Waddell & Reed Financial Inc
Q3 2016 Earnings Call Transcript

Published: 25 Oct 2016

[Operator:]

Good morning, and welcome to the Waddell & Reed Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Phil Sanders, Chief Executive Officer. Please go ahead.

[Philip James Sanders:]

Good morning. With me today are Tom Butch, our Chief Marketing Officer; Brent Bloss, our Chief Financial Officer; and Nicole Russell, our VP of Investor Relations. Nicole, would you please read the forward-looking statement?

[Nicole McIntosh-Russell:]

During this call, some of our comments and responses will 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 including, but not limited to, those we reference in our filings with the SEC. We assume no duty to update any forward-looking statements. Materials relevant to today's call, including a copy of today's press release as well as supplemental schedules, had been posted on our website at waddell.com under our Corporate tab.

[Philip James Sanders:]

Thank you, Nicole. And good morning, everyone. Thank you for joining us today and welcome to our third quarter earnings call. Since this is my first time hosting this call as CEO, I would like to start by sharing some thoughts with you before we get into the recent results of the business. The past couple of months have given me an opportunity to gain additional perspectives on our business. It is clear that we have both tremendous resources and the potential to perform better than we have, but also face some near-term and intermediate challenges that require careful focus and attention. We are facing a number of industry headwinds, including significant regulatory change, fee pressures and lower demand for actively managed products. This is happening at a time when we are experiencing some near-term investment performance issues in several of our key products. Fortunately, our biggest asset is an employee base that is tremendously talented, ready to think differently and highly committed to our success. As we work toward addressing the issues we face as an organization, I am confident that we are up to the challenge and will rigorously evaluate our model, our process, our growth opportunities and our alternatives. Our balance sheet remains exceptionally strong, thereby affording us the time and financial flexibility to work through these headwinds. First, and chief among our challenges, is the impact of the new requirements and regulations facing our industry stemming from the DOL's fiduciary rule. While we continue to assess and prepare for its impact on our business, we are committed to meeting the regulator's requirements within the timeframe specified. And although the eventual solution may involve modifications to parts of our business model, we are committed to delivering conformance to the rules in the best way possible for all of our stakeholders. This remains a top priority for our company. We understand that there may be questions around this topic. We are entering the final stages of our evaluation process and expect to reach some final decisions in the next couple of months and look forward to sharing our strategy at the appropriate time. We believe success under the new DOL construct will require a more institutionalized process for both investment management and the sales and marketing parts of our organization. By institutionalize, I mean the ability to clearly articulate a product's investment philosophy and process with all relevant data analytics related to portfolio construction, risk parameters, attribution analysis, sources of alpha generation, et cetera. This will be required across our product line and include everyone to varying degrees from portfolio managers to client service personnel. With respect to investment management, we continue to make progress in this regard by strengthening our risk management capabilities and resources, making the director of research a fully dedicated position without portfolio management responsibilities and increasingly moving toward a team-managed approach across our product suite. We all know that delivering strong and consistent investment performance is essential, and we are confident these changes will prove beneficial in meeting this objective. As our industry evolves, it is also clear that the sales and marketing function must adapt to the new realities of more targeted points of sale with higher levels of due diligence. We understand that performance is essential for sales but believe that it alone neither defines the ability to generate sales or to sustain assets. In today's increasingly competitive environment where professional buyers are ever more demanding and sophisticated, we need to provide our sales force with the tools to adapt and excel. In recognition of this, we are implementing some structural changes to that part of our organization that Tom will explain in further detail. We are also examining our product line to make sure it is responsive to ever-evolving investor preferences. For the market, the past quarter was a solid performance period across most asset classes and a generally better environment for the performance of active management. And while one quarter does not make a trend, we are encouraged by this, as we benefited across a number of our portfolios. 2016 investment performance has gradually improved across the complex as the year has progressed, but we understand that this is a process, and it will take some time to get back to our historical levels of success. I will note, however, that the improved investment performance of active managers industry-wide did not translate into active management flows regaining traction versus passive. Any progress here will likely take some time and a more sustained period of outperformance for active managers. This morning, we reported net income of $53.8 million, or $0.65 per diluted share, which on a GAAP basis rose 60% compared to the prior quarter. It should be noted, however, that each quarter contained a number of items that distorted the underlying operating results. Nonetheless, adjusting for these items, both net income and earnings per diluted share rose quarter-over-quarter. Assets under management declined 2% during the quarter. Redemptions declined to their lowest level since the second quarter of 2015. However, sales remain weak, and market appreciation in our portfolios could not entirely offset outflows. While we see some initial signs of encouragement in our results, we are still in the early stages of returning the firm to its former footing. I will now turn it over to Tom.

[Thomas W. Butch:]

Thank you, Phil, and good morning. Across our businesses, net outflows decreased by half from the elevated levels in the second quarter, the improvement owed to sharply lower outflows in the institutional channel and more modestly moderating outflows in the retail unaffiliated distribution channel, offset partly by increased outflows in our broker-dealer channel. Our retail unaffiliated distribution channel, like most active managers, was challenged during the quarter to generate sales momentum in other than a small group of products. Thus far in October, net daily sales are essentially in line with both the prior quarter and the month of September. Again, this owes to abating redemptions rather than sales growth, as daily sales levels month-to-date are lower than the prior month and quarter. Some of our newer products as well as some existing products that heretofore did not gain visibility and traction are experiencing positive flows with the possibility of significant flows imminently in one of them. And just last week we launched the first three of our NextShares exchange-traded managed funds. While distributed narrowly at present, this structure will be launched at a major wirehouse in 2017, and we believe other distributors inevitably will be attracted to its positive attributes. Redemptions increased in our broker-dealer during the quarter and net outflows increased accordingly. At the same time, AUM and AUA increased 2.1% and 3.1% respectively. We continued to make good progress on our Project E initiative and have marked November 21 as the go-live date for our automated processing and client portfolio management technologies. Our new advisory program broadening the investment choices available to our classic advisors is targeted for implementation late in the fourth quarter or early in the first. The institutional channel saw modest sales but more tame levels of redemptions than in the prior quarter. We have been notified of redemptions that in sum will total approximately $440 million, all scheduled for the fourth quarter, from a non-U.S. entity for which we serve as sub-advisor that is moving these strategies in-house. There are currently not placements in the pipeline that will offset this amount. While in a number of ways the unaffiliated distribution channel and the institutional markets retain discrete characteristics, in important ways, they are converging. As Phil indicated, the due diligence requirements of the markets are increasingly uniform; the demand for timely in-depth data and analytics is intensifying at every point of the sales process from consultants to institutions to financial advisors

[Brent K. Bloss:]

Thanks, Tom, and good morning, everyone. As Phil mentioned in his opening remarks, there were a few items in the quarter, although not material in the aggregate, that need explanation, given their impacts to various line items in the income statement. We included a table on page eight of our press release to assist readers' understanding of the line item impacts. These adjustments, including non-cash curtailment gain of $8.5 million, recorded as a reduction in both underwriting and distribution and compensation cost. This gain resulted from an amendment made to our post-retirement medical plan. Benefits under the plan will no longer be offered to employees who retire after December 31 of this year. Current retirees will be grandfathered under the current plan. In addition to the $8.5 million gain, this change will result in lower benefit expenses of approximately $1 million a year. The quarter also included an impairment of an intangible asset of $5.7 million resulting from a decline in assets under management related to a sub-advisory relationship. This intangible has a remaining balance of $2.7 million. Continuing efforts related to Project E contributed an additional $1.3 million in expenses during the quarter. To-date, we have spent approximately half of our $8 million budgeted for 2016. Finally, as we digest the implications of the DOL rule on our business, we expect to incur increased expenses over the next several months for consulting, legal and technology enhancements in order to comply with the rule. We expect implementation expenses to be at least $5 million over the next 12 months to 18 months. The current quarter included $700,000 in spend towards this effort. As announced previously, the conversion of load-waived A shares to I shares in our advisory accounts beginning in the third quarter resulted in a reduction to underwriting and distribution revenues and expenses and shareholder service revenues. The impacts of this change were in line with our prior guidance. During the third quarter, we extended an offer for a lump sum distribution to terminated vested participants in our company-sponsored defined benefit pension plan. Reducing the number of participants in the plan will reduce future plan obligations and administrative costs and reduce volatility. The window for election closes next Monday, and distributions will occur by year-end. As such, the fourth quarter will include a non-cash settlement charge between $15 million and $30 million, depending on the ultimate level of participation. Our forecasting shows that we remain ahead of schedule as we work to reduce our run rate expenses by $40 million. Areas where we have seen favorable spending following the reset of the cost structure have been in compensation, travel and advertising. We continue to look for efficiencies and opportunities to reduce costs without inhibiting our ability to move the company forward. At its recent meeting, the board of directors decided to continue our current dividend payout rate. Assuming a normal market environment and a modest deceleration of outflows, we are comfortable that we can support the current dividend and still maintain the flexibility to do buybacks to offset dilution from future equity grants. It likely would not be our intention to support the dividend with our excess cash for an extended period of time if our earnings power were to materially differ from our current expectations. I will now turn it back to Phil.

[Philip James Sanders:]

Thanks, Brent. Since I took the helm on August 1, our team has been diligently working on identifying strategic priorities and looking at the range of alternatives to address each of our challenges. We are united in our priorities to meet DOL compliance requirements, improve investment performance, reinvigorate sales, and continuously evaluate product opportunities to meet client needs. We know we have a lot of work to do to return our firm to the growth path we enjoyed in years past. Waddell has a long heritage of success and a culture of winning. We haven't forgotten that. We are united and committed in our desire to make the changes to help reposition the firm for renewed growth and profitability. With that, operator, we would like to open the call for questions.

[Operator:]

We will now begin the question-and-answer session. The first question comes from Chris Shutler with William Blair. Please go ahead.

[Chris Charles Shutler:]

Hey, guys. Good morning. You mentioned on the DOL, the final decisions have – that you'll be announcing some things over the next few months. Just what are the key areas that you're thinking about and that you'll be making announcements related to?

[Thomas W. Butch:]

Good morning. This is Tom. As you would imagine, we've really put our time into analyzing the rule, identifying conflicts that are across the various parts of our organization. Participating both in the asset manager and broker-dealer dimensions of our business means that we have to be responsive in both of those areas. And so I think we're looking at any of the impacts that can touch either of those. Certainly on the broker-dealer side, that deals with things like levelized compensation, the utilization of the best interest contract and its applicability to commission-based business and proprietary products. I'd say on the asset management side, some of the principal conversations engage share classes going forward and our ability to continue to protect our place on various asset management platforms. And I think substantively those are the things on which we've most focused to date.

[Chris Charles Shutler:]

Okay. That's helpful. And then just on the advisor business, Tom, maybe you can just talk about what is the kind of the all-in fee right now for – there's the wrap account fee. Including the advice and the underlying investment product, I think it's kind of upper 1s to 2% all-in. But maybe just confirm that. And I'm guessing that's going to have to evolve over time, and Project E will help in that regard. But do you think you need to do anything more proactively to bring down the costs for the end investor?

[Thomas W. Butch:]

Well, there are a number of advisory programs. The most broadly utilized one has a fee to the client of 130 basis points. One of the things that will happen in Project E is we will have greater module flexibility, greater fee flexibility, and greater asset allocation flexibility in that construct. And whatever fees are deemed appropriate in that context will be supported by a more flexible technology going forward.

[Chris Charles Shutler:]

Okay. Thank you.

[Operator:]

The next question comes from Glenn Schorr with Evercore ISI. Please go ahead.

[Glenn Schorr:]

Thanks very much. A related question on the broker-dealer channel. When you look at the redemption rates across retail and affiliated and institutional, obviously, the broker-dealer channel has always been better. But as the platform, I guess, gets open architecture and makes all these adjustments that you're contemplating, should we look for a more similar mix of business, internal and external? And would – is it a bad assumption to assume that the redemption rates would move more towards the other channel as well?

[Thomas W. Butch:]

Well, what we said in the past and what I would therefore repeat is that as our architecture does open, it's reasonable to expect that some portion of current platform assets would migrate first to the new platform that is broader in terms of its investment selections. And we've bottled that for a short to intermediate term at roughly 25% of proprietary assets going into other selections. As to the redemption rate into the future, we really haven't – we really haven't the expectation that it moves all the way to the context of the other two channels. Really our focus has been on the near-term implication of the offering of broader platforms and the behavior that that may create among advisors.

[Glenn Schorr:]

I definitely follow that. On a positive note, you mentioned the possibility of significant inflows, and one of the products caught my attention. Is there any other color you can share on this? How big is the product? What kind of product?

[Thomas W. Butch:]

This is one of our newer sub-advised products. A large institution has indicated it will be making a platform allocation to the product, which could be sizable. We don't want to size that precisely. But we're hopeful for a significant allocation to the product in the fourth quarter.

[Glenn Schorr:]

Okay. Thank you.

[Operator:]

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

[Robert Lee:]

Thank you. Thanks for taking my question. So maybe, Tom, just a question for you. Could you maybe – with all the changes taking place in the advisory channel, can you update us on what's going on with advisor retention as well as recruiting? I mean, are you seeing or do you expect there to be kind of more movement of advisors in and out, and – or is it right now kind of everyone just on hold until the whole industry settles out. I mean, how do you view that?

[Thomas W. Butch:]

I think it's a little bit of all of the above. As you look across quarters, Rob, at the trend line, it's pretty static. There's in's and out along the way. But the advisor total population has not moved all that materially. I'll say a few things. Yes, I do think that the confluence of the changing regulatory environment and aging advisor population and the dynamics that creates for a number of broker-dealers should accelerate a lot of activity for people, advisors potentially seeking new broker-dealers with which to affiliate. I would say that with our choice value proposition, it's still very well received in the marketplace. We have a modest head count gain on the choice side year-to-date. And what we're seeing is the quality of candidate by way of trailing 12 productivity is probably at its best level ever, and we're seeing very, very good people attracted to our value proposition. The classic side is kind of in and out essentially static. Headcount's down a little bit this year. Activations are up and above plan, but the people who are hitting hurdles to stay affiliated is down a little bit. So, nothing really hugely material there. So I do think that we have a whole lot going on related to Project E and relative to DOL. So we're probably being a little more measured and deliberate in the process of bringing people on board during this time period. But the demand that we've seen and the attractiveness of our value proposition are very much intact.

[Robert Lee:]

Great. And maybe a follow-up for Brent. I missed some of the numbers you had put out there. It think it sounded like there was a $5 million expected incremental cost around DOL, but I'm just not sure if that's what you said. Could you maybe repeat some of your commentary around its expenses over the next coming – next several quarters?

[Brent K. Bloss:]

Yeah, Rob. I did mention a $5 million incremental spend related to DOL that included the – for consulting, legal and then some of the IT implementation costs that will come along with that. So that's our best estimate at this time. We'll incur some more in the fourth quarter and then probably about half of the $5 million, I would expect, into the first and second quarters of next year.

[Robert Lee:]

Great. Thank you.

[Operator:]

The next question comes from Dan Fannon with Jefferies & Company. Please go ahead.

[Daniel Thomas Fannon:]

Thanks. And good morning. I guess it just seems at a high level that you're talking about a broader reorganization of both distribution and potentially on the investment side, it seemed, if I heard correctly, you talked about more of a team-based approach on the investment side. Can you expand upon that and the distribution kind of melding both the retail and the institutional? I guess can you talk about the time period from which you think that's going to happen and how – if that's incremental to any of the cost savings you guys have already outlined?

[Philip James Sanders:]

Okay. This is Phil. I'll start, and maybe Tom might want to add a little bit. I think what we're really trying to do here is structure the firm for longer term success and establish the framework that basically positions us to be successful in the evolving industry landscape we see. I talked about the institutionalization of the investment management process. I think that is definitely happening. This was underway prior to the DOL, but I think it's being exacerbated by the DOL and accelerated. And so increasingly, the points of sale are more limited and the bar of due diligence is rising, as I said. So I think it's a more technically-driven sale. I think what the industry is demanding is more team-based management with well-defined risk parameters, clearly articulated philosophy and processes. And so we're making those kind of changes. We were partly there, I would say, within the investment division prior to all this. But I think we're just driving that throughout the – across the whole organization. But it's not investment management alone. There's also, I think, other aspects of this. It involves the sales and marketing part of our organization as well. And there's an evolution that's taking place in that aspect of our business. And so I think the restructuring that Tom had described in detail was really to kind of get the right people in the right place, get us positioned to be successful so when performance turns, we have the right people in place to execute and finish the sales. Client service demands a higher level of caretaking and communication and that kind of thing. So it's really a gradual but intentional restructuring of the firm in terms of establishing the framework for success and building it for the long-term future of how the organization or the industry is evolving. I don't know if, Tom, you want to add anything to that?

[Thomas W. Butch:]

I think it's very well said. I would only say that in certain cases we had groups doing parallel things, which in our mind were very much converging of the kind that Phil talked about. And so, not only does it bring the talent together, it enables us to do it in a more efficient manner. And per the last part of your question, we would expect incremental run rate savings on the order of $4 million.

[Daniel Thomas Fannon:]

Great. And then, Brent, just to follow up on your comments around the dividend, just it looks like, first off, your investment portfolio declined and your cash balances went up. And curious about that, but that also the dividend going forward, it's obviously not earnings or some level of cash flow. Can you give us a metric just comparable today to like what's a quarterly run rate of cash flow that you guys are comfortable to cover the – that will cover the dividend or you're willing to let it get to?

[Brent K. Bloss:]

Yeah. In terms of the cash balance question, the cash balance did go up during the quarter, and that was due to taking out some of the seed money. So it was just a shift between the investment balances and cash. We would expect in the fourth quarter that might move – some of that might move back to the investment side as we seed the NextShares fund and a couple of other mandates on that side. So, up about probably $30 million would go the other way. And in terms of the dividend, Phil, do you want to...?

[Philip James Sanders:]

Yeah. This is Phil. I would just say, to just kind of really reiterate what Brent made in his opening comments, I think the way we're looking at this is we're fortunate that we have an extremely strong balance sheet, and we have the flexibility to pay the dividend for a period of time while we sort through some of these issues and kind of try to right the ship and face some of these headwinds we're facing. Obviously, over the long-term, we have to generate the earnings power to pay the dividend on a sustainable basis, and that's kind of the approach we're taking. We've got some time here, we've got some financial flexibility, and that's kind of how we're positioned. But ultimately, our intent would be to pay this, but ultimately we have to have the earnings power to support the dividend in the long run, but we don't see it as a near-term threat.

[Daniel Thomas Fannon:]

Great. Thank you.

[Operator:]

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

[William Raymond Katz:]

Okay. Thanks very much. I appreciate you taking my questions. I just want to follow up on that last discussion. I was just trying to do the math very quickly and maybe just the speed here, there's some error in my thinking. If we take, Tom, at face value that you could see a 25% pickup in the redemption pressure in the retail broker-dealer if you were to sort of move to more of an open architecture, if the back-of-the-envelope math is correct, I'm coming up with about $0.30 of earnings degradation. So, how does that sort of box with your last comment around the sustainability of the dividend? Because it just seems like there's going to be a step function down in earnings notwithstanding the quarter. And I'm just trying to understand the thinking on maybe a go-forward payout ratio.

[Thomas W. Butch:]

Well, I'll start. It's Tom, and I'll let others fill in. I would not attach the math of the 25% to the entirety of the book of business in the Advisors channel. Of the total assets, roughly $17 billion are in advisory, and $15 billion of that $17 billion is in the programs that we believe will be most effective by the migration to greater investment selection in them. So I think your starting point more likely will tether to that $17 billion or $15 billion number than to the total asset base of the channel.

[William Raymond Katz:]

Okay. So that's – I'm sorry.

[Philip James Sanders:]

I was going to say – this is Phil. Again, I think longer-term there are a lot of moving parts to this and in considerations in terms of sales or products or other actions, market action, that kind of thing. And I think our approach has been pretty clear. We have the financial flexibility to sustain this dividend for a period of time, but obviously our expectation is that we'll need to have the earnings power as a firm to support it over the long-term, and that's how we're approaching it.

[William Raymond Katz:]

Okay. And just a follow-up. Staying on the retail distribution channel for a second, a bit of a two-part question, maybe it's related, maybe it's not. The payout ratio, if you look at direct expenses relative to revenue, came down rather substantially sequentially if you strip out some noise from last quarter and just the more recent trend. So sort of wondering if you could sort of talk to that a little bit. And then, stepping back, and maybe this is going to be in concert with your study in the next couple months, but one of your peers, or a large peer I should say, recently moved away from commission-based brokerage accounts within qualified accounts. Could you maybe frame out the size of that part of your book and how you're thinking about that relative to the BIC? Thank you.

[Brent K. Bloss:]

Hi, Bill. This is Brent. I'll take the first part of that. I think the difference in the payout of what you're seeing in the retail broker-dealer, the affiliated relates to the DAC write-off. If you remember, in the second quarter, we took a DAC write-off of about $6 million. So the ongoing expense that would have been amortized related to that write-off is not in there. So that's why the elevated expenses in the second quarter compared to the third quarter. And then I'll let Tom take your second question.

[Thomas W. Butch:]

Yeah. We're aware that one and maybe another broker-dealer have announced the intent to move away from the commissionable side of the retail retirement business. At least as many or more firms seem to be on a path, which would retain both advisory and commissionable business in the retail context. We're currently in that latter camp subject to, as we've said, a lot more discovery and a lot more conversation. To size the business, Bill, I mean, what you would do is you would just take the ending AUMs of about $43 billion, subtract the $17 billion and that would be the part that is in the commissionable side of the house. And again, through the utilization of the BIC, it is currently our thinking that we would continue to operate in both the commissionable and advisory context, but a lot more thought and conversation will go into that.

[William Raymond Katz:]

Okay. Thanks for your patience answering my questions.

[Operator:]

The next question comes from Patrick Davitt with Autonomous. Please go ahead.

[Patrick Davitt:]

Thank you. Seeing that you're still kind of evaluating the DOL, as you said, how should we think about the $5 million guidance? As a starting point or a best guess? It would seem to me that that will probably change in a couple of months when you come out with kind of the final plan.

[Brent K. Bloss:]

Yes, Patrick. This is Brent. I think it is our best guess at this time. And again, it just includes kind of our – what we've been through so far and our expectations around what implementation might bring. Now, as we talk about other items and how we deal with conflicts and other things, there'll be ups and downs, I guess you could say, in terms of revenues and expenses that'll have to be evaluated as our plan comes together. But at present time, we know that it's going to take some resources to implement some of the changes that are coming. And those will include some IT-type items that will need to be put in place that will take some contracting work to add to our resources here in the near-term to meet the deadline for the rule.

[Patrick Davitt:]

And would that $5 million kind of be more associated with the one-time contractor-type expenses or would it include some kind of ongoing expenses for all of the build-outs for the rule?

[Brent K. Bloss:]

No, that's the one-time cost to build-out for the rule.

[Patrick Davitt:]

Got you.

[Brent K. Bloss:]

Doesn't include any ongoing costs at this time.

[Patrick Davitt:]

But it's fair to assume there probably will be still.

[Brent K. Bloss:]

Yes, we could expect that there probably would be some ongoing costs of compliance and other things as we work through our decisions and how we plan to manage through this. I would expect some, but at this time, we can't really put a number on it.

[Patrick Davitt:]

Okay. Thank you.

[Operator:]

The next question comes from Mac Sykes with Gabelli. Please go ahead.

[Macrae Sykes:]

Good morning, gentlemen. On the pay-out ratio aside, why still the commitment to the dividend versus more accelerated repurchase program just given the valuation and the decline in this year's year-to-date?

[Philip James Sanders:]

Yeah. Mac, this is Phil. I would just say that we have a pretty strong capital return program relative to our peers. I think that's historically been the case and continues to be the case when you combine the dividend and share repurchase. We have substantially met our commitments for the year already on a share repurchase program. I would say though that capital allocation is obviously something that we continue to review, and we are not ruling out additional share repurchases or more aggressive share repurchases. We're trying to be thoughtful and – about this, but it's not off the table. It's just something we're ongoing to review. But just to reiterate, I think in total, the capital return program of the company historically and continues to be very strong relative to our peers.

[Macrae Sykes:]

And I know it's early days for your ETMF products, but can you provide some additional color on the marketing strategy for these? What has been the reaction so far from the sales team? And where do you see the most immediate opportunities?

[Thomas W. Butch:]

Well, the sales team is excited about the prospect over the long-term of having a new structure to deliver active management that will compete with certain of the attributes of ETFs that have really pushed a lot of money in that direction. We are really in the earliest of phases, as you point out, with this product. Only a couple of very small broker-dealers have adopted it. In a certain sense, that's good for us because it provides sort of a lab to make sure the product is working as it should, trading as it should. But the sales opportunity really I don't think materializes meaningfully until the first quarter of next year when one of the very large wirehouses will, for the first time, implement the product structure. That's when really the first opportunity for genuine traction begins. So we have three products. Two of them are variations on styles that we have in the 40 Act structure, and another is effectively a mirror of – a direct mirror of the 40 Act structure. So we're looking at delivering both existing strategies through that structure and using it as a way to take new active strategies to market as well. Again, early days. 2017 will be an important year because it is our hope and it's our belief and that of the NextShares team in Boston that other distribution breakthroughs will follow, and this will become a widely accepted product at that time.

[Macrae Sykes:]

Thank you very much.

[Operator:]

The next question is a follow-up from Patrick Davitt with Autonomous. Please go ahead. Mr. Davitt, your line is open. Please go ahead.

[Patrick Davitt:]

I'm sorry. Thanks for the follow-up. You mentioned the I guess quote-unquote "normal markets" in terms of your assumption for earnings to support the dividend. What is the definition of normal markets in that framework? I guess, what's your market assumption?

[Brent K. Bloss:]

We use 5% to 6% market action.

[Patrick Davitt:]

Great. Thanks.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Phil Sanders for any closing remarks.

[Philip James Sanders:]

Okay. Well, thank you, everybody, for joining us today. We appreciate your engagement, and we look forward to catching up to you in a few months down the road. Thank you very much.

[Operator:]

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