranging from full open architecture offering individual securities such as stocks and ETFs as well as programs composed of ETFs and mutual funds that have been screened by an independent third-party consultant.

Last quarter, we mentioned the launch of WaddellONE, the centralized advisor desktop platform available to all financial advisors and associates, providing direct connectivity to several of the firm's existing technology partners. Adoption across the advisor force has been strong, increasing efficiencies and facilitating access to key information.

During the third quarter, we also launched WaddellONE Anywhere, the web-based version of the WaddellONE desktop platform. Progress continues on the other key components of our business administration program, including enhanced reporting, improved data analytics and a simplified business processing model.

You'll recall, it has now been over 2 years since we began the process of opening the architecture within our wealth management business, transforming technology, products and our service delivery model to where we are today, well positioned to compete as a leading wealth management firm. We are keenly focused on recruiting [in] other growth enablers within this business. While the transformation process is not without its challenges, most notably its impact on asset flows for Ivy, we have seen a stabilization of redemptions and the overall flow trends have remained inside of our initial expectations, while advisory assets and revenues continue to grow.

We have successfully positioned our wealth management business for future expansion with a real value proposition to advisors and clients, and I'm excited for the future. As we move closer to an inflection point in our wealth management business and reestablish more favorable growth metrics in terms of advisor count and assets under administration, we expect this to exert a stabilizing influence in our overall operating model and further position our company as a diversified financial services franchise.

Finally, we have made considerable progress in identifying a future location for our new corporate headquarters and are now focused on the possibility of bringing an innovative, distinctive and sustainably designed new facility to Downtown Kansas City, Missouri. Our foremost goal is a workplace environment that meets the needs of the workforce of tomorrow and enables us to attract and retain top talent to accelerate our growth strategy. We look forward to sharing more as we continue to progress in this process.

I will now turn it over to Ben to discuss the quarterly results.

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [4]

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Thank you, Phil, and good morning, everyone. As Phil noted, we reported net income of $33.1 million or $0.46 per share compared to $33.9 million or $0.45 per share during the prior quarter. Earnings per share for the quarter benefited from unrealized gains on our seed and corporate investment portfolios of about $0.02 per share as well as from a lower share count.

I will start by covering asset flows in more detail and then review our operating results for the quarter. Assets under management ended the quarter at $68.8 billion, down 4% from the prior quarter, while average assets under management of $70.5 billion, were down 1%. In total, net outflows of $2.7 billion were elevated in the quarter, most notably in our unaffiliated channel, where redemption activity in 2 of our larger products had an outsized impact on the quarterly results.

At the same time, sales continued to be slow given the market environment and investors' preference for lower-risk fixed income and money market funds. Ivy Investments' AUM within our affiliated wealth management business experienced net outflows of $1.1 billion, which was consistent with both the first and second quarters of 2019. And as Phil mentioned, it's encouraging to see the pace of outflows within the wealth management business stabilizing. In fact, those results have been relatively consistent across the past 6 quarters, and we are considering momentum in advisory asset growth as clients continue to move from brokerage to advisory, which is our long-term focus in the wealth management business.

Within the institutional channel, net outflows were $181 million for the quarter. While the net outflows in this channel have continued to improve modestly, the balance of the $200 million of known redemptions we disclosed earlier this year have now redeemed in October. While our current institutional business represents a small portion of our overall assets, we remain focused on future opportunities and believe our long history of delivering institutional-caliber investment management capabilities will serve us well as we continue to rebuild the pipeline.

Wealth management assets under administration ended the quarter at $57.1 billion and decreased slightly compared to the second quarter. We ended the quarter with 1,344 advisors and advisor associates, a reduction of only 3 compared to last quarter as the pace of advisor attrition continues to slow. The reduction in advisor count has been in line with our expectations, and we have been pleased with our ability to retain assets under administration.

As you know, we've completely redesigned our recruiting approach towards experienced, higher-producing advisors, and we are out in the market now actively engaging with advisors, who will benefit from our approach to advisor support, our competitive grid, our technology enhancements and our full product suite. While our recruiting teams are still getting up to full speed, the pipeline is building and we're encouraged with the activity thus far as we look to drive advisor growth.

Turning now to the quarterly financial results. Total revenue was $271 million and increased slightly compared to the prior quarter as stronger U&D revenues were partially offset by lower investment management fees and shareholder service fees. U&D revenues increased primarily due to higher advisory assets under administration in our wealth manager. Investment management fees were lower due to slightly lower average assets under management and a lower effective investment management fee rate. The effective fee rate was 62.9 basis points and was 0.5 basis point lower than the prior quarter, entirely due to a true-up in fund fee waiver expenses. Adjusting for that true-up amount, the effective fee rate was consistent with the second quarter rate. Shareholder service fees were lower than $700,000 as well primarily due to a nonrecurring decrease related to the outsourcing of transfer agency transactional processing operations, which reduced shareholder service fees revenues by $500,000 in the quarter.

Operating expenses increased $1.8 million due to an increase in distribution cost of $1 million related to higher revenues and an increase in the controllable expense categories from a low second quarter amount. Controllable expenses, which are comprised of compensation, G&A, technology, occupancy and marketing, totaled $104.5 million compared to $103.5 million last quarter.

The compensation line included approximately $3 million of severance expense related to the transfer agency outsourcing, while the technology line actually benefited from a nonrecurring decrease from the transfer agency outsourcing of $1 million.

Additionally, occupancy cost decreased $1 million due to field office real estate closures in line with our plans. For the fourth quarter, we expect controllable expenses will be in a range of $106 million to $108 million, inclusive of the remaining restructuring charges related to the transfer agency outsourcing. The effective income tax rate was 23.3% for the quarter in line with expectations, and we continue to expect the tax run rate to be in the range of 23% to 25%, excluding the impact of any additional nonrecurring or discrete items.

Cash and investment balances were again relatively consistent with the prior quarter. As we highlighted on the last call, we completed our prior buyback target and continued our active repurchase program into the third quarter. Given the volatility during the quarter, we repurchased over 3% of our outstanding shares at what we continue to believe to be attractive prices. We remain focused on executing an active capital return program, while investing in targeted organic growth enablers and keeping our options available for inorganic growth opportunities.

Operator, we would now like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Dan Fannon with Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [2]

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My first question is on the advisor. In kind of outlook, you talked about a backlog of recruitment that's building. So I guess, as you think about the next 12, 24 months, like what is a reasonable expectation for advisors coming on? What is the make-up of those advisors in terms of average size? And then just trying to get a sense of the momentum in that business and how to think about that onboarding process?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President & Director [3]

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Dan, this is Shawn. I'll go ahead and take the question. We're continuing to see the steady progress, as we've been building out our full recruiting capabilities. And we've been staffing up our recruiting department over the last few months and the pipeline has been building. With regard to the advisors that we're focusing on as we've been talking about, focusing on the higher-performing or higher-producing type advisors that are more in line and more consistent with our current average productivity of advisors. So as we look at those tending to have a 5-year or more average inside the industry as well as having productivity that's in line with our current advisors. So we're continuing to see that expand as we move into 2020 and or -- intend on hitting an inflection point from a growth perspective as we continue to progress forward as the pipeline continues to grow.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [4]

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And when you say inflection point, do you mean -- where that -- and we should see that in the number of advisors [in terms] of starting to grow? I guess, when you say it was used in the prepared remarks as well that term, I guess, what does that mean from your definition? And what should we expect?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President & Director [5]

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Yes. That's for us looking to get to positive growth rates and headcount of advisors.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [6]

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Got it. My follow-up is on just expenses, and I think you gave some additional guidance for 2020 last quarter around kind of a controllable component this quarter came in a little bit below, I think, what you had said and then we get the fourth guidance. I guess, any update to how you're thinking about 2020 and kind of maybe in the moving parts if markets are less constructive, what other areas to potentially cut back on if the revenue environment becomes more difficult?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [7]

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Sure, Dan. This is Ben. As you mentioned, our costs were a bit lower for third quarter, a couple of primary drivers there, some savings in compensation due to open positions, in particular. As you know, we're in the midst of our [TA] outsourcing and we've seen some voluntary turnover there as we made that announcement. We've also -- we're a little bit aggressive, I think, on our forecast for hiring. And then I mentioned in my remarks a couple of the other things related to the DST transition that drove the quarter a little bit lower. In regard to 2020, as you can imagine we're in the midst of our budgeting process and we'll have a much better sense for you on the next call. As I've indicated before as some guidepost, we expect to have some headwind going into next year for inflation as well as some of the ongoing technology project work that we have talked through that's underway right now. However, we expect to be able to offset at least a part of that with continued broad cost control and finding ways to operate as efficiently as we possibly can.

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Operator [8]

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The next question is from Bill Katz with Citi.

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William R. Katz, Citigroup Inc, Research Division - MD [9]

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So, as you think about the wealth management platform where your focus is, could you just talk a little bit about how you sort of see the migration of maybe the fee rate or the overall expense ratio to the client as you migrate more to fee-based and to third-party financial advisors?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President & Director [10]

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Bill, this is Shawn. Yes, we're continuing to see the fee rate remaining at about 118 basis points and keeping in mind that's on those retail client accounts, which is the primary market in which we serve. We expect that to remain relatively consistent in the advisory-based programs. There could be some movement in that in time as we continue to see more adoption into some of the newer programs such as the guided investment strategies and MAPDirect, which are new programs that we introduced that can have some alternatives with some [lower out] fee levels. But in general, we've been seeing the migration from brokerage to advisory for some time now, and we expect that fee level to remain relatively consistent.

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William R. Katz, Citigroup Inc, Research Division - MD [11]

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Okay. And then, Phil, perhaps [yourselves] as you think about -- I appreciate the migration to wealth management firms out of the manufacturing side of the equation, but when you look at your [greater] flows, either by segment, or by asset class, the numbers are pretty stout negatively. As you look over the next 12, 24 months, where do you see at the product level the best opportunity to maybe enhance [gross] sales?

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [12]

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You want me to take that?

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [13]

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Yes. Go ahead, Amy.

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [14]

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Bill, this is Amy. So I would say over the course of the next 12 to 24 months and we're starting to see it in some pipeline opportunities today as we continue to have both strong performance and strong interest in our small- and mid-cap franchises. So we would anticipate seeing continued growth there. I would also state that our large-cap growth product has really started to pick up a lot of interest in the pipeline. And so that's an area where while [the] asset classes [is in] outflow we have the opportunity to go and capture some market share. In addition to that, our emerging market equity that the environment is working against it today, but certainly we believe that there is a nice strong secular growth behind that asset class, in general. And we have a couple of fixed income products that we could start to see some pickup. I will say that in the course of the third quarter, we were able to get asset strategy replaced on a large distributor platform. So that's a nice step in the right direction for that product and continued conversations will go on around that strategy as well.

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Operator [15]

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The next question is from Glenn Schorr with Evercore ISI.

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John Joseph Dunn, Evercore ISI Institutional Equities, Research Division - Associate [16]

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This is actually John Dunn on for Glenn. Kind of piggybacking off that last question on the fee reduction side. Now that we're a little further away fee cuts, just a little -- maybe little more on the effect -- maybe you've seen on gross sales there, maybe it could be extended to other funds?

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [17]

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I'll take the part about the effect on gross sales. So we did the fee reductions in late July of last year on a series of some of our products that we're focused on. Sales comes from a number of different places and so I do think that it was generally a very positive response in the reduction. We've seen a couple of the products that where we lowered the fees are in that positive flow both year-to-date and when you look out to the 3-year timeframe. So positive flow in an environment where the asset classes are negative, I think, we're seeing some good traction there. Really as we looked at the fees and continue to evaluate fees going forward, we're really looking at making sure that we stay in a competitive stance within the category, knowing that as active managers, we have to earn our right to compete.

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [18]

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Maybe one follow-up, additional point is the reductions that Amy was referencing that took place little over a year ago were fairly meaningful and broad-based. I think as we go forward, they'll be a little bit more targeted and kind of maybe across the, selective across the product line, but also in random points throughout the year or 2. It wouldn't be -- it would be more incremental in nature and kind of a rolling ongoing review process.

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [19]

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Yes. And when you look at our fees across our fund complex, we have approximately 70% of our assets that sits at an average fee level or below average. So we're making good progress in that area.

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John Joseph Dunn, Evercore ISI Institutional Equities, Research Division - Associate [20]

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Got you. And then just, now that we're in a Reg BI world, maybe just if you could comment on, how you think about that and maybe any adjustments you might be making for that new environment?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President & Director [21]

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So I'll take that, this is Shawn. We're continuing our efforts and establishing our projects and moving forward with the implementation of the material aspects of Reg BI. We've made significant progress through the prior initiatives with our DOL fiduciary rule efforts, although that rule is vacated. A number of the things that we did in progress with that rule remained in effect even in light of the vacating aspect of the rule. So mitigation and elimination of conflicts of interest in our wealth management business, levelization of compensation arrangements, all those types of things that came out of that rule -- that we implemented, we kept in effect also doing things from client disclosure enhancements with respect to conflicts of interest or other types of our aspects of account relationships, account assessments. So we felt like we were in really good position as the Reg BI was introduced by the SEC. However, we're continuing to look at completion of our Form CRS and disclosure requirements associated with that since we are a dual registrant, broker/dealer investment advisor. We have a 4-page document that we have in draft format that we'll be incorporating into our operational workflow processes. We're also operating through a number of other initiatives that are inside of Reg BI, just from an overall aspect of disclosure requirements and aspects of related to fees and other transactional related processes that we'll be working with our clearing firm. So good progress is being made in that regard as we work towards the June implementation date.

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Operator [22]

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Next question is from Kenneth Lee with RBC Capital Markets.

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Kenneth S. Lee, RBC Capital Markets, Research Division - VP of Equity Research [23]

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Just one within the unaffiliated distribution channel. Wondering if you could comment on what you're seeing in terms of client demand and net fund flow trends, specifically within the national accounts, the DCIO and the RIA markets?

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [24]

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Sure. So, I'll start, Kenneth, with the RIA market, that is a channel, where our new model delivery portfolios are really interesting to the client base inside of the channel. So we're seeing conversation across the large, small and mid-growth franchises as it relates to the new model delivery portfolios we have out. We're actually in contract right now or in contract negotiations right now with a potential partner on that side of the business for a large-cap growth model. So there's been a lot of great traction and conversation there as well as with our emerging market equity franchise. In the DC space, the DC space tends to be more style box oriented. So we have our large, mid, small growth franchises there as well, really picking up traction. And then the DC space outside of the funds, we have a series of collective investment trusts. So as you know, we continue to try to make sure that we address product development not only from where we have a strong capability to be able to management -- from an investment standpoint, but also what is the appropriate vehicle that a client base might need. And so we're seeing a nice pick up in interest in the collective investment trust space from our partners in the DCIO space and that would be across, again the domestic equity franchises and emerging market equity and then in science and tech as well.

And then from a national account standpoint, like I said, we did just have asset strategy replaced on one of our partner platforms. So we felt like that was a really good progress. We continue to have conversations around some mid-cap opportunities, both with our mid-cap growth portfolios and our mid-cap income opportunities and as it relates to potential models. So it's all kind of in the same area across channels.

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Kenneth S. Lee, RBC Capital Markets, Research Division - VP of Equity Research [25]

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Got you. Very helpful. And then just one follow-up in terms of any updated thoughts on potential for M&A? I know in the past, you've talked about either looking for opportunities to further expand the wealth management business or expand the product mix. Just wanted to get your latest thoughts right now?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [26]

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Sure, Ken. This is Ben. I'll start. I think as we have said before, given the progress we've made in strengthening both our investment management and wealth management platforms of our business, we feel that we're now positioned to execute on a transaction or something attractive were to surface and would fit well with either of those businesses. We're looking for an acquisition with strategic rationale and of course that makes financial sense. Transactions certainly are hard to predict, as you can imagine, and there are a lot of factors that we will consider. I can tell you from our perspective, the market is active. There is a lot of activity going on, and we are studying opportunities.

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Operator [27]

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The next question comes from Robert Lee with KBW.

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Jeffrey Drezner, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [28]

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This is Jeff Drezner on for Rob Lee. Just one quick question on the share repurchases. I know you kind of ran through the program, how do you think about next year and how much would you be willing to dip into the cash and investments for that?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [29]

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Jeff, as I think we completed the commitment that we made, of course, and we've really continued with a very a similar pattern here through the rest of the third quarter, in particular, because prices were quite attractive. Our balance sheet strength and liquidity, we think, is a key differentiator for us and we'll continue to work toward not necessarily growing our cash balance from the significant free cash flow we have, but continuing to balance, returning that to shareholders through our dividend, of course, and buybacks and have some dry powder there, if you will, when and if an acquisition opportunity arises.

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Jeffrey Drezner, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [30]

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Great. So, is it fair to assume that at these prices perhaps the repurchase would continue in this manner?

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [31]

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Well, I don't -- [it'd be unnecessarily] comment on what current activity or pricing, I think you can see from past experience and that type of thing. We've been pretty active in the marketplace. As Ben said, we've really not that interested in letting our cash balance grow. We generate significant cash flow. We don't feel like it's mutually exclusive in terms of being active in share repurchase and also doing incremental acquisitions. We've got a lot of balance sheet strength, liquidity and that type of thing. So I think the record really speaks for itself, and we're committed to a strong capital return program.

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Jeffrey Drezner, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [32]

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Got it. And then a just quick follow-up. In the wealth management, what percentage of sales in fee-based accounts are --[otherwise] going to your products versus third-party products?

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [33]

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Go ahead.

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Shawn Michael Mihal, Waddell & Reed, Inc. - President & Director [34]

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Yes. This is Shawn. We're continuing to see with regard to the overall new sales coming in with the opening of the [architecture] platforms and expansion of sales going towards other unaffiliated products. In general, the overall concentration ratios that are occurring within the wealth management side of the business and our own affiliate products is running at about that 68% or so. We're going to continue to likely see that continue to shift over the course of the coming months and years as the product platform has been opened with newer sales going to the availability of new product lines, and as Phil mentioned on the opening remarks, with respect to opening the product platforms, we've launched 9 different advisory programs, many of those have unaffiliated products associated with them. Obviously, as indicated with more than 5,000 funds from 100 different fund families, we are still seeing some sales go into our affiliated products through some of the other legacy, more advisory programs that we've had in other brokerage type programs. But with regard to new sales our expectation is that a we'll continue to see the migration over [upsells] going towards additional unaffiliated products.

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Jeffrey Drezner, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [35]

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I'm sorry, you said 68% was in your products, is that right?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President & Director [36]

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That's correct. Yes, right around 68.7% currently today is the concentration ratio affiliated products.

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Operator [37]

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The next question comes from Michael Carrier with Bank of America Merrill Lynch.

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Sameer Murukutla, BofA Merrill Lynch, Research Division - Associate [38]

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This is actually Sameer Murukutla on for Michael. Just a quick one. I just want to clarify on -- just the 3Q fee rate, that was impacted by some of the waivers. Is there any that's going to spill over into 4Q? Or should we just assume that we get -- a similar bump up, assuming [that makes it similar] ?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [39]

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I think you can assume a bump up to be consistent with Q -- the prior quarter.

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Operator [40]

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The next question is a follow-up from Bill Katz with Citi.

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William R. Katz, Citigroup Inc, Research Division - MD [41]

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Just a few things that sort of came up from some of the commentary back and forth. Phil, just there's been a bunch of articles, just about the potential for the headquarter move. Anyway to sort of frame out any type of particular savings opportunity that may arise as you migrate from the current to the new location?

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [42]

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Well, I'm going to let Ben address that, Bill.

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [43]

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Sure. I'll be happy to and, Phil, free to add. Bill, we're currently working through the process to assess all of our options very carefully. We don't have any specific financial impacts to share today at the moment. And I hope to be in a position to share those in the coming quarter once we firm up everything. I would tell you that we don't anticipate any near-term run rate impacts in regard to the headquarters change.

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William R. Katz, Citigroup Inc, Research Division - MD [44]

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Okay. That's helpful. And then you'd mentioned that you had the outflows were somewhat amplified by a couple of your larger products. Could you highlight just maybe when that happened? Which products quantify them? And then to the extent, do you have any kind of view of what's been happening in October, I'd be sort of curious to see what the trends look like?

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [45]

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Yes. Bill, this is Amy. So international equity -- our international core product has certainly been one where we've seen a large amount of outflow. As you know, our larger increased amount of outflow over the course of the last year. Really as you went into 4Q of 2018, you saw a really substantially big change in that category from a flow characteristic period. So as you look through the first 3 quarters of 2018, as an asset class, it was a net positive. And as you roll through the first 3 quarters of 2019, it's a net negative asset class. So we have a little bit of that dynamic going on as well as the product that just suffered a performance interruption. And so we've had some struggles there, but we're working hard to retain the dollars that we have. And then science and tech has been a product that's been outflowing over the course of the last few years. Again there was a performance interruption there, though this year and for really like the last 18 months, the performance has really picked up. So we would hope and expect to see that flow.

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William R. Katz, Citigroup Inc, Research Division - MD [46]

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Do you want to comment on how October has been, given that we're sort of at the end of the month at this point?

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [47]

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Yes. Sorry about that. October looks a lot like September, August and July. So a lot more of the same. Our redemptions do continue to slow. So our net numbers are getting better though the gross numbers are certainly muted. So I would say more of the same.

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Operator [48]

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(Operator Instructions) And our next question comes from Mac Sykes with Gabelli.

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Macrae Sykes, G. Research, LLC - Research Analyst [49]

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Can you talk a little bit about the fourth quarter, first quarter in terms of seasonality for recruitment of advisors? How important is that period for bringing on new assets versus the rest of the year?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President & Director [50]

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Mac, this is Shawn. Certainly, as we have been ramping up our recruiting efforts and engaging more with other advisors, experienced advisors, we are focusing quite a bit as we roll off of this year into 2020 with expectations that that pipeline that has been building really starts to generate additional recruits as we roll into 2020. And what we typically have been experiencing is the preparatory work that goes into making a migration of moving from one firm to another and a lot of times it's rounding out the conclusion of the year and then rolling into the following year. So we've been working with a number of recruits, indications are strong for increased activity as we move into Q1. With that being said, typically we will experience a little bit of reduction rolling off fourth quarter, just having to do with the minimum production requirements and things of that nature. So that may have some impacts on net numbers, but that's [what] typically have been the lower performing type advisors that are exiting the firm due to not hitting minimum production requirements.

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Operator [51]

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The next question is from Stephanie Ma with Morgan Stanley. Ms. Ma your line is open on our end, it is possibly muted on yours.

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Phil Sanders for any closing remarks.

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [52]

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Okay. Thank you. Thanks everybody for joining us this morning. I appreciate your focus, time and attention, and we look forward to catching up with you in a few months. Thank you.

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Operator [53]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.