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Edited Transcript of WDR earnings conference call or presentation 30-Apr-19 2:00pm GMT

Q1 2019 Waddell & Reed Financial Inc Earnings Call

OVERLAND PARK May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Waddell & Reed Financial Inc earnings conference call or presentation Tuesday, April 30, 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, CIO & Director

* Shawn Michael Mihal

Waddell & Reed, Inc. - President, COO & Director

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Conference Call Participants

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* Brian Kharl Wu

Citigroup Inc, Research Division - Associate

* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Jeffrey Drezner

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

* Kenneth S. Lee

RBC Capital Markets, LLC, Research Division - Analyst

* Macrae Sykes

G. Research, LLC - Research Analyst

* Sameer Murukutla

BofA Merrill Lynch, Research Division - Associate

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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. First 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, VP, Corporate Controller and 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; 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, CIO & Director [3]

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Good morning. Thanks for joining us. Today, we reported net interest income of $32 million or $0.42 per share for the first quarter compared to $46 million or $0.60 per share during the prior quarter. Recall that the fourth quarter of 2018 included a $16 million gain from the revaluation of our pension liability.

During the first quarter, the market environment represented almost a mirror image of what we experienced in the fourth quarter of 2018. Supported by a more dovish monetary policy tone from both the Federal Reserve and the ECB, growing optimism on trade negotiations with China, fading U.S. recession fears, and a stabilizing outlook for the Chinese economy, global equity markets staged a powerful rally.

In fact, the S&P 500 index delivered its best quarter since the third quarter of 2009, immediately following its worst quarter since 2011. While the tone of the market has certainly been more positive recently, there is still a fair amount of debate around these issues, which could result in continued bouts of volatility pending more clarity around the path forward.

While we welcome the recent uptick in investment sentiment, the flow dynamics into actively managed equities remain challenging for both our company and the industry in general. Furthermore, recent market volatility has not been helpful in reversing this trend. We remain confident that active management will play an important role in our client's long-term financial solutions. And as investors seek out financial guidance and realize the merits that can come from a long-term financial plan, built around distinct investment products, we believe our diversified business model will be a strategic advantage.

Ben will go into further detail shortly but at a high level, we continue to experience flow headwinds in both our unaffiliated distribution channel and our wealth management business. While some of our challenges can certainly be attributed to industry trends, we have also had to work to improve investment performance for some of our key strategies, transition to a more open architecture platform in our wealth management business, and strengthen our sales infrastructure.

We have made meaningful progress on all of these initiatives but results do not come overnight. As previously discussed, we spent the better part of last year realigning sales leadership and reallocating and working to better direct our resources in order to more effectively service all of our distribution channels.

While we would certainly like to see a quicker payoff from our efforts, we are focused on getting the right structure in place for sustained long-term success. Rest assured, this remains a key priority for our oz.

Investment performance for the past quarter was solid, as 8 out of our top 10 largest strategies representing, almost 73% of our assets, ranked in the top half of their respective Morningstar peer groups. Furthermore, four of these top strategies registered top quartile performance for the time period.

On a trailing 1-, 3- and 5-year basis, investment performance continued to steadily improve across the complex when measured by the percentage of assets ranked in the top half of their respective Morningstar universes. For the past 2.5 years, we have been steadfast in our commitment to strengthening our investment management and risk management resources and capabilities. We are encouraged to see these efforts paying off but understand there is more to be done here.

A key component of our strategy going forward is evaluating opportunities with regard to our product line. We recently introduced 7 equity strategies in a model delivery format, providing the marketplace a new way to access existing strategies.

It is important for us to continue to offer vehicle flexibility across our distribution network. Offering model delivery provides key ID equity strategies at an attractive price point and helps us remain competitive and adaptable to investor needs.

Turning to our wealth management business, or what we have in the past called our broker-dealer business, we have made significant strides since the beginning of the year. Referring to this important part of our company as a wealth manager is an important distinction that better frames the way our associated independent financial advisors do business. Advisors associated with Waddell and Reed focus on financial planning and finding long-term solutions for clients, rather than having a pure focus on transactions or individual products.

In an industry where trust, partnership, and goal setting are foundational to progress and success, we believe wealth manager better defines the business and our focus on client results. As we continue to work on evolving that business, progress was evident throughout the first quarter, including technology enhancements, expanded advisory programs, and a stronger practice development program.

Following our January announcement of the agreement with Refinitiv, formerly Thomson Reuters, to deploy the Thomson ONE: Advisor Desktop Solution. We have begun a pilot program for the advisor workstation called Waddell One, which provides a single access point to core applications and systems.

The first phase of a broader launch to all advisors is expected later this year. Other aspects of the business administration program center on an aggregated data platform and streamlined workflow, which will be rolled out over the coming months. Also, in March, we introduced a text capture program for mobile and desktop use, allowing advisors to communicate with clients through texting.

Additionally, advisor programs were expanded during the quarter, as we introduced a new third party strategist program called Guided Investment Strategies, that offers a wide range of portfolios, including both ETF and mutual fund options. We also expanded the range of asset managers available through guided investment strategies and other advisory programs, providing advisors and their clients additional choice and flexibility as they build investment plans.

As we continue to improve the advisor experience and the support we provide, we introduced in April a custom coaching and practice-building program called Great Practice Solutions, or GPS. The program allows advisors to review key aspects of their business, access direct coaching from industry experts, and personalize a plan for growth and continued progress.

All of this progress moves us toward the forefront of the industry standard independent model, while focusing on attracting and supporting productive, experienced advisors, seeking a differentiated service model. We are particularly encouraged by the progress made on our advisor productivity levels to date, which reached all-time highs during this quarter.

In addition, our recruiting teams are now being put in place and we have recently enhanced our recruiting package, which we believe is market competitive and should position us well to grow through the addition of productive advisors in the future.

Let me now turn it over to Ben to cover our financial and business 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 interest income of $32.1 million or $0.42 per share compared to $46.5 million or $0.60 per share during the prior quarter. The fourth quarter of 2018 included a $0.16 positive impact from the annual revaluation of our pension liability, while the first quarter of 2019 included a $6 million or $0.06 per share benefit from gains on our seed and corporate investment portfolios.

I will start by covering asset flows and then dive deeper into our financial results for the quarter.

Assets under management ended the quarter at $71.7 billion, a 9% increase compared to the prior quarter, while average assets under management of $70.1 billion, decreased 2%. Net outflows of $1.8 billion improved meaningfully from the challenging fourth quarter flow dynamics, but we experienced some notable carryover effects and sales remained subdued.

That slowdown persisted across our retail distribution network as both our unaffiliated distribution channel and our wealth manager experienced softer sales in the quarter.

Coming off the volatile fourth quarter, investors have been slow to return to actively managed equities. Given our more equity focused asset mix, we experienced only a modest lift in flow activity. In general, investors continued to pursue more defensive strategies, such as fixed income, at the expense of international and higher beta domestic equity strategies.

Outflows for our international core equity and science and technology strategies remained somewhat elevated during the quarter. While our emerging market equity and high-income strategies also continued to experience outflows, it was a significantly reduced rate from the previous quarter.

On a positive note, our small and midcap franchises continue to resonate in the marketplace and we are optimistic that steadily improving performance across a broader array of products is laying the groundwork for a much improved flow outlook in the future.

Within the institutional channel, net outflows were $216 million. The $500 million of redemptions we signaled last quarter had not occurred as of March 31. However, we still expect those redemptions in the second quarter with $300 million of the $500 million already coming out in April.

We continue to believe we are past most of the instability in our institutional channel. As a reminder, the institutional channel currently comprises less than 6% of our total assets under management.

Assets under administration in our wealth management business ended the quarter at $56.1 billion, increasing 9% compared to the fourth quarter, primarily due to market appreciation. Adding to Phil's recap on our progress transforming our wealth management business, we ended the quarter with 1,367 advisors and advisor associates. And as we expected, first quarter attrition was slightly elevated as a result of the annual transition of advisors producing below our minimum production levels.

We believe the pace of advisor attrition is at or nearing its longer-term norm. As Phil mentioned, we reached new highs in advisor productivity with average productivity of $400,000 for the trailing 12 months ended March 31, 2019, a 40% increase compared to the same time last year. As a reminder, the previously announced increase to the compensation payout rights for independent financial advisors went into effect January 1 and its impact is included in our recorded results.

We continue to expect that this reinvestment in our business, through what we believe is a best in class compensation grid, will be fully offset by savings from a reduction in our field office footprint and the corresponding support overhead by 2021.

Turning now to financial results. Operating income decreased $8.9 million as revenues declined 5%, which was partially offset by lower operating costs compared to the prior quarter. In addition to the lower asset levels, revenues were impacted by two fewer days in the quarter. The effective management fee rate was unchanged from the prior quarter at 63.5 basis points and was lower by 2 basis points from the same quarter a year ago, consistent with our expectations of the impact from the fee reductions we made in the second half of 2018.

Operating costs declined by $3.9 million or 2% partly due to variable distribution costs, which moved in line with a reduction in revenue but were somewhat muted by the change in the advisor compensation grid. Controllable expenses, which includes compensation, G&A, technology, occupancy, and marketing, were $104.5 million for the quarter and were $1.8 million lower compared to the fourth quarter of 2018, primarily related to lower G&A expenses on certain discretionary spending, in addition to some timing of project-related expenses that won't be evenly distributed through 2019 and are expected to be heavier in the remainder of the year.

We made solid progress on our advisor technology package in the quarter. However, much of that spend will be incurred throughout the remainder of 2019 and into early 2020. As we look at our controllable expense base, we continue to believe in our ability to exercise expense discipline and offset the increases from incremental technology spending and inflationary pressures over the near term.

Given the expense performance in the quarter, our expectation is that controllable expenses will increase in the balance of the year but be lower than our $440 million expectation at approximately $435 million for the full year of 2019 dependent primarily on our continued technology rollout.

The effective income tax rate was 24.6% for the quarter and was within our guided range. Based on current share prices, we expect an additional tax charge in the second quarter for the shortfall from the vesting of restricted shares of approximately $2.4 million. We continue to expect the tax run rate to be in the range of 23% to 25%, excluding the impact of any additional non-recurring or discrete items.

Finally, we ended the quarter with cash and investments of $814 million. We made further progress toward our goal of $250 million in share buybacks by the end of 2019 and ended the quarter at 78% complete against that target.

One final point on capital management. We have been pleased with the flexibility of our current capital return program, between the sustainable dividend level and an opportunistic share buyback plan. During this time period, our cash and investment balance has remained relatively consistent. We believe this strategy provides attractive current returns to stockholders, as our growth plans take hold and drive our future results.

As we look forward, we plan to continue our practice of tightly managing cash balances at or below their current levels, while maintaining the flexibility our balance sheet affords us to pursue our organic growth plans as well as attractive inorganic opportunities should they become available in both the asset management and wealth management spaces.

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) Our 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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I guess just to follow-up on the last comment here around capital management, the maintaining of cash balances at or around current levels. But I guess is there a bit of a change in tone around M&A. Because it seemed like you're mentioning both asset management as well as wealth management in terms of potential uses.

Can you talk about what's changed or what might be of interest to you?

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

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This is Phil. I think while we've been talking about this for some time now, I think it's fair to say that we spent the last two years kind of doing a lot of things to kind of restructure the company and transition the wealth management side of our business. We had some things to fix in terms of investment management and the asset manager.

So I would just say while we've always been open to it, I think probably our ability to execute on that, and our appetite for that is probably a little bit maybe more open-minded to that today than we've always been. I think we're just in a better position to execute on that and move forward.

So as Ben indicated, we see opportunities or the ability to have an appetite either in the asset management space but also the wealth management space where we've made significant progress in transforming that business. So we've been able to kind of restructure the company and reposition it over the last couple of years, while still maintaining significant cash balance.

And so we've indicated for quite some time, I think the balance sheet has been an area of strength of the company and that balance sheet strength and liquidity affords us optionality as to how we look to return capital to shareholders, or investment in organic growth, or potentially see inorganic opportunities if they become available.

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

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And I guess a follow-up on expenses. Appreciate the updated guidance. I guess longer term, is there a - as we think about 2020 and beyond, is there a growth rate that we should be thinking about on a more normalized level? Or is kind of -- is there a focus on keeping things flat? Just thinking a bit more longer term on the expense outlook.

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [5]

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Yes, the further you go out, of course, the harder it is to predict. But we don't have an expectation that would significantly differ from inflationary pressures in the longer term. And as I mentioned I think on a previous call, while we expect some elevated costs as we work through our technology transformation, we believe as that concludes that our run rate will moderate, as we are sunsetting or winding down older systems at higher costs in lieu of better and more efficient processes.

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Operator [6]

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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 [7]

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This is actually Jeff Drezner sitting in for Robert Lee. I just had a quick question in regards to you calling out the declines in insurance product sales contributing to the lower broker-dealer revenues. Is there something that changed about the business model that's driving this perhaps?

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [8]

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Jeff, can you repeat the question, please?

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Jeffrey Drezner, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [9]

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Sorry?

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

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Oh, I'm sorry. So Jeff, this is Shawn. Was the question related to the insurance sales within the wealth management space?

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Jeffrey Drezner, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [11]

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Yes.

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [12]

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And then the association to -- I'm sorry, I missed what that other part was. It was hard to hear what you were saying.

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Jeffrey Drezner, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [13]

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Apologies. Is there something about changes in the business model that are perhaps driving the declines in the sales?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [14]

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No, I would say that there's really no changes in the model. We tend to see a little bit of variability with insurance sales and we've seen some fluctuation between various different insurance products where, in the past, we've seen more increases sales on the variable annuity side and moving over to more of an indexed annuity side of the business.

But it tends just to be some fluctuation in that insurance side of the business. So there really hasn't been a change to the business model that has impacted overall sales on the insurance side.

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Jeffrey Drezner, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [15]

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And if I could just follow-up with one quick one. Just in regards to growing the advisor force and perhaps when you might get back to thinking about growing that.

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [16]

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Yes, absolutely. This is Shawn again. So we are focused on growing the advisor force. We are in the process of standing up additional recruiters inside of a centralized model supporting our three regions across the country.

It's been a core concentration for us as we've been working over the last 24 months or so to really get the wealth management side of the business in a position where we thought it was appropriate working through a new productivity level and working towards a support structure model that we believe is highly competitive, along with a recruiting package that is competitive. So we are absolutely focused on that growth model and are actively working our recruiting pipeline.

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Operator [17]

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The next question comes from Kenneth Lee with RBC Capital Markets.

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Kenneth S. Lee, RBC Capital Markets, LLC, Research Division - Analyst [18]

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Appreciate the detail on operating expenses going forward. But just to dig in a little bit more, a lot of moving parts given seasonality and changes to headcount. But what's a good way to think about run rate for compensation expense going forward?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [19]

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Kenneth, it's Ben. I don't think we expect a whole lot of change in the comp run rate. As you know, we tend to be a little bit seasonal in particular to benefit and tax caps that are often incurred in the first quarter. We also had a very modest amount of severance in the first quarter but I don't expect any significant change in the comp run rate through the year.

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Kenneth S. Lee, RBC Capital Markets, LLC, Research Division - Analyst [20]

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And just one follow-up. In terms of the underwriting and distribution fees and expenses within the retail broker-dealer and the unaffiliated channel, what are the expectations going forward for those items?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [21]

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I think both of those will move tightly with revenue. We're -- as I mentioned in my comments, there's a little bit of divergence in correlation between the two in the wealth management space because of the incremental grid changes that we've made for the beginning of the year.

But I think going forward on a run rate basis, we wouldn't expect those to not be correlated going forward. One reminder, especially as you look to prior periods, would be to note that as we transitioned our grid really in '18 moving into '19, we have some incremental U&D revenue in the wealth manager space for the charges related to services we're providing to our advisor force.

So again, as you look at the prior periods, you might see a lack of tight correlation there. First quarter, though, should be pretty indicative of the ongoing run rate.

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Operator [22]

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The next question comes from Bill Katz with Citi.

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Brian Kharl Wu, Citigroup Inc, Research Division - Associate [23]

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This is Brian Wu on for Bill Katz. Regarding the wealth management business, we noticed the yield or fee rate on the fee base and brokerage AUA declined quarter-over-quarter. Could you speak to what is driving the underlying trend over the last several quarters? How much of that is perhaps due to mix, or market factors, or perhaps pricing changes due to competition?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [24]

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I might start, Brian, and Shawn, please chime in. I think the most significant driver there is the fact that revenues will lag assets a bit in that space, in particular for advisory products. In our model, advisory products are all -- I don't know if all but mostly billed at the beginning of the month based on asset levels.

So as you think, for example, about January 1, asset levels were lower and then moved their way up through February and March. That's probably the major driver that you'd see there impacting the rate. I'll defer to Shawn if he has other intel on that. But I think that would be far and away the biggest impact there.

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [25]

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No, that's absolutely correct and that's one thing we've been focusing on with the fourth quarter performance as we saw the declines in asset levels proceed through fourth quarter, it has taken some time. While we've seen some recovery to the first quarter with that billing process being at the first of each month based on an asset basis.

At that point, the last billing on advisory assets for the quarter was on March 1. So assets were inclining over the course of January and February into March. But it will take some time to recover back to that asset level, which we were at when we started the fourth quarter of last year.

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Brian Kharl Wu, Citigroup Inc, Research Division - Associate [26]

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And just a follow-up. There's a notable step down in the wealth management margin. How much of that is due to the adjusted payout grid? If you could dimension and if there's any other factors. And then is that a reasonable level you expect going forward?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [27]

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I would say that's certainly partly due to the grid change, Brian. But I would say the topic we just discussed was also a large driver of that margin impact. And to add onto what Shawn said, assuming asset levels hold their current or better positioning into second quarter, we should see some significant improvement there.

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Operator [28]

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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 [29]

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This is actually Sameer Murukutla on for Michael Carrier. I had a quick question related to the balance sheet again. As you highlighted, you have a relatively strong balance sheet. But can you provide an update on how much, like, minimum cash you would like to keep on hand? And then maybe what do you believe is the appropriate size of the [seed] over time.

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [30]

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I wouldn't offer a particular dollar figure for the amount of cash on hand. We obviously have some working capital needs that I think are pretty modest and we have some regulatory capital requirements that are quite, quite small. As we continue to look at our balance sheet, I'll try not to be repetitive to our comments, but we want to preserve the flexibility that we have there but balance that with opportunities we see for growth, whether that be organic or inorganic.

In regard to our seed portfolio, we have something in the neighborhood of $250 million to $270 million of seed currently that's a part of our product incubation and development process, which we think is of course key to our asset management business.

I think that will continue to be at a similar or perhaps somewhat moderated level as we think about that going forward and will continue to evolve our product portfolio.

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Sameer Murukutla, BofA Merrill Lynch, Research Division - Associate [31]

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Just one follow-up. When we just look at the wealth management side of the business, as you highlighted, productivity has been steadily increasing as you have lost some of lower producing advisors. But I guess I just wondered, the total AUA, that's been negative. How should we look at that moving forward? Is it a very important figure for you guys and if it is, what could turn that around?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [32]

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This is Shawn again. Yes, it is an important figure for us and is something we continue to monitor. We're working through a number of initiatives with our advisor field force that's focused on understanding that AUA number and impacts to the overall business, as well as our demographics of our client population that tends to move that number with respect to those that have entered into more of a distribution phase respective to their assets and holding with regard to the total AUA.

So it is an important number for us. We're continuing to watch it. Certainly, our recruiting efforts will be something that we're focused on to continue to grow the business. As Ben had mentioned in his comments, focusing on opportunities in the wealth management space that -- where M&A may be appropriate will be another area that we're continuing to focus.

And then the organic components of it with our existing advisors and supporting them from a growth perspective of overall understanding the flow demographics and continuing to provide opportunity that preserves the AUA with respect to their individual practices.

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [33]

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I would also add, this is Ben, that I think we're very focused on the transition from brokerage assets to advisory assets. We have, aside from a fourth quarter blip, historically been positive in the advisory assets flow, although we continue to work against the headwinds of clients exiting more brokerage based investment accounts.

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Operator [34]

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

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Macrae Sykes, G. Research, LLC - Research Analyst [35]

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One statement and then two quick questions. First, I would just say nice progress on the repurchase program. I think since 2017 you've reduced the share count by 7 million shares and 9%. So that's -- and keeping the cash level. So I think you deserve more credit for that.

Could you just dive a little bit deeper into the recruiting aspect of wealth management? How is the platform differentiated today versus the peers that you may be trying to recruit from? And then as you think about recruiting going forward, how important is improving the productivity number for the firm overall versus just trying to get more scale on the platform?

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

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Good morning, Mac. This is Shawn. On the recruiting front, absolutely it's something that we are focused on and looking at the components of productivity in comparison to scale it something that we will focus on as well.

We are focused on the opportunities that will most be aligned to advisors that are looking to join a differentiated support model. So certainly as you look across the industry of the commoditized business model with association to broker-dealers and investment advisors, we feel that we've created a support model that is more unique and dynamic, aligned to helping advisors grow their productivity.

So scale is an important component of it. Productivity is as well and we certainly don't want to sacrifice the productivity side. the intent is really to focus on the advisors that are already what we deem to be in that high performing type categories, having some experience, being in that neighborhood of over 125,000, driving towards 200,000 but where we can put them into our turnkey programs and help them really grow their practices and build them up to that higher levels of productivity.

So while there is and can be some impact as you recruit in that range, we are certainly focused on the structure that we put in place that really helps those advisors grow their business. From an overall model differentiating factor, we've implemented a number of initiatives in the technology space, which is one of those commoditized type approaches that you have to compete in. But it's an area where we continue to invest because we know that that's an area of focus that we'll continue to drive for the future.

In those other areas that really differentiate us throughout the industry, Wealth Solutions Group, which is a dedicated advanced sales support team that we've implemented in the course of November through fourth quarter going into the first quarter, which we've been standing up. We've implemented the practice development group, which is focused on which comments you heard about before, our great practice solutions, GPS program, which is a turnkey program designed for coaching. As well as identifying those areas inside a practice for an advisor where they need to focus to really bring their practice to the next level.

We've invested into a Diamond Service Group, which is a higher level of concierge-type services for those higher producing advisors. So really working to support that model, as well as our field leadership structure, which we reorganized, which is really dedicated to providing that day-to-day support to advisors in the field. So helping them from a growth perspective.

So something that's a little differentiated in the independent space, where typically those types of services don't exist, which will really help drive that productivity. We understand that scale is a component that we need to focus on, which we'll be really focused on that aspect of recruiting in which we talked about earlier. And we are driving those initiatives to work through the recruiting, particularly with the more competitive recruiting package.

So a lot of opportunity is what we see here for the future is we laid the groundwork over the last few years. From a product perspective, another commoditized type approach of what you need to have on your platform. But we've rolled out a number of initiatives in our product space, particularly related to the advisory programs, which not only just supporting an open architecture platform but having a wide variety of also turnkey asset management programs that are available to advisors as well, as they look to provide that opportunity around their practices that they can offload some of the investment management responsibilities while they focus on building client relationships.

So collectively, in that package, we feel that we've built a more differentiated model in the independent space, which will give us an opportunity to continue to focus on growth.

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Operator [37]

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The next question is a follow-up from Dan Fannon with Jefferies.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [38]

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Just wanted to follow-up if you could talk about April at all in terms of gross sales have picked up or any change in redemption activity, any kind of color on the current quarter outside of -- I got the redemption on the institutional side of roughly $300 million so far in April.

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO, CIO & Director [39]

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This is Phil. I'll start and if Amy wants to jump in. I don't think we've seen in total a significant change in the month of April compared to what we experienced in the first quarter. We've seen a little, as we mentioned in the prepared comments, the outflows have remained a little bit elevated in international core, in science and tech, and we've seen a moderation in the outflows, especially on the emerging market side. So that's a positive.

We've seen some things come back to life a little bit toward the latter part of the month in terms of sales and less redemptions. But overall, I would say that the trends in the month of April are pretty consistent with what we've experienced in the first quarter. Too early to call a marked improvement in that regard.

Amy, I don't know if there's anything to add?

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [40]

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No, I think that's good. Thanks.

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Operator [41]

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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, CIO & Director [42]

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Okay, everybody, no real closing remarks. I appreciate you tuning in and we'll catch up to you down the road. Thank you.

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Operator [43]

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