Waddell & Reed Financial Inc
Q2 2018 Earnings Call Transcript

Published: 31 Jul 2018

[Operator:]

Good morning everyone and welcome to Waddell Reed's Second Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time I'd like to turn the conference call over to Ms. Nicole Russell, Head of Investor Relations. Ma'am, please go ahead.

[Nicole McIntosh-Russell:]

Thank you, Jamie and on behalf of our management team I would like to welcome you to our quarterly earnings call. Joining me on our call today will be Phil Sanders, our CEO; Ben Clouse, our CFO; Brent Bloss, our COO; Shawn Mihal, President of our Broker-Dealer, Waddell & Reed Inc; and Amy Scupham, who leads distribution and is 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 that are 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.

[Philip James Sanders:]

Thanks, Nicole. Good morning, everyone. Today we reported quarterly net income of $44 million or $0.55 per share compared to net income of $46 million or $0.56 per share last quarter. Assets under management ended the quarter at $78.7 billion down approximately 2% during the quarter. As an organization, we continue to execute on the strategic initiatives we outlined last year. This is not easy work, but I believe we are making steady progress in evolving our business model and establishing the framework for long-term success. I will focus my remarks this morning on our efforts to reinvigorate our product line and sales as well as provide an update on investment performance. Ben will expand on the quarter's financial results, then provide an update on our progress against key strategic investments and various corporate efficiency initiatives. Finally, Shawn, will provide an update on our broker dealer business. As part of the firm's key strategic initiatives, we continue to evaluate the competitiveness and relevance of our product line in the marketplace while focusing our investment management and distribution resources in areas where we can provide our clients the strongest offerings. We took the first notable step earlier this year by completing the merger of the former Waddell & Reed Advisors Funds into similar Ivy Funds thereby creating greater operational efficiencies and economies of scale for our clients. In June, we announced our intention to expand our internal product rationalization with the merger of six additional funds. Once approved by shareholders, the mergers are expected to take place in November of this year. This disciplined approach helps ensure that our product set stays focused, relevant, competitive, and properly resourced amid the evolving industry landscape. It also provides us greater flexibility and capacity to introduce new offerings and investment vehicles consistent with client demands in our firm's core capabilities. Strong investment performance is essential to the long-term success of any active manager, and we continue to make steady progress in improving investment performance across much of our product line. Similar to last quarter, we saw the majority of our key strategies outperform their benchmarks for the quarter and continue to improve their one, three and five-year Morningstar and Lipper rankings. In fact, on a trailing one-year basis, over 75% of our funds representing over 85% of our assets under management have improved their peer group performance rankings. We continue to believe that the uptick in volatility and the gradual trend toward normalization of monetary policy on the part of global central banks will provide a more favorable backdrop for active management over time. Over the past 18 months, we have made a significant commitment to strengthening our investment management and risk management capabilities both in terms of personnel and technology, and this remains a priority. Having the right products and solid investment performance is only part of the equation. We must also ensure our products are competitively priced. As previewed last quarter, recently announced selective pricing adjustments in 10 of our key strategies – we recently announced selective pricing adjustments in 10 of our key strategies. The adjustments are the result of an extensive review of our pricing structure and represent another important step in the ongoing refinement of our product line. The fee reductions are focused on strategies in which we believe we are best positioned to compete in multiple distribution channels. The evaluation included, but was not limited to performance, market opportunity, broad placement on partner platforms, and gatekeeper evaluations. Net outflows for the quarter rose due to a softening of sales across both unaffiliated and institutional distribution as well as an increase in institutional client redemptions. Within unaffiliated distribution, second quarter sales declined compared to the prior quarter while redemptions were generally flat. The reduction in sales can be attributed in part to seasonality, weaker industry trends, and declining sales in a couple of key products. Our international core and emerging market equity strategies both experienced weaker sales trends as international equity markets underperformed domestic equity and fixed income markets amid rising global trade tensions. Given their well-established investment teams and track records, we remain confident in the long-term prospects of both of these strategies. As performance continues to improve across our product set, we have seen a broadening of sales into other products including mid-cap growth and small cap growth and are optimistic that our pricing initiatives could help this trend. Our institutional channel experienced both a decline in sales and an increase in redemptions when compared to the prior quarter. The $1.7 billion redeemed by institutional clients during the quarter were centered on our core equity and large cap growth mandates. As previewed on our last earnings call, we anticipate the departure of a long tenured, large cap growth portfolio manager may continue to create a near-term headwind for this channel. We have been notified that another $500 million will be redeemed in the coming months. Currently, the institutional channel represents approximately 6% of our assets under management. Within our broker-dealer, net outflows of proprietary products declined for the second consecutive quarter and redemptions were at their lowest level since 2016. Shawn will have more to say about our broker-dealer business in just a few minutes. We continue to work diligently to diversify our assets under management and flow profile across the various distribution channels. As part of this effort, we continue to refine our organizational structure to ensure each of our distribution channels is properly resourced to support future growth. Additionally, we continue to build out data analytics capabilities that will support a more targeted sales and marketing effort going forward. These efforts combined with improving investment performance and a competitive pricing structure, provide the necessary foundation for growth. Let me now turn it over to Ben. Ben?

[Benjamin R. Clouse:]

Thank you, Phil, and good morning everyone. As Phil said, we reported second quarter net income of $44 million or $0.55 cents per share, which was similar to the $0.56 we reported in the first quarter. Total revenues declined slightly by $2.3 million sequentially. Lower average assets under management were due primarily to the loss of institutional assets during the quarter. Unaffiliated redemptions were consistent with the first quarter while redemptions in the broker-dealer improved 10% sequentially. Sales declined modestly in both unaffiliated and institutional distribution while market action was more positive across all distribution channels. We also implemented some client fee enhancements on advisory accounts that will add $1 million to $2 million in revenue per year on a run rate basis. These fees, which are consistent with the marketplace, partly offset the decline in management fee revenues. Operating cost declined slightly in total by $600,000 despite unusually high severance costs of $4.4 million in the quarter. Compensation declined otherwise due to slightly lower head count, a reduction in payroll taxes, and retirement savings plan costs as individuals reached their annual limits, and lower equity compensation. The quarter also included a $1.2 million intangible asset impairment related to a sub-advisory agreement as a result of a decline in assets. Our remaining intangible assets are all associated with our core mutual fund business. The remainder of operating expenses declined – increased slightly. Controllable expenses, consisting of compensation, G&A, technology, occupancy, and marketing declined to $112 million from $114 million in the first quarter despite the severance charge. Lower compensation costs drove that sequential improvement. Our effective tax rate during the quarter was 23.1% and declined slightly due primarily to the favorable settlement of a state tax issue, which more than offset the tax shortfall from share-based compensation that vested in the second quarter. The tax impact of share-based payments is expected to decline significantly now as shares which were granted at a higher stock price are fully vested. We continue to make progress on our cost containment initiative and expect to further rationalize our broker-dealer real estate footprint in locations with low occupancy or low profitability. As we focus on our most productive advisors, we have less demand for office space due to a lower inflow of new advisors. We have already made meaningful progress against our goal to reduce costs by $30 million to $40 million, and are on track to reach the final $10 million to $20 million in net savings across the company by the end of 2018. We expect our full cost reductions to be realized in our 2019 run rate. The primary areas of focus are real estate and streamlining of systems and resources with the latter being addressed through further reduction in contract resources in the second and third quarters. While we are focused on expense management, we continue to invest in initiatives meant to drive revenue growth. We announced last week some repositioning of pricing on a select group of mutual funds. As Phil noted earlier, we believe these changes will enhance our competitive position in the market. The fee reductions in aggregate will reduce the effective fee rate on our retail mutual funds from approximately 67 basis points to 65 basis points beginning in August. While this strategic initiative will pressure near-term management fee revenues, these products will be better positioned to take advantage of sales opportunities and help our asset retention efforts. We continue to add investment research staff and are working on a more comprehensive data strategy, including enhancements in the ease of doing business for advisors and enhanced sales data for our distribution team. During the quarter, we completed share buybacks of $40 million bringing the cumulative total purchased to $81 million toward our two-year goal of $250 million. Our balance sheet remains strong with cash and investments of $825 million at the end of June, affording us ample flexibility and liquidity to meet our strategic objectives. I will now turn it over to Shawn to provide an update on our Broker Dealer progress. Shawn?

[Shawn M. Mihal:]

Thanks, Ben, and good morning. Assets under administration ended the quarter at $57 billion, representing a 1% increase compared to the first quarter and a 6% increase compared to the second quarter of 2017. Advisory products continue to drive growth and assets under administration with net new inflows of $315 million during the quarter, and $1.3 billion over the last 12 months. Asset-based advisory fee revenues, which accounted for 57% of the broker-dealer revenue during the quarter, were $67 million, an increase of 2% sequentially and 14% compared to the second quarter of 2017. Given the importance of advisory products in the marketplace, one of our key strategic priorities is to expand product choices available to financial advisors. The broader evolution of our advisory suite of products started last year by adding more investment choices to strategic relationships with third party manufacturers. This list of strategic advisory product partners was further expanded this year with the introduction of two new fund families. The addition of funds from these new fund families was in coordination with the ongoing review of all funds by an independent financial consultant. As we discussed in prior quarters, our goal is to offer advisors access to advisory products that allow them to more effectively service every client from early accumulators all the way to high net worth individuals. Another important goal for our broker-dealer is to enhance the advisor experience by providing them with tools to conduct business easily and efficiently. Our business administration platform which will increase efficiency and allow for a seamless connection of business processes to an aggregated data platform is well underway. A final vendor selection decision is expected by year-end with the rollout of the platform anticipated in 2019. Technology continues to play a crucial role in how advisors conduct business and is strategically imperative for Waddell & Reed to make the right investments and secure our standing as a broker-dealer of choice. Our ongoing work and supporting advisory continues to progress steadily. Last quarter, we repositioned internal resources as part of our development of an elite service program designed to provide our highest performing advisors with a dedicated service professional that will offer personalized concierge service. This quarter, we intend to fill newly created or lead service positions and begin introducing the service to our top advisors with expansion to additional high-performing advisors throughout the remainder of 2018 and into 2019. We believe this dedicated service will further enhance our advisor's experience and expand our service-based value proposition. Advisor head count is starting to level off as the percentage of advisors falling below our increased production minimum has substantially declined in recent quarters. You will recall that one of our four strategic pillars is to evolve the broker-dealer into a self-sustaining, competitive, profitable entity. As a result, we proactively shifted our focus away from inexperienced individuals and directed our recruiting efforts toward industry-experienced financial advisors. While this has significantly impacted head count, it is important to keep in mind that the average annual production for advisors who left during the first six months of 2018 was $78,000. This has led to a meaningful improvement in average productivity which stood at $314,000 for the trailing 12 months into June 30, 2018. For comparison purposes in 2016, the year prior to the implementation of the broker-dealer strategic pillar, we recruited and lost several hundred financial advisors for a net overall nominal decrease of 38 advisors and had an average annual advisor productivity of $224,000. We ended June with 1,130 financial advisors and an additional 339 advisor associates who are licensed assistants supporting advisors. Our firm is founded and our beliefs are rooted in the importance of financial planning. Planning is at the core of what we do. While other firms are just starting to turn their attention to financial planning, it has been a foundational element of how we conduct business since the very beginning. In light of continuing industry consolidation broker dealers have the potential to become a commoditized service focused exclusively on payouts and losing the personalized service, which financial advisors have historically enjoyed. With the development of our corporate strategy we have deployed initiatives designed to increase payouts for higher performing advisors, enhanced technology, offer a broad selection of programs and services designed to support our advisors' practices, and expand in our product and service offerings. While these are all important components of our competitive position, we maintain our focus on our legacy of financial planning, dedicated support, and personalized service. Within our broker-dealer we offer value proposition that delivers a service experience designed for the individual needs and personal support of our advisors and the clients they serve. We are committed to supporting a community of advisors to inspire collaboration engagement between each other and with our leaders as we work collectively to evolve our firm. Waddell & Reed's long heritage of financial planning permeates the culture of our broker-dealer. Overall our mandate is to sustain a broker-dealer that is operationally efficient, accessible, culturally strong, and competitive. The work we are doing every day supports this mandate through three core elements. Modern planning tools, and state-of-the-art platform and processing systems, a broad span of diverse products, an elite suite of support services for advisors. Across more than 80 years, we redefined our business model yet kept its core intact, our focus on financial planning through a client-centric culture. Operator I'd like to now open the call to questions.

[Operator:]

Ladies and gentlemen, at this time we'll begin the question-and-answer session. And our first question today comes from Glenn Schorr from Evercore ISI. Please go ahead with your question.

[John Dunn:]

Hi. It's actually John Dunn just filling in for Glenn. On the fee cuts interest being the class I and the class N shares, how does the interplay go between the other share classes that don't enjoy the cuts, and is there – is that a tough thing to pull off? Also, how do you settle on the right rate? Is it the account to the median, the average, and what were the conversations with the distributors like?

[Amy Scupham:]

Do you want me to take that? Hi.

[Philip James Sanders:]

Yeah. Amy why don't you...

[Amy Scupham:]

Hi. This is Amy. I think I can get part of that, and then – and Phil and Ben can fill in around the edges. So, as far as the class I and class N shares go and the interplay with the others, these are fee waivers that we put on the class I shares and the class N shares. And what we did was we went across the product line to make sure that we weren't cutting into actual management fees. And so, if where we did, they actually have some minimal impact on some of the other share classes. The conversations that we had as far as how did we figure out what was the rate that we wanted to get to was really broad across a number of months. So, we started out by focusing in on the product set from the standpoint of where do we feel like we can have broad distribution across multiple distribution channels. And then as we started to zero in on where we wanted the rates to be, we utilized the Morningstar pricing pillar methodology and we kind of aimed for on average the median of the below average quintile. And so, it's broken down into five quintiles and that's what we were aiming for. And then we had discussions with distribution with Phil and investment management kind of around the edges to figure out which ones we wanted to have where and this is where it fell out.

[John Dunn:]

Got you. And then just a follow-up. Can you give us a flavor if any material funds or any activity as far as like getting dropped from distribution list in the quarter? And kind of what you're seeing not just for you guys but for the industry?

[Amy Scupham:]

I'm sorry, can you repeat that?

[John Dunn:]

Yeah, sure. Were any material funds that you dropped from any distribution lists in the quarter and any – if you give us a flavor about what you're seeing about book and consolidation lists for you guys and for competitors?

[Amy Scupham:]

Yeah. So, we had three of our distribution partners go through rationalization that was announced I believe in the first quarter and kind of became official during the second quarter. As far as AUM goes, it was not substantial at any of the partners averaging probably around 2.5% to 4% of our AUM being rationalized in total.

[John Dunn:]

Got you. Thanks very much.

[Amy Scupham:]

At the partners. Yeah.

[Operator:]

Our next question comes from Dan Fannon from Jefferies and Company. Please go ahead with your question.

[Daniel Thomas Fannon:]

Thanks. I guess, another follow-up here on just the pricing. Can you – the 2 basis points that you highlighted, I guess, can you give us the AUM that is impacted by that? And then also just what's the – you talked about the potential pickup in sales. I guess what is the time period for which you might think you'll see behavior change as a result of these changes.

[Benjamin R. Clouse:]

Good morning, Dan. It's Ben. I'll maybe take the first half. I'll let Amy and Phil talk about sales. As I mentioned that 2 basis point impact is applicable to class N and class I shares across our retail assets, retail being $74 billion at the end of June is the way to think about that. And then I'll let you guys maybe speak about sales if you want to add.

[Amy Scupham:]

We did some modeling to look at what it would take to – in sales lift in order to get back the revenue impact from this fee reduction. And I think we're looking over a time period of call it 18 to 36 months. I think that there's a couple of the strategies that might have a near-term positive impact while some of the others might take a little bit longer. I think ultimately what we were looking to do was to put ourselves in a position that we felt gave us a long-term opportunity to compete. And when we combine this with the improving investment performance, and the fee reductions, we feel pretty good about where we are.

[Daniel Thomas Fannon:]

Okay. And then just a follow-up on in terms of activity. You mentioned a $500 million kind of redemption coming I guess in the next few months. Any other updates in terms of July or on the retail and kind of activity as a whole as well as anything institutional?

[Philip James Sanders:]

This is Phil. Maybe I'll do it at a high level and if Amy wants to add any color she can. As I said, we indicated in the preliminary comments there was an additional $500 million that will be transitioning out with respect to our institutional business. The majority of that is large cap growth, and then I think there is a large cap core account. That's what we know at this point in the institutional world. I think in terms of the broader sales trends that we've gotten off to for the month of July, I would say that the softer sales trends that we experienced in the second quarter are kind of continuing into the third quarter, kind of no change really in the pattern there. And then also very similar, the redemption trends I would say are pretty consistent right now as we head into one-third of the way through the third quarter.

[Amy Scupham:]

And I would just add that. In the institutional space, we have had some interest across some other strategies. However, I wouldn't say that at this point it's anything that would move the needle significantly.

[Daniel Thomas Fannon:]

Great. Thank you.

[Operator:]

Our next question comes from Robert Lee from KBW. Please go ahead with your question.

[Robert Lee:]

Great. Thanks for taking my questions. Maybe just following up on some of the fund mergers and fee actions to position the product line. So, with the pending fund mergers and I guess in November, could you maybe just update us on I'm assuming obviously that's to reach additional break points on those funds as well. Is there going to be an associated revenue impact from those mergers and then maybe if you can quantify that? And then maybe with this fee action you just did those fund mergers, do you feel like at least for the time being you're kind of at the end of the actions you need to take at least through the end of the year?

[Philip James Sanders:]

Sure. This is Phil. I'll start and if anybody else wants to jump in they can. I think the fund mergers we announced in total, the assets under management of those funds are less than $2 billion, so they'll be merging into existing funds. We will experience some incremental revenue headwinds. I think that'll be less than $2 million as we model it out. It does help us again as I indicated to consolidate the product line, make sure we're properly resourcing and focused, and that type of thing. So – and as far as where that takes us, and what the process will be going forward, I think we're in pretty good shape at this moment in time. I will say though that over time this is an evolution, and we'll continue to review the product line to ensure relevance and opportunities, and that type of thing. So if we see further opportunities down the road, we won't be afraid to do it. But I think this gets us in pretty good stead for the time being.

[Robert Lee:]

Great. And then, maybe as a follow-up, capital management and the uses of your substantial excess capital, historically the firm's not been acquisitive, but you do have plenty of liquidity – dry powder and if you can maybe update us on your thoughts on the role that you think M&A could play in going down the road and maybe I'm particularly interested in the broker-dealer business, understanding you revamp that, focused on higher producing advisors, trying to recruit higher producing advisors, but could M&A play a role in that part of your business as well because eventually you have to get back to growing the number of advisors.

[Philip James Sanders:]

Right. We've indicated that we're more open to those types of acquisitions and use of the balance sheet. And clearly, we're in a good position there. I think any things we would do would likely be incremental in nature. We want to preserve the culture and I think initially our focus is going to be likely to be more on the asset management side of the business where if we can enhance our investment capabilities with new strategies or resources that type of thing. I think a little bit longer term and as we look out a little bit, we wouldn't be opposed to looking at opportunities in the wealth management side or the broker-dealer. As you know, we've – Shawn has been leading a transformation in that part of our business and really we have to improve some operational issues initially. But as we kind of get that in order and we get to where we need to be, then that presents some new potential opportunities down the road.

[Benjamin R. Clouse:]

Rob, it's Ben. I might just add as a reminder, we dedicate a significant portion of our liquidity to seeding new products as well.

[Robert Lee:]

Great. Thank you.

[Operator:]

Our next question comes from Bill Katz from Citigroup. Please go ahead with your question.

[Brian Wu:]

Good morning. This is Brian Wu filling in for Bill Katz. Thank you for taking my question. Just turning to – about your expenses, you guys mentioned data and technology investments across your organization as well as rollout of services for high performing financial advisors. Are these included in your controllable expense guidance or should they be thought as investments on top of that?

[Philip James Sanders:]

Those would be included.

[Brian Wu:]

Okay. Great. Thank you very much.

[Operator:]

Our next question comes from Patrick Davitt from Autonomous Research. Please go ahead with your question.

[Patrick Davitt:]

Hey. Good morning. Thank you. I want to follow up on the rationalization answer. When you say 2.5% to 4% of your AUM was being rationalized, does that mean that decision has been made and they kept you on? I wasn't quite sure what you mean by that.

[Amy Scupham:]

Hi. Hi, Patrick. It's Amy. I'm sorry. Yeah. Two of the firms, it was soft close, no forced liquidation. So, that was between 1.5% and 3% of our AUM that can be that the advisor can choose to continue to hold that we won't be able to sell into those products anymore. And then in one of them, it was a forced liquidation and that was a little higher percentage of our total AUM at that distribution partner and that was a forced sale.

[Patrick Davitt:]

And that money is already gone now?

[Amy Scupham:]

No. It will be going out in the next call it six months.

[Patrick Davitt:]

Okay. The, I guess the follow-up to that is there any change in the guidance you've given on the expected outflows from opening the architecture, and maybe even kind of like broader commentary around changes in client behavior since you've done that as we get further along through that process?

[Philip James Sanders:]

I'm sorry, Patrick. Can you repeat that?

[Patrick Davitt:]

Yeah. Any update on the guidance on your expectations for outflows driven by the opening of the architecture, and then more broadly any changes in client behavior as you've done that?

[Philip James Sanders:]

The outflows have eased going into this quarter and certainly it's been our intent to continue to broaden the open architecture – open up the architecture with the addition of a few additional fund families in one of our products that was introduced to our classic advisors, the MAP Navigator program with the addition of two fund families going into that particular program. As we look at the quarter and just looking at the outflows of movements that have moved from the proprietary holdings over to the MAP Navigator program, we've seen movements of about $400 million in total of proprietary assets moving into that program and about $254 million of other assets coming into that program for about a total of $656 million. Currently, we still see the mix inside that program holding somewhat steady at about 25% of that being proprietary assets inside the MAP Navigator program. So as those assets move into that program, 25% are going into roughly proprietary assets with the other balance going into nonproprietary assets and that's holding pretty steady for the last several quarters.

[Brian Wu:]

Helpful. Thanks.

[Operator:]

Our next question comes from Michael Carrier from Bank of America. Please go ahead with your question.

[Michael Carrier:]

All right. Thanks a lot. The first question, just on the rationalization and the efficiencies, I guess, I just wanted to understand for the rest of the year like the $10 million to $20 million that you're looking to execute on, just any color on maybe the expense line. I'm just trying to think about that with maybe the $15 million or so given these fee reductions. And so from an operating income view, should we still be expecting that $10 million to $20 million more on the expense side and some of those fee changes will be offsetting some of that?

[Philip James Sanders:]

Well, let me take that in a couple parts, Michael. Just for clarity, the fee reductions, of course, are only applicable for the last five months of the year, so the impact of that will be a little bit diluted. In regard to expense savings, I wouldn't probably provide any specifics by line item but I would tell you those are going to be concentrated in our broker-dealer as well as in our systems area where we are and Brent or Shawn could elaborate on this, where we're in the process of modernizing some of what we do. And in fact realizing some savings as we transition away from older and more expensive technologies to a more streamlined way of doing business. We'll continue specifically to see some savings in the rent line as I alluded to. And the other items will really be in the – in the G&A and technology and compensation space. I don't know if you guys want to add to that.

[Shawn M. Mihal:]

No. I think that that covers it.

[Michael Carrier:]

Okay. And just one quick one. I think you mentioned on the tax rate. I think you said on the volatility on the equity commutation that impacts the tax rate. It sounds like that would be more muted going forward. Just wanted to make sure that and heading into 2019 like similar like comments meaning we shouldn't expect like the level of volatility that we saw this year.

[Philip James Sanders:]

Yeah. In particular, based on current stock price we would expect the shortfall from the vesting impact in Q4 to be well below $1 million. I would expect that impact to be about $2 million in the second quarter of 2019. So less than half of the impact this year, and then dramatically drop off after that.

[Michael Carrier:]

Got it. Okay. Thanks a lot.

[Philip James Sanders:]

Sure.

[Operator:]

Our next question comes from Kenneth Lee from RBC Capital Markets. Please go ahead with your question.

[Kenneth S. Lee:]

Thanks for taking my question. Looks like revenue per advisor increased substantially in the quarter, and now it's above that $300,000 level that you guys previously were aiming for, north of $300,000. I'm just curious in terms of the path to broker-dealer profitability, is that going to be more dependent on increasing the revenue generation within that business, or is it going to be relying more on cost containment? Thanks.

[Shawn M. Mihal:]

Hi, Kenneth. This is Shawn. And we're certainly focused on controlling the cost inside of the organization, as Ben has discussed, and as we've been focusing on expense saves. However, we are certainly equally as focused on growing the revenue in that space. And while we have been attriting the advisors and rightsizing to focus on the higher performing advisors, we're finding additional opportunities there to continue to focus on revenue growth, and we're certainly turning our attention in that direction as we move forward into subsequent quarters. Certainly, as what Phil had mentioned, working on operational efficiencies and resolving some of the differences between our choice in classic channels and the way that they produce their business and from an operational perspective has been something we've been focused on. As we continue that effort, we feel we'll have more opportunities to focus on the revenue side of it while still working on that control of the expense side.

[Kenneth S. Lee:]

Got you. And just one quick follow up. In terms of the fee adjustments, maybe you could give us a little bit more color in terms of perhaps which fund categories do you think the company has more pricing power. Where do you think you're better able to maintain fees without any kind of adjustment? Thanks.

[Amy Scupham:]

I don't know if I understand the question.

[Philip James Sanders:]

Yeah, this is Phil. Maybe Amy can jump in here. I think realistically we didn't make adjustments on every single product because we did this case by case and we had certain funds where we had very competitive performance and the fees were competitive as well. But I'm personally not that – I don't know that anybody has really true pricing power in this business. Obviously, the better performance the less – you have a little bit of flexibility but at the end of the day, the way I think about it is there are always going to be strong competitive products that have good performance. And if you don't have competitive pricing structure it's going to be really tough to grow those assets. And so, we're thinking about it a little bit altruistically in the sense that, as Amy indicated, our approach has really been to try to work – working hard every day on getting strong investment performance across every product we manage. But we also have to ensure that the pricing structure is competitive. And we don't know where these opportunities will present over time. But we want to position ourselves when the opportunities do present themselves where we have the ability to take advantage of it. So, I think it's less about thinking about necessarily the pricing power aspects. It's about getting it competitive because poor performance no matter how low you cut the fees in our view is not a sustainable way to win business. We need the combination of both. And that's kind of how we're thinking about it.

[Kenneth S. Lee:]

Got you. Very helpful. Thank you.

[Operator:]

Our next question comes from Michael Cyprys from Morgan Stanley. Please go ahead with your question.

[Michael J. Cyprys:]

Hey. Good morning. Thanks for taking the question. Phil, I just wanted to circle back on your commentary earlier on M&A where you were mentioning that you're kind of thinking about that potentially as a way to enhance investment capabilities with new strategies, new capabilities there. I just – just hoping you could flesh that out a little bit more in terms of what could make sense there in terms of the types of capabilities or types of strategies, and how do you think about that in the context of full M&A versus more bolt-ons and team hires?

[Philip James Sanders:]

Yeah, I think we think about this a lot and have looked at a few opportunities along the way, but it's likely to be incremental in nature. I think any outright acquisition is likely to be relatively modest and something that we can integrate. We feel like we have a lot of things we're working on internally and we're focused. And so, we're not likely to be taking on kind of a wounded type of situation where we have a lot of management distractions. I think it'll be more of a kind of a bolt-on or something with a clean strategy that would benefit through our distribution channels perhaps. I also think that we are open to the idea of acquiring investment talent or capabilities that would be kind of more team-based or whatever, maybe it's incremental individuals or however the case may be. So, it's really going to be likely more modest and incremental. Cultural integrity is important in terms of kind of not disrupting the culture and our approach here. I think it'll likely be – we see opportunities. We have a pretty successful track record in some international products, and I think there's lots of opportunities to expand there so we'd be – that would be one area. We certainly have strong core competencies in a lot of the traditional core situations like large cap growth or core small cap, those types of strategies, strong credit capabilities. I think there's perhaps incremental opportunities in the multi-asset category as well. So, those are a few of the asset classes that we would be most focused on. They are consistent with what we do well but I think anything we would likely do would be more incremental in nature.

[Michael J. Cyprys:]

Great. And just a follow-up question regarding the balance sheet. Just curious how much would you say is excess of the $240 million cash and $584 million, I think in investment securities and how do you think about balancing the excess towards seed versus buybacks and M&A?

[Philip James Sanders:]

Maybe I'll just go ahead and start, and then Ben can jump in here. The way I think we're thinking about it is, the balance sheet is very strong and liquid, and we don't really see anything that's inhibiting us from being proactive in all of these areas. So, we indicated that we would have a plan to repurchase $250 million worth of stock over two years. We're on track to execute that. We don't find that commitment at all inhibiting our ability to fund seed capital initiatives or perhaps do incremental acquisitions. As you know, we generate a lot of cash flow on a quarterly basis. So to me, we certainly have the flexibility to adjust that if a unique opportunity comes along. We can make those adjustments. But right now, we don't really find that inhibiting in terms of any of our strategies. I don't know, Ben, if you want to add anything to that?

[Benjamin R. Clouse:]

I agree with that. The only thing I would add to that is we do have some regulatory capital requirements that we obviously have to balance, and that we're in favor of more liquidity versus less because it gives us the flexibility that we want.

[Amy Scupham:]

Phil, I wanted to jump in and clarify something really quick just along the terms of rationalization from our third-party distribution partners so that I can be more clear with the numbers. When I was talking about the percentages of assets, I'm talking about percentage of assets at those distributors. So, I just wanted to let you know kind of on a – from a guidance perspective, we're looking at about approximately $60 million to $70 million that was the soft close no forced liquidation. And the hard close forced liquidation is $130 million, just so we can be more clear. It wasn't a total AUM of Ivy.

[Michael J. Cyprys:]

Thanks for clarifying (46

[Operator:]

Our next question comes from Mac Sykes from Gabelli & Company. Please go ahead with your question.

[Macrae Sykes:]

Good morning. Thanks for taking my call. Just to go back to the rationalization comment. Maybe you could talk about your channel mix for unaffiliated, how has it evolved over time, and do you see it changing further as you improve the performance in your funds?

[Amy Scupham:]

Sure. This is Amy. Right now, our channel mix is heavily weighted to our national channel. And so, we look at about 80% to 85% of our sales coming in that broker-dealer national channel wholesale. What we're looking to do over time is to diversify that mix further into the defined contribution-only space, insurance, institutional, and RIA. And so, what we're doing from a distribution standpoint is trying to better define what exactly those are, and how you approach the different marketplaces and the different client needs in each of those marketplaces. And what I would hope to see is not a diminishing sales – not diminishing sales in the national channel but a pickup in sales in some of these other distribution channels.

[Macrae Sykes:]

And just as a follow-up in terms of product innovation for some of those other channels you mentioned, do you feel like you have the right vehicles in place to be able to reach them?

[Amy Scupham:]

So, we're working on some – we're working on that. So, we do have currently a group of collective investment trusts, which is becoming more and more popular in the defined contribution space. We're undergoing a project now where we're expanding the number of strategies that we have available in that vehicle. We're also looking at picking up our model delivery vehicles for certain client bases, and it's something that we've just continued to approach as we look at evolution of our product development strategy.

[Macrae Sykes:]

Thank you very much.

[Operator:]

Our next question is a follow-up from Robert Lee from KBW. Please go ahead with your question.

[Robert Lee:]

Great. Thanks for taking my follow-up. Could you maybe just update us – I'd be interested in hearing kind of the progression of kind of sales flows through second quarter, and then maybe if you can maybe update us how you're – how the third quarter has kind of gotten off to a start, kind of what you're seeing, any change in investor activity momentum and maybe how things stand today?

[Philip James Sanders:]

Well, I don't know if there's much to add in what we indicated earlier. I think as the quarter has – the third quarter has gotten off to a start, we've seen kind of similar redemption trends than what we experienced in the second quarter. And the sales level have – sales levels I think have persisted at a slightly softer level than we experienced in the second quarter. So, it's kind of a continuation of the same trends. And then obviously as I indicated earlier, the outflows that we've been notified in terms of the institutional side of our business but nothing really to add beyond that I think at this point.

[Robert Lee:]

Okay. Thank you. And then maybe just one quick follow-up, just to I want to make sure I have the numbers correct. So, if I take the 2 basis points to kind of back of the envelope it's close – about $15 million annualized revenue impact from the fee adjustments. Is there any offset to that from, I don't know, maybe some of the sub-advisors and some products are absorbing some of that or should we think that that's going to kind of all kind of fall to the bottom line in the short term?

[Philip James Sanders:]

Rob, that's an accurate estimate. There'd be a little bit of incremental impact for common expenses to other share classes. So, I think it'd be a little bit north of your number but you're right in the ballpark of what our expectation is on an annual basis.

[Robert Lee:]

And is there any kind of offset from, I don't know, some vendor payments may absorb some of it or lower sub-advisory costs they absorb some of it?

[Philip James Sanders:]

Not of any significance, no.

[Robert Lee:]

Okay. Great. Thank you.

[Operator:]

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

[Philip James Sanders:]

Okay, everybody. We appreciate you joining in and we look forward to give an update next quarter. Thank you very much.

[Operator:]

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.