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

Q2 2019 Waddell & Reed Financial Inc Earnings Call

OVERLAND PARK Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Waddell & Reed Financial Inc earnings conference call or presentation Tuesday, July 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

* Daniel P. Hanson

Waddell & Reed Financial, Inc. - CIO

* 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, COO & Director

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Conference Call Participants

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* Daniel Thomas Fannon

Jefferies LLC, Research Division - Senior Equity Research Analyst

* Glenn Paul Schorr

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst

* Kenneth S. Lee

RBC Capital Markets, LLC, Research Division - Analyst

* Macrae Sykes

G. Research, LLC - Research Analyst

* Michael J. Cyprys

Morgan Stanley, Research Division - Executive Director and Senior Research Analyst

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Robert Andrew Lee

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

* 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, everyone, and welcome to Waddell & Reed Financial, Inc. Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Mike Daley, Vice President, 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; 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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Thank you. Good morning and thanks for joining us. The first half of the year has been noteworthy for our company as we continue to take significant strategic steps to accelerate our business model transformation and improve our long-term agility and effectiveness. We continue to focus on long-term foundational improvements that will strengthen our investment management capabilities, improve our distribution operations and position our wealth manager to capitalize on its long-term growth potential, all while maintaining operational efficiency and returning significant capital to shareholders. We know this is an ongoing endeavor, but we will be persistent and disciplined in our approach.

In a few minutes, I will highlight several specific actions we took during the quarter. Then we'll follow with the financial details. But at a high level, we reported net income of $34 million or $0.45 per share for the second quarter compared to $32 million or $0.42 per share during the prior quarter.

Despite some volatility associated with ongoing trade tensions in fears of a global economic slowdown, equity markets generally posted another solid quarter of performance. In fact, U.S. stocks hit record highs during the period, propelling the S&P 500 Index to its best first half performance since 1997. With trade talks back on the table and the lack of inflation providing plenty of breathing room for global central banks to maintain their accommodative monetary policies, equity markets have remained relatively buoyant this year. Questions linger, however, about the strength of the global growth outlook. Sluggish economic indicators, uncertainties around trade policy and geopolitical considerations have also suppressed bond yields, resulting in a favorable backdrop for fixed income assets as well.

Ben will cover the asset flows in detail, but I would note that flows remained challenged during the quarter, although redemptions were in line with the first quarter and have moderated compared to the second half of 2018. Given the uncertainties associated with progress on the trade front and the strength of the global growth outlook that I noted earlier, flows across the industry have been substantially weighted towards fixed income products at the expense of active equity products.

Investment performance during the quarter resulted in trailing 1-year performance holding relatively steady across the complex. On a 3-year basis, performance continues to steadily improve. For the past year, the majority of both of our funds and total assets under management now ranked in the top half of their respective peer groups. For the trailing 1- and 3-year periods, the majority of total AUMs now ranked in the top half of their peer groups.

We know improving shorter-term performance trends lay the groundwork for longer-term performance improvements. Overall, we are encouraged to see that investments we have made over the past few years in our research staff, portfolio management teams, technology and risk management capability is paying off.

I mentioned previously that I would highlight several key actions we undertook this quarter to move our organization forward. First, as most of you know, we recently named the industry veteran, Dan Hanson, as our new Chief Investment Officer. Dan fully embraces our strong investment culture while bringing diverse and direct experience that will both complement and elevate the work of our broad investment team. First and foremost, Dan is a firm believer in fundamental active management and has a long track record of strong investment performance. He also has extensive experience in ESG investing and served as a founding member of the Board of Directors of the Sustainable Accounting Standards Board from 2011 to 2016. Dan's approach to ESG integration is a natural complement to our culture and heritage of identifying strong, sustainable business models. Overall, his extensive experience in product development and commitment to proprietary research and sustainable investing align with our strategic efforts and our values-based culture. We remain committed to acquiring and developing top-level investment talent, and we couldn't be more excited to have Dan onboard.

Secondly, during the quarter, we announced a couple of important corporate initiatives, beginning with our intent to outsource the transactional processing operations of our internal transfer agency to one of our long-standing technology partners. We expect the change to be seamless for our fund shareholders, financial advisers and business partners. Savings generated from this move will help to reduce expenses to our mutual fund shareholders. This action creates a more agile, operational structure to better position the company to achieve its long-term growth plans.

Also, we announced that we have undertaken a comprehensive review of our future real estate needs and are currently evaluating options for a new corporate headquarters within the Kansas City metro area. Our search process is ongoing, and we look forward to sharing more information as we progress.

And lastly, within our wealth management business, we continue to build on our value proposition to financial advisers through technology, products and a leading service model. As part of our technology initiatives, we were excited to introduce Waddell One this quarter, which coincided well with our national adviser conference. Waddell One is a centralized adviser desktop platform available to all financial advisers and associates providing direct connectivity to several of the firm's existing technology partners. Waddell One is a key part of an incremental series of enhancements the wealth management business is implementing over the next year as part of its business administration program. Additional components will include enhanced reporting, improved data analytics and a simplified business processing model.

We also broadened the range of asset managers available within our advisory programs and added additional portfolio, construction and planning services this quarter. Each of these actions represent progress toward realizing the long-term value of our wealth management franchise.

So as you can tell, it was a busy quarter, and we're excited to see the results of each of these initiatives over the long term as they play -- as they each play an integral part of our overall transformation strategy.

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 $33.9 million or $0.45 per share compared to $32.1 million or $0.42 per share during the prior quarter. As we highlighted in this morning's release, both the first and second quarter included a $0.06 benefit in investment and other income from unrealized gains on our seed and corporate investment portfolios as we benefited from strong markets in both periods.

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 $71.9 billion, fairly consistent with the prior quarter, while average assets under management of $71.4 billion increased nearly 2%. Net outflows of $2.4 billion were higher than the prior quarter but improved compared to the same period last year.

Within our unaffiliated and wealth management distribution channels, net outflows were $800 million and $1.1 billion, respectively. Increased volatility in the equity markets during the quarter contributed to slower sales in key products as investors preferred lower-risk, fixed income and money market funds compared to our more equity-focused product set. The sales slowdown was present across both our unaffiliated distribution channel and our wealth management channel. Redemptions also increased slightly compared to the first quarter.

From a product perspective, after experiencing net inflows for the first 6 months last year, our international core equity fund was particularly challenged during the second quarter of 2019 due to changing investor demand patterns and some performance headwinds. The impact of broad market sentiment on net flows is notable in the year-over-year comparison as the foreign large blend category experienced positive flows through the first 6 months of 2018 but has now shifted to net outflows. Although performance for our emerging market equity strategy has remained solid, we have seen a similar flow dynamic where it has shifted from positive to negative net flows over the past year. We have well-established teams in both of these strategies, however, and we are confident in their long-term prospects.

We remain committed to strengthening and growing our non-U. S. equity franchise and over the past year have added dedicated resources to our international, global and emerging market equity strategies. While it was a tough quarter from a flow perspective, we are confident that the combined impact of improving investment performance and foundational improvements in our sales infrastructure will significantly improve our asset flow trends in the future.

Within the institutional channel, net outflows were $361 million. We highlighted $500 million of known redemptions last quarter, of which $300 million occurred. The balance of that known amount is expected to remain with us until later in the year. We are focused on future opportunities within our institutional channel but understand it will take some time to reestablish our presence here.

Wealth management assets under administration ended the quarter at $57.4 billion, increasing 2% compared to the first quarter primarily due to market appreciation. As planned, the pace of adviser attrition continues to slow, and we ended the quarter with 1,347 advisers and adviser associates. We are making steady progress on building out our full recruiting capabilities as we drive toward the inflection point for adviser growth. At the same time, we continue to hit new highs in adviser productivity each quarter and ended the second quarter with average productivity of $408,000 for the trailing 12 months, a 30% increase compared to the second quarter of last year.

Turning now to the operating results. Operating income increased $5.8 million as revenues increased 4% on stronger average assets and 1 additional day in the quarter. The effective investment management fee rate was 63.4 basis points and was relatively consistent with the prior quarter, simply reflecting mix dynamics within our asset base. In addition to the asset lift and additional day, underwriting and distribution fees benefited from a seasonal increase in commissionable sales.

On the expense side, operating expenses were higher by $5 million, entirely due to higher distribution cost of $6.7 million related to the revenue increase. We had another quarter of strong expense management within the controllable expense categories of compensation, G&A, technology, occupancy and marketing and advertising, which totaled $103.5 million for the quarter, a decrease of $1.1 million from an already low first quarter. Improvements in compensation costs from lower equity compensation and a seasonal decrease in payroll taxes were the main drivers of the lower expense.

In addition, while G&A and technology costs were higher than the first quarter, the expected implementation costs from our technology initiatives will not be incurred evenly throughout the year, and we continue to expect elevated expenses from those efforts in the back half of the year.

Given all of these factors, our expectation is that controllable expenses will be in the range of $106 million to $108 million per quarter for the remaining 2 quarters.

As Phil previously mentioned, we announced last month our intent to outsource the transactional processing operations of our transfer agency. We expect the transition will impact approximately 150 employees and will be substantially completed by the fourth quarter of 2019. We also expect to record a pretax restructuring charge in the range of $4 million to $6 million, which will be spread across the third and fourth quarters of 2019.

Income tax expense for this quarter included the previously disclosed charge of $2.4 million or $0.03 related to the shortfall from the vesting of restricted shares. This item drove the effective income tax rate higher for the quarter, but 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 a consistent level of cash and investments compared to last quarter. We made further progress towards our goal of $250 million in share buybacks by the end of 2019 and ended the quarter at 93% complete against that target. Notably, since the beginning of 2018, we have reduced outstanding shares by almost 11%.

As we shared last quarter, we have been pleased with the flexibility of our current capital return program between a sustainable dividend level and an opportunistic share buyback plan. I will reiterate that we plan to continue our current 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. Recall that we have an open share repurchase authorization, which allows a seamless transition as we complete the previously announced $250 million buyback target and look to allocate capital in the future. We are firmly focused on continuing an active capital return program while maintaining options related to organic and 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) Our first question today comes from Michael Carrier from Bank of America Merrill Lynch.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [2]

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Maybe first one, just on the sales and the flows in terms of the outlook. So you mentioned like the 1- and 3-year performance showing more improvement. I guess just from a product standpoint, are you seeing any areas where you're starting to see some renewed interest that eventually can maybe offset some of the redemption? And I understand what you're saying on like the industry factors being more of a headwind in this environment, but anything on the product side where you're seeing some early signs given the improvement in the performance?

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

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Yes. Maybe I'll just make a couple broader comments, and I'll let Amy follow up. I'd say, in general, if I look back over the last couple of years and I think about a lot of the progress we've made across the organization with respect to institutionalizing a lot of the investment approaches and risk management and kind of the -- reestablishing our foothold in the marketplace and the sales infrastructure investments and that type of thing, combined with improving performance, we're getting more opportunities to engage with people on a quality basis. Obviously, we've got some strong pockets of performance with respect to the small and mid-cap franchise. Large-cap growth, science and tech and asset strategy have made significant turnarounds. And we've established credibility on the international side as well, high income and other things.

So I'd say in a broad sense, we're having better conversations and we're getting more engaged. But as you know, this is a process. And maybe I'll let Amy talk about maybe any specific areas or any additional thoughts she has on this.

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [4]

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Yes. I think that all that I would really add to that is when we look at the first half of this year, we're seeing opportunities to compete for business that we weren't seeing a year ago. And as you recall, a couple of quarters ago, I discussed new leadership in the Ivy channel and then as well as new coverage -- a new coverage model. So we see some channels having early signs of success. Our RIA channel is very well established, doing very well across our emerging market equity franchise. And then our insurance group is really reestablishing the partnerships out in the field and doing very well year-to-date as it relates to 2% to goal.

So we're seeing some nice early feedback. The changes that we've made and the evolutions that we've made across the firm have been well received by our clients and by our partners. And we're committed to doing this in the right way and taking a long-term approach, and we're just excited about what we're seeing. I think Phil mentioned improving performance in asset strategy, strong performance in large-cap growth. Getting some of these larger asset classes moving in the right direction from a sales standpoint can meaningfully help us as we look forward into the last half of the year.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [5]

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Okay. And then, Ben, just 2 kind of clarifying things on the expense side. I think you mentioned the $106 million to $108 million per quarter in the second half on the discretionary side. But I think you mentioned the outsourcing, including some charges during those quarters. So I just want to understand like maybe where those are going to be. And then given those moves, I think you said as you look to 2020, the discretionary was somewhere around like the $430 million plus some tax spend, which would be maybe $430 million to $440 million. But just any change on the longer-term outlook for the discretionary level.

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [6]

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Sure, Mike. In regard to the controllable, correct, I expect $106 million to $108 million for the -- for Q3 and Q4. Incremental to that will be some restructuring charges that we 8K-ed here a few weeks ago and gave a range of $4 million to $6 million. Those will be spread through that period, relatively evenly, I think, between Q3 and Q4.

In regard to 2020, of course, the further out we look, the less precise I can be. I think inflation is probably a very good proxy for what we would expect in our expense growth, although we'll continue to look to offset that as much as we can through ongoing review of our cost structure. I know I previously talked about I don't expect a significant long-term increase in technology. Once we get through some of the transitions that we are making, that transition cost is probably the most significant variable there in our expense base as we'll incur that here a bit in the end of 2019, as I mentioned, and into 2020 as well. Hopefully, that helps.

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Operator [7]

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Our next question comes from Bill Katz from Citigroup.

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William R. Katz, Citigroup Inc, Research Division - MD [8]

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Just staying with the flows for a moment. Seeing some nice growth in the advisory business and then just some continued outflows, I guess, in the non-advisory business. Can you sort of walk me through what kind of inflows are related to the assets coming in the door versus those going out the door and how that might evolve as you look out over the next several quarters, if you will?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [9]

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Yes. This is Shawn Mihal. I think when you're talking about the flows on the advisory and non-advisory business, you're really focused on the wealth management side. So if I'm wrong, just correct me there. But we've been continuing to see over the course of the last few years this migration to the advisory side of the business, I think, falling within the expectations that we're going to continue to see that area of growth and which we've been building out our overarching product platform on the advisory side, opening up more of the channel within that advisory business to a variety of different platforms. And then inclusive in this year, we've launched a couple of new advisory products on that advisory side. Our Guided Investment Strategies launched in January. And this past June, we also launched our MAP Direct program. So opening up the architecture and expanding out that side of the business, which is resulting in that increase in the advisory side of business.

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William R. Katz, Citigroup Inc, Research Division - MD [10]

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Okay. And then just in terms of the relocation. I guess 2-part question here as well. First is any sort of update on timing associated with that? And then, b, is that influencing your guidance in any way as you think about preliminarily 2020 inflation plus or minus ongoing review?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [11]

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In regard to timing, really all I can share is that we are working through the process to assess what our options might be. We don't have any better indication on that at the moment. In regard to expense guidance, I don't expect anything of significance through '19 and '20. And again, related to my comments on the timing, we'll certainly incorporate anything we learn there, but I expect it to be in the longer term.

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Operator [12]

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Our next question comes from Dan Fannon from Jefferies and Company.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [13]

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So just a question on capital and M&A. In your prepared remarks and I think last quarter also, you highlighted the potential for both wealth management and -- or across your 2 segments potential M&A. So just curious how if those are nice to have or kind of how focused you are on potentially inorganic growth at this point given where you sit with your core business.

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [14]

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Well, I think we're definitely focused on those opportunities as they come about. One of the strengths of our company over the last couple of years has been the balance sheet. And I feel like I look back and we've made a significant transformation in our company and are in a much better position today to execute on acquisitions or inorganic growth opportunities than we could have been couple of years ago. We've done all of this while controlling the cash and accumulating that. Now we have a lot of financial flexibility.

So I think you can see we've been pretty vocal about it. I think we -- our intent is to grow our wealth manager as well as look for opportunities within the asset management to expand capabilities. You can see the potential benefits of diversifying and broadening the revenue stream across our organization and reducing the volatility of the operating model. And I think I can just highlight a lot of potential opportunities down the road. But it's something where we're actively looking at. But obviously, as we said in the past, it's not something we're going to do just for the sake of doing. We're going to be prudent. We're going to be pragmatic about it and disciplined in our approach and be mindful of our culture. But I think we have a lot of flexibility in an industry that's seeing a lot of disruption. We're in a position to take advantage of that hopefully.

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Daniel Thomas Fannon, Jefferies LLC, Research Division - Senior Equity Research Analyst [15]

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Got it. And then the follow-up on pricing. You guys changed pricing a little while back in terms of trying to get more competitive in certain products. So wanted to see where -- how you think that's impacted gross sales or you're seeing the desired effect, and then also going forward, if that's a tool you might be using more proactively on a go-forward basis.

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [16]

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I might start with an overarching comment, and I'll let Amy talk about maybe the specifics. I'd say, in general, it is something we'll review on an ongoing basis. Recall, we made those broader changes about a year ago or so. My expectation is going forward, they would be a little bit more strategic and kind of ongoing and probably incremental in nature based on the product and opportunities and that type of thing. But obviously, we know in this industry, you've got to have -- not only have strong performance and a properly resourced product and a strong risk management, you have to have a product that's competitively priced. And so we're committed to doing that as well. So I think the go-forward options will be more incremental but on an ongoing basis. Maybe, Amy, you can address and see what your -- the feedback in the marketplace has been.

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

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Yes. The feedback in the marketplace obviously has been very positive. As it relates to how it's impacted sales, it's a little early to tell, but we have a bit of a mixed bag today. So some products have seen a quick pickup, some have seen less so. And of course, there's so many things that play into it in addition to price. It's hard for us to really tell from that standpoint.

I mean I think a point that I would make is as we look to really be -- to increase the competitiveness of our pricing in our products in the marketplace, we've made a lot of progress in the moves that we made last year. And a substantial amount of our assets sits at an average price or lower-than-average price standpoint.

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Operator [18]

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Our next question comes from Kenneth Lee from RBC Capital Markets.

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Kenneth S. Lee, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Just one on the recent appointment of Dan Hanson as the CIO, and I think you've touched upon this in the prepared remarks regarding ESG. But wondering if you could outline any specifics in terms of potential changes to the investment process that you envision and perhaps product development efforts as well.

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [20]

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Sure. I'd say it's a little too soon to get into specifics, but obviously, Dan's background in ESG is something that was attractive. But more importantly, it's been his approach to ESG investing. He's got a lot of experience in managing money in the real world and has over a decade worth of top-level performance in integrating ESG and fundamental research. So I think as we sought out this position, it was really somebody who could come and bring new -- a new level of new perspectives, new capabilities.

Look, we know ESG is something that's on the minds of our clients and other investors, and that's something that we want to be able to offer products to. I don't think it will result in a significant change to our investment process across our organization. That's one of the beauties of Dan's background. And I'll let him maybe just chime in here in a second. But as we had conversations along the way, it's clear first and foremost, as we've indicated, he's a fundamental investor, and his approach is something that's very pragmatic and one where I think we'll see a framework type of approach that can be implemented in different ways across our product suite. So we'll have more to say on specifics, but Dan, I don't know if there's anything you want to add in terms of how you think about it.

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Daniel P. Hanson, Waddell & Reed Financial, Inc. - CIO [21]

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Well, thanks for the question, Kenneth. And I guess just quickly in terms of changes to the investment process, my attitude and our attitude is we're fundamental investors, so really believe it's hard to separate business analysis of sustainability issues from just sort of core bottom-up fundamental analysis. So to the extent ESG issues are part of the material investment case, that's something that any fundamental analyst is integrating. We think there is an opportunity to be relevant to the market to serve clients. But overwhelmingly, we take a view -- a pragmatic approach, not a dogmatic, formulaic approach. We'll be looking more at ways we can serve clients in a way that's authentic to our approach and certainly have more to share in the future.

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Kenneth S. Lee, RBC Capital Markets, LLC, Research Division - Analyst [22]

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Great. Just one follow-up on the wealth management side. And I think you touched upon this briefly in the prepared remarks as well. But wondering if you could just comment on the current recruiting environment for experienced advisers.

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [23]

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This is Shawn Mihal. And yes, the recruiting aspect, we've been working through over the course of last several months really building out our platform for the future. And inclusive inside that has been building out a more robust recruiting department as we've really changed the structure of how we recruit advisers. So certainly, in the past, we were more focused on bringing in significant numbers of advisers that were newer to the industry. Going forward, we are changing our approach and attention to those more higher-producing, higher-performing advisers. So as we've been working and setting the foundation and getting these recruiting positions filled, our pipeline is starting to become a little bit more robust as we've gained additional attention from prospective advisers, as we've worked to introduce ourselves out there with regard to a lot of the changes that we've made over the last 18 months.

So we are seeing an uptick in the activity. We do expect that it's going to take a little bit more time through the second half of the year into 2020 as we really get to recruiting resources, working together as a team and get them all in place here over the course of the next couple of months. So more to report back as we continue to stand that up.

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

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Ken, I would add just to what Shawn said that as a reminder, we also augmented our adviser payout grid the beginning of this year, which just contributes to our overall environment of being an attractive wealth manager for that talent.

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Operator [25]

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Our next question comes from Robert Lee from KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [26]

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The first one, I guess, maybe a little bit of a modeling question. And this is just trying to better grasp the change in the transfer agency on the financials. So can you -- obviously, there's -- I assume there's some shareholder sources revenue that goes away and you did mention that there is some affected employees, too. So should we be thinking this in the no kind of bottom line impact? Could you help us kind of think about the moving pieces? And I'm assuming that's incorporated within your $106 million to $108 million expense guidance.

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

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Rob, that's correct. The first part of your statement there, there really won't be a significant bottom line impact. Again, the savings created there, we are passing on to fund shareholders ultimately for their benefit. There will be some movement in our P&L. Essentially, there's a revenue and expense gross up that we'll see move a little bit in 2020. But again, the bottom line really won't move with any significance.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [28]

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Okay. Great. And just -- if I think of -- in the wealth management channel, could you maybe just update us -- if we were to think of total product sales, I mean whether it's going to fee-based account or more traditional-type fund sales to extent those still occur, could you maybe just update us on -- how much of that are you kind of -- of the sales you're capturing into Waddell managed products today? And are you -- do you feel like you're at kind of the stable level of that? Or is there any reason you expect that to improve or worsen from here?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [29]

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Yes. Robert, this is Shawn. And maybe I'll take those, and if anyone else, Ben, wants to add some additional color or comments to it. We've been opening the product platform quite a bit over the course of the last 1.5 to 2 years. And obviously, with the launching of some of the advisory programs in mid-'17 was really the initiation of that. And forecasting kind of the flows had been inside expectations of what we've seen migrating from the affiliated funds over to these other advisory programs and rationalizing into other investment products.

When we look across the entirety of the wealth management side of the business, we've been maintaining in that low 70% range. And I think end of the quarter, about 70.4% concentration ratio of the affiliated funds inside that channel. As we reported before, we do expect that to moderate slightly over time as new sales are really flowing into a broader product spectrum. So we are seeing, as we build in these platforms, the additional competition with other investment products that are available inside those platforms.

So we are starting to see a little bit of moderation of that overall concentration, but again, slightly, and we saw some -- it's a little bit more accelerated when we first launched the programs, and now it's -- the pace has really resumed to a point where we're seeing these go-forward investments going into the advisory side really rationalizing out to a much more reasonable allocation of affiliated funds to unaffiliated funds. So we do expect it to stay inside those expectations. Inside the advisory programs that we launched, there are still exposure to affiliated funds. And we're seeing, depending on programs, anywhere from the single-digit-type allocation all the way up into the double-digit 20% range allocations into affiliated funds depending on the programs that have more open architecture associated with them. So we'll continue to monitor that, but we are, as I mentioned, staying inside expectations.

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Operator [30]

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Our next question comes from Glenn Schorr from Evercore.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [31]

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Kind of a follow-up on some the questions and one of your comments when you noted this type of environment that people are putting more money into the lower-risk products, fixed income money market. If you look at your product set, it impacts you. And I'm sure a lot of people love the big dividend and the huge share count shrinkage. But how do you balance that capital return with having enough product to endure this type of product preference cycles and have a more durable and steadier flow stream? So I guess that's a long-winded question of asking do you have enough product? And what new products do you have on the come.

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [32]

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Yes. Glenn, that's something obviously we think about. And I think I tried to touch on this a little bit earlier. I do think there are some real opportunities and long-term benefits by broadening and diversifying our product mix. Within the asset manager, obviously, we're under-indexed to fixed income capabilities. And so I think there's an opportunity there for us to be acquiring some talent or new capabilities. I think generally, international has been an area we've kind of grown organically and been recently successful at. But that's also one that I'd expect to see growing long-term demand. So that would be an opportunity. Multi-asset, we have some good history in that type of thing.

So I do think there are opportunities to broaden the product set, diversify a little bit and get into some of the more uncorrelated to U.S. domestic equity. Also, as you know, we are looking at internal product development as well with respect to potentially some concentrated versions of existing strategies. So that's a real opportunity. Another way to diversify and broaden revenue stream and reduce the volatility of the operating model is to grow the wealth manager. And that's -- obviously, that's something else we are focused on as well.

So I think you made a good point. Certainly, we have the flexibility in terms of the strong capital position to take advantage of these opportunities. I don't think it's necessarily mutually exclusive whether we have a strong capital return program and also the ability to do niche acquisitions or complementary acquisitions. So it is something we're focused on in this environment, for sure.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [33]

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Maybe a related follow-up. It has to do with the marketing dollars. Maybe you could talk a little bit about what you feel is working where the best dollars are spent right now.

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [34]

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Glenn, are you asking from like a distribution standpoint, our best partnerships? Is that where you're going with that question?

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [35]

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I actually left it open on purpose to see where you go with it, whether it be certain distribution channels or specific products that you think have the right performance profile right now that could sell.

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [36]

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Yes. Okay. So I'll talk a little bit about that, and if anybody wants to add anything else as it relates to other parts of the business, we certainly can. We have some strong distribution partnerships that we put dollars into. Inside of those, we've been able to be highlighted in products such as mid-cap income opportunities, which is an income-oriented version of our mid-cap strategies that a lot of our partners have either highlighted in a newsletter or as a top fund for a quarter, whatever. And so we've done a lot around that.

We have put money from a distribution standpoint back into the hands of our sales force really to have them dollars in their hands to be able to drive the business in their individual channels. We went through a restructure that created that scenario where our national channel wholesale force has approximately a 50% inherited rate of new advisers in each of their territories. So what are different ways that we can get our investment capabilities and our investment people out in front of groups of advisers to showcase the evolutions that we've done. So we've put dollars there this year, and we're seeing good returns on that as well.

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [37]

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I might just add that just from a broader perspective and just to be clear and follow up on one of Amy's points. I think if you look at our sales mix shift historically was very wirehouse-centric, and as Amy indicated, that we've made some meaningful investments in our sales infrastructure in developing different channels to make sure our products are hitting all available distribution channels and getting to the right opportunities and having a broader, more comprehensive sales approach.

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [38]

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Yes. I would agree with that. I think we spent the bulk of 2018 really building out our professional buyer groups with -- which I would refer to as our institutional and institutional-like channels. And so that was in progress throughout 2018. It's a fully staffed group today, and they're out reintroducing the Ivy in those parts of the marketplaces. So there's some dollars being spent there.

In addition to that, to kind of go back to your first question, Glenn, I think in addition to any kind of product development or other new products to go to the marketplace with, one thing that we've really tried to focus on is what is the vehicle that's necessary or how are people consuming the investment strategies that we do have. So the opening of model delivery portfolios, I think, is substantially important as -- in a lot of long-only equity products, that is a major way of consumption for a lot of our adviser force.

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Operator [39]

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Our next question comes from Michael Cyprys from Morgan Stanley.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [40]

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You guys mentioned that you're open to inorganic growth with your wealth manager? I was just hoping you could elaborate on your framework and criteria there for M&A on the wealth management side. Is this more about scale and expanding the number of advisers or more about technology capabilities? Just curious how you're thinking about that and how you prioritize inorganic growth on the wealth management side versus the asset management side.

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [41]

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Michael, this is Shawn. I'll take the first portion of that, and then some others may fill in. On the wealth management side of the business, from an inorganic growth perspective, we've been doing a number of transitionary projects related to technology and we're continuing to invest in technology, and I think Ben provided some commentary with respect to our technology initiatives. So we're continuing those efforts. So this isn't purely focused on the technology side of things as we have been doing a significant amount of innovation inside that space. But from an overall scale and growth perspective, we're really looking at the foundation that we've been building inside the wealth management side of the business with the technology, the payout grid, the support services model to really be a scalable business model and looking across the recruiting capabilities as well as other opportunities outside of that from an acquisition standpoint. It's really presenting that opportunity to bring in a set of advisers in a more mass scale that are more aligned to the productivity of our existing advisers. So really focusing on more of those higher-performing advisers to scale that line of business specifically from a growth perspective.

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Michael J. Cyprys, Morgan Stanley, Research Division - Executive Director and Senior Research Analyst [42]

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Okay. Great. And then are you also able to provide an update on flows for July?

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Amy Jo Scupham, Waddell & Reed Financial, Inc. - SVP of Distribution [43]

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Yes. I mean I think flows for July look very similar to what you've seen as we've moved through the year. So sales are still slightly depressed, but redemptions are also down slightly year-over-year. So it's much of the same.

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Operator [44]

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And our next question comes from Mac Sykes from Gabelli.

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Macrae Sykes, G. Research, LLC - Research Analyst [45]

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Just a quick one. I'm sorry if I missed this. But could you just remind us about the repurchase program metrics and timing and whether at this point it makes more sense to be more opportunistic just given your capital position?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [46]

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Sure. As a reminder about the framework in October of '17, we announced a $250 million buyback target. As I said in my prepared comments, through June 30, we were about 93% complete towards that target and expect we'll complete that here in the latter half of 2019. In regard to -- going forward, we continue to be opportunistic with share buybacks as potentially adjusted for inorganic opportunities that we may pursue. As a reminder, we do have an open authorization which we'll continue to operate under -- at whatever point we complete our $250 million target. We continue to intend to manage our cash balance at or below its current level.

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Macrae Sykes, G. Research, LLC - Research Analyst [47]

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Great. And I apologize for having repeat it, but Phil you've done a nice job improving both the asset management and wealth management kind of individually in some respects. And we've seen some recent transactions in the marketplace where those segments were sold off individually. Could you just update us kind of on the total platform and the importance of having both of those segments for the Waddell model?

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [48]

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Yes. Well, I think for us, obviously, we are a little bit unique in the marketplace given our heritage and the heavy proprietary exposure of Ivy Funds within our wealth manager. So that provides some unique opportunities and challenges for our company. But we're committed really to both of these businesses and we see real opportunities to grow the company overall. And I think the wealth manager is a little bit of underappreciated in our eyes and we've made a lot of improvements, we think, over the last couple of years. As Shawn has indicated on a lot of these calls, this is a grind. I mean it's gradually opening up the architecture by providing better technology, better services, better opportunities, more choices for advisers and clients.

So we're at the point now where we think this is an opportunity to actually grow this business. And so we are kind of excited about the longer-term potential. We spent a lot of the last 2 years establishing and getting us in this position. So I think for us, it makes strategic sense to keep -- to hold on to these businesses and grow them and develop them. And we see real opportunities together.

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Operator [49]

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(Operator Instructions) Our next question is a follow-up from Bill Katz from Citigroup.

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William R. Katz, Citigroup Inc, Research Division - MD [50]

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A couple maybe nested questions inside it. Just in terms of the balance sheet, I appreciate this discussion about sort of incremental buyback from here and the cash levels. You're sitting on a lot of investments. What's the latest thinking in terms of sort of sustainable seed capital? And then how much working capital do you think you need to maintain to the extent that inorganic opportunities would start to present themselves?

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [51]

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In regard to seed, we currently have a seed portfolio around $350 million of our balance sheet, of our investment balance. I don't expect we would see significant change in that, in particular, in the near term as we think about product development. In regard to -- I apologize, I forgot the second part of your question.

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William R. Katz, Citigroup Inc, Research Division - MD [52]

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Working capital. Sure. Working capital.

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Benjamin Russell Clouse, Waddell & Reed Financial, Inc. - Senior VP, CFO, Treasurer [53]

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Thank you. Sorry. In regard to working capital, we generate significant free cash flow. As you know, our primary need for working capital is product development and in the seed portfolio. So we don't have a particular need for a significant amount of working capital beyond that and consider that capital available for investment or growth beyond our seed.

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William R. Katz, Citigroup Inc, Research Division - MD [54]

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Okay. And just one last one. When you think about the new FAs that are coming in, how do you sort of triangulate about what you think the effective advisory fee rate might be versus the incremental margin of those assets coming on?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [55]

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Bill, this is Shawn. Maybe just to clarify the question. Asking on the effective fee rate, are you talking about on the advisory programs? Or are you talking about payout grid? Advisory program?

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William R. Katz, Citigroup Inc, Research Division - MD [56]

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Advisory, correct.

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [57]

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Yes. The effective fee rate, I think, has typically been in about the 110 basis points range, which is fairly consistent with the data that we look at across the industry averages that we pull down from some of the providers out there. So in certain programs, it might be a little lower, some might be a little bit higher but certainly tracking to that average. So as we look to bring on existing advisers, I don't anticipate seeing -- or bringing on new advisers into the program with new assets, I don't anticipate seeing a substantial change in those effective fee rates since we're tracking pretty much to the average.

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Operator [58]

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And our next question is a follow-up from Robert Lee from KBW.

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Robert Andrew Lee, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [59]

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Maybe this is a little bit of a left field kind of question. But on inorganic growth, I mean, in the wealth management channel, I mean, clearly you've seen over the years different types of broker-dealers, wealth managers deciding they needed to offer banking products to be competitive and offer more complete product set to their customers. So I mean do you view that as necessary? And does that inform your inorganic -- what you're looking for inorganically, which maybe includes a tiny bank or something to capture banking products?

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Shawn Michael Mihal, Waddell & Reed, Inc. - President, COO & Director [60]

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So let me -- this is Shawn. Let me touch on the first part of that. But from the inorganic growth perspective and the product set, as you're likely aware, we clear through Pershing, which has a number of different products available and services available, particularly as it relates to more of the high net worth-type clients. And we've expanded out that product set. And it's not just over the last 2 years. We've had a number of different initiatives and products and services that we've introduced through Pershing over the last several years. And we're continuing to expand out as Pershing continues to evolve its product set. So providing a holistic competitive platform all the way from, as we talked about before, early accumulators, all the way up to the high net worth investors.

So making certain services, loan advance-type programs, trust services, even some private banking services and things like that through that platform is really where we've expanded out those product sets, and we're continuing to evaluate to fill in any areas of gaps where we feel that we really need to compete in that space. So that is something that we'll continue to evolve over time. But we have made significant progress in bringing in a variety of different services for those high net worth clients in that space.

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Operator [61]

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And ladies and gentlemen, with that, we'll end today's question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

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Philip James Sanders, Waddell & Reed Financial, Inc. - CEO & Director [62]

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Just want to thank everybody for joining us today, and we look forward to catching up to you in a few months. Thank you very much. Have a great day.

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Operator [63]

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Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.