Waddell & Reed Financial Inc
Q4 2016 Earnings Call Transcript

Published: 31 Jan 2017

[Operator:]

Good morning, everyone and welcome to the Waddell & Reed Fourth Quarter 2016 Earnings Conference Call. [Operator Instructions] Please also note that today’s event is being recorded. At this time, I would like to turn the conference call over to Mr. Phil Sanders, Chief Executive Officer. Sir, please go ahead.

[Phil Sanders:]

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

[Nicole 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 Securities and Exchange Commission. We assume no duty to update any forward-looking statements. Materials that are relevant to today’s call, including a copy of today’s press release as well as supplemental schedules, have been posted on our website at ir.waddell.com under the corporate tab.

[Phil Sanders:]

Okay. Once again, good morning and thanks for joining us. This morning’s results capped a challenging year for our company. Brent will provide more details on financial results, but I wanted to give a few highlights. Adjusted earnings per share of $2.14 for our year ended December 31, 2016 were down 27% from the $2.94 in 2015. During the fourth quarter of 2016, we earned $0.48 per share on an adjusted basis, a decrease of 37% from the $0.76 of earnings per share in the fourth quarter of 2015 and down 25% from the $0.64 of adjusted earnings per share during the third quarter of 2016. This year’s lower earnings were driven by decline in assets under management due to net flows in all three of our distribution channels. Throughout 2016, we took steps to adjust our cost structure to reflect the reduction in earnings power. And while we met our cost savings objectives, we remained focused on opportunities to add efficiencies to our operating model. Amidst the challenging industry backdrop, we enter 2017 keenly focused on four key objectives

[Tom Butch:]

Thanks, Phil. Good morning, everyone. Beginning with retail unaffiliated distribution, which we formerly called wholesale. In the fourth quarter, outflows continued to moderate to a 2-year low. We remained at levels still distant from breakeven flows. We have noted in recent calls that depressed growth sales had become as important an issue as redemptions. Gross sales ticked up from the third quarter’s depressed levels and intra-quarter increased month by month. The trend appears to have continued in January with gross sales appearing to notch slightly higher than December’s and net outflows appearing to moderate to their lowest level since August of 2015 on a monthly basis. In terms of January’s gross sales mix, the top five funds are well diversified by asset class, and none represents more than 25% of sales. Gross flows are led by international core equity, high income, small cap value, science and technology and emerging markets equity. Net flows are led by international core emerging markets equity, energy, mid cap income opportunities and Apollo multi-asset income. Those of you who have been on these calls for sometime will note that many new names are populating the sales list and we believe this to be a positive development. Of course, many of you will be interested in the net sales performance of asset strategy, cross-channel net outflows at $1.5 billion, were at a multi-quarter low in the fourth quarter. This owed to softening redemptions as gross sales remained depressed. Further moderations in the funds net outflows, is evident in January. Asset strategy AUMs are about $7.9 billion, with more than a third of that total in the Waddell & Reed advisors funds, sold only through Waddell & Reed financial advisors and the variable insurance fund, which is held within insurance contracts and again is held principally by clients of Waddell & Reed advisors. As you know, large distributors are in the process of pairing their investment product platforms, prompted both by the DOL fiduciary rule and an oversupply of product that’s build up over time. We have heard from some of our largest distributors and while we are not unaffected by this process, the majority of funds affected by this recent rationalization effort were those which had attracted few assets and were not central to our sales efforts at this time. Now we are focusing our efforts on a tightened span of distributors, which in our view provide the best opportunity for asset growth and efficient home, office and wholesaler coverage. Consistent with that focus, we severed financial relationships with a number of distributors that don’t meet that criteria. We also continue to review our product line to ensure its relevance and its cost competitiveness and continue to make adjustments as appropriate, including the addition of new funds and an ongoing focus on fund expenses. In the institutional channel, net outflows moderated from the third quarter, but remained negative in the absence of sizable wins. Outflows remained subdued this far – thus far in January. Much of our effort in recent months has necessarily focused on the broker-dealer channel, where the intersection of our Project E initiative and preparation for the DOL’s fiduciary rule has created a heightened level of activity. The key focus as discussed on the last several calls has been our advisory programs on the classic side of our business. You remember that classic comprises the bulk of our advisors and AUM and our broker-dealer. To refresh your memories, our MAP advisory program, a mutual fund wrap program, is utilized broadly by Waddell & Reed Financial advisors and at year end had $14.6 billion in AUM and represented about 60% of channel sales in 2016. The new advisory program about which we have talked on recent calls, MAP navigator is expected to be added to the broker-dealer in the second quarter. Again, as you will recall, it includes mutual funds from four major unaffiliated fund families. Two important program structure changes to MAP navigator have occurred since our last call. First, we are working to create sub-advised index funds for inclusion in our MAP advisory programs. The addition of index products is intended to satisfy our advisors expressed interest in such products to complement the actively managed funds included in the advisory products. We expect these funds to be available early in the second quarter and to be available in the existing MAP program immediately and MAP navigator thereafter when it becomes available. Second, my way of aligning with industry best practice, we have contracted with a major investment consultant and research firm to conduct fund screening on the MAP and MAP navigator platforms such that all funds, including our own, that we have made available to advisors on the platform will have been screened and approved for platform use by a respected and impartial third-party. Our intention is to expand this impartial third-party fund screening process to all MAP programs during 2017. We believe this will align us with emerging industry standard and give advisors and clients the added benefit of the independent review of the investment options available in our MAP programs. We are also creating a third MAP program, which we will call MAP Direct, through which we will outsource to that same firm, model creation for a home-office discretionary program, where the advisors would not make fund recommendations. Rather, the independent investment consultant would create these models utilizing our active proprietary product. We expect that the inclusion of index products in MAP will further enhance advisor and client satisfaction with program. For those that do migrate to the other MAP programs, we would expect that the adoption of MAP Navigator with its expanded choices would be higher than that for MAP Direct, but that the latter program also will be of appeal to a subset of advisors for whom outsourcing of fund recommendations would prove attractive. We are unambiguous about our ability to continue to make our proprietary products a centerpiece of the Waddell & Reed broker-dealer. Across all of our environments, we understand well the dynamics reshaping asset management and distribution and as reflected in our comments so far, we are responding with actions that we believe position us well to remain an important, relevant industry participant and to sustain and accelerate our progress. Let me now turn the call over to Brent for a deeper look at our financials. Brent?

[Brent Bloss:]

Thank you, Tom and good morning. As detailed in our earnings release, we are reporting adjusted earnings per share of $2.14 for year ended 2016 compared to GAAP earnings of $2.94 for year ended 2015. On a GAAP basis for 2016, we earned $1.78 per share. As you can see in the non-GAAP results laid out in our press release, $0.37 in adjustments to 2016 earnings per share reflect a number of items taken throughout the year. Adjustments in the fourth quarter included non-cash charges were the payout of pension benefits to terminated vested participants and the write-off of a fund adoption intangible tied to our international distribution, which was restructured in the quarter. Fourth quarter also contained adjustments for expenses related to our ongoing efforts related to Project E and the DOL fiduciary rule compliance. 2016 adjusted operating income declined by 32% year-over-year and the operating margin dropped from 27.4% to an adjusted 23%, reflective of the 23% decline in assets under management that Phil alluded to earlier. Our fourth quarter results showed a decline in revenue and profits both year-over-year and sequentially. We reported adjusted earnings per share of $0.48 for the fourth quarter of 2016 compared to unadjusted earnings of $0.76 for the fourth quarter of 2015 and adjusted earnings of $0.64 for the third quarter of 2016. Fourth quarter 2016 revenue was down 19% versus the fourth quarter of 2015 and 3.4% compared to the third quarter of 2016. The adjusted operating margin in the fourth quarter of 22.3% was down versus the prior quarter as assets declined by $4.5 billion during the fourth quarter. Now on the expense front, we successfully implemented expense reduction strategies in 2016 to reduce our run rate fixed expense base. Our goal for 2017 is to try and maintain costs more or less unchanged from second half 2016 levels, realizing the situation is good. We will manage costs responsibly and evaluate uses of our capital carefully. Beginning in 2017, our effective tax rate will be impacted by a new accounting standard requiring the recognition of tax shortfalls or excess tax benefits related to employee share based payments through the income statement. In 2016 and prior years, these charges or benefits were recorded to equity rather than earnings. The tax affects of future share based payments will be recognized through earnings in the reporting period in which they occur and as a result will cause volatility in our effective tax rate in future periods as restricted shares vest. Moving to capital management, we repurchased 2.3 million shares of common stock for approximately $50 million during the full year of 2016. This repurchase activity offset the dilution of restricted share grants made during 2016. Finally, we finished the year with $555 million in cash and cash equivalents and $330 million in investment securities. This was an increase in cash and combined investment balances compared to year end 2015 of approximately $34 million. Our strong balance sheet and history of conservative capital management allows us some flexibility around our dividend during this transition period. Assuming normal market and decelerating outflows, we feel comfortable in our ability to pay the dividend at the current level and fund share buybacks to minus dilution from equity grants. As is always the case however, we constantly monitor our financial outlook to ensure it supports our plan, return of capital over the long-term. Now I will turn it back to Phil for some final comments.

[Phil Sanders:]

Thanks, Brent. The speed of change with which our business is evolving and the complexity with which we operate continues to rise. We began 2017 in much the same way 2016 ended, with the disciplined and rigorous evaluation of our business model, processes, opportunities and alternatives. The world has changed and it’s up to us to actively position the company for success, not only for today, but also for the future. Waddell & Reed will celebrate its 80th anniversary later this year. Our success in part has been due to a constant belief in the value of active management, the importance of financial planning and meeting clients’ goals and objectives and the steadfast commitment of our employees. With that, operator, we would like to open the call to questions.

[Operator:]

[Operator Instructions] Our first question today comes from Glenn Schorr from Evercore ISI. Please go ahead with your question.

[Glenn Schorr:]

Hi, thanks very much. Curious for a little bit more color. You mentioned in the prepared remarks the severed relationships with certain distributors. Just curious if you could box it in of, do you still have AUM in those channels? And what percentage of sales maybe in the last 2 or 3 years those channels might have represented?

[Tom Butch:]

Hi, Glenn, it’s Tom. Just spitballing the answer without maybe the precision that you might want, I want to make clear that severing the financial relationship really means that these were cases where we had sort of distribution access in a partnership or a preferred partnership. And while in these cases, most of which are smaller broker-dealers that we didn’t feel we had the ability to service in a way that validated that expense. We still have the ability to wholesale at those firms and the AUMs are unaffected. We are not leaving those firms. We are just leaving the financial relationships inherent in the preferred status. I would say that in aggregate, all of those relationships were top of mind less than 10% of sales.

[Glenn Schorr:]

Okay, that’s totally helpful. And then just a follow-up, last quarter, I think you mentioned that a large institution indicated that they were going to be making a large platform allocation to one of the sub-advised products. I am just curious if that happens or if that’s still in the queue? And then anything you could talk about between Apollo, LaSalle and Pictet in terms of performance and flows?

[Tom Butch:]

Sure. We did mention last quarter the expectation of a, I think we call it potentially sizable allocation from a buyer that did not occur for the timeframe we initially anticipated. We have no reason to believe it will not and we believe it still be firmly in the queue. Relative to Pictet, Apollo and LaSalle, of the three, the one that’s picked up notable AUMs is Apollo. Those two funds, the strategic income and multi-asset income fund, have been very well accepted in our proprietary broker-dealer and increasingly our populating platforms and gathering sales at unaffiliated broker-dealers. The combined AUMs of those is north of $0.75 billion and the growth, I think, probably is still nascent, because again it’s still getting its way on to some of the larger platforms. The Pictet products have had some salience with our internal advisors. The targeted return bond funds, the latter of those two, which we think sort of has a corner office advisor appeal, is still finding its way on to platforms. As I think we have talked about in the past, one of the challenges with newer product is the period for getting it up and running at the large broker-dealers is elongating, particularly in light of the rationalization that is taking place at many of those firms. And so the sales to-date aren’t I think reflective of their long-term potential. And then on the LaSalle funds, I’d say we had a respectable year with the risk managed fund last year and would anticipate the same this year.

[Glenn Schorr:]

Excellent. Thanks for all that. Appreciate it.

[Operator:]

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

[Dan Fannon:]

Thanks. Phil, you mentioned conflicts within the broker-dealer channel that you guys recognized. Can you explain that and maybe talk about some of the solutions, I assume, that’s what’s part of the actions you guys are taking, but if you could expand upon that, that would be helpful?

[Tom Butch:]

This is Tom. I will take a first lack at it. You know the DOL stricture provides for the elimination or mitigation of conflicts related to the retirement business that can be in the form of less than level of compensation. And for us, one of the things that’s obviously of import is the sale of proprietary product and making sure that, that rises to the same standard. So we have said about all the things you would expect us to by looking at levelization of compensation, looking at arrangements we have with other parties where revenues are flowing in multiple directions and we have also looked at the proprietary issue and that really is one of the things that gave rise to as we discussed having third-party support for the creation of our MAP Navigator product and ongoing screening thereafter. And I would say those are the principal components that we have spent time on. This has been, as I am sure, it has for all of our peer firms just a consuming process and has I think brought together a lot of resources where we have had to analyze everything in that light. And I think we have moved down the road pretty well. But again, I think those are the key points.

[Dan Fannon:]

Okay. And then just to follow-up, maybe Tom and I am going to probably not going to get the programs all right that you have given the various names, but can you talk about the fee differentials between the existing Classic and then the various MAP initiatives that you are rolling out in addition to the index products that you talked about just to think about the varying scales of the fee levels?

[Tom Butch:]

While the fee levels are essentially consistent across the programs, there is some variability that the advisor is able to charge based on the level of services provided. But as you said, it is bounded essentially the same across those programs and is consistent with industry standard. Is your question on the index – what’s your question on the index funds, I am sorry?

[Dan Fannon:]

I am just basically trying to think about how these changes are going to impact your revenue streams based on what you are charging today for this existing book of AUM versus some of the new programs you are rolling out and how that might transition?

[Tom Butch:]

Okay. So I am separating two things, I guess. My first question was responsive to the asset base fee that the advisor charges. The second question relates to having index product and its adoption and its fee rate relative to active, I suppose. Is that accurate?

[Dan Fannon:]

Yes.

[Tom Butch:]

Okay. So obviously, index products have a lesser fee rate. I think it’s important to talk about philosophically how we approach this. Our advisors have been desires of having index product for some time and our notion was that, two things, rather than having third-party funds, be central to that. Our advisors, we believe and has been corroborate in our conversations with them, would be very positively directed toward or having our own products. And so we set out to find a partner with whom we might create those. And the second part of this really is that we chose not to create products in the most commoditized asset classes within the index world, which as you know are really owned essentially by a few providers at very, very low fee rates. Instead, we tried to add products to our platforms that we thought were complementary to what we had might be inventive in new and a passive construct and maybe even edge toward a factor tilt and away from the most undifferentiated products. And so even after splitting a fee with sub-advisors, we think we have a respectable fee attaching to this business on the order of on an un-weighted basis of 20ish basis points.

[Dan Fannon:]

Great, thank you.

[Tom Butch:]

Which effectively as you know would be an institutional rate for certain major asset classes in any case. So again, giving our advisors what they want, doing it with products which are not the big undifferentiated commoditized ones and enabling us, if we do our job right, to participate in the revenue stream.

[Dan Fannon:]

Thanks.

[Operator:]

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

[Robert Lee:]

Great. Thanks and good morning everyone. I guess maybe my first question would be for Brent, can you just maybe flush out for us as we look ahead to 2017 kind of how the incremental Project E and DOL costs will kind of play out over the next couple of quarters, should we expect this is going to run at kind of similar run rate next quarter or two quarters, then kind of dissipate or disappear in the second half or is it kind of should we just expect these run rates to continue through the year?

[Brent Bloss:]

Rob, I will address Project E first. With some delays, I think we have given some numbers in prior quarters around that effort. And I think it’s still well on budget, but given extension of the timeframes of implementing some of the components here, we feel like that’s probably through the end of the second quarter probably around $4 million. In terms of the DOL, we have recently completed all the design and are working towards finalizing requirements here soon related to that initiative and depending on how that rule moves forward, we have a lot of folks on the ground right now moving these projects forward in the implementation stage. And so we are able to dial those folks. Now, we have moved on from consults to more local resources. We are able to dial those resources up and down fairly quickly. So if things get kicked with the DOL, we can adjust accordingly. But right now, we feel like if we are still the targeting that April 10 date that we would spend in implementation probably around $8 million to $10 million to finalize things throughout 2018 related to that regulation.

[Robert Lee:]

Great. And then maybe a follow-up to – this may be for Tom on the last question, so if we were to think of kind of some of the existing or updated or new MAP programs kind of economics to Waddell, I mean there is I guess on the one level, there is the proportion of the advisor level fee that is retained by the firm by Waddell and then there is the – as I think you mentioned roughly 20 basis point depending on the product, maybe sub-advisory fee that you would also capture, is that the right way to think of it kind of going forward?

[Tom Butch:]

Well, if you are talking specifically about the index products, that’s correct. The index products would be obviously be part of the blended rate of all the funds that would be represented in the aggregation of all the client portfolios. So you are right that there are two levels, which is one is the asset base fee, which we participate in. And the second is the investment management fees, which are underneath that fee. And the 20 basis points again unweighted just represents what our part of the management fee attaching to the index products is the blended rate is obviously much higher than that because today it comprises only our active products.

[Robert Lee:]

Okay. And if I could, just maybe one last question I think Tom, in the past you have suggested that your own internal expectations is that once the new platform is in place that something on the order of about 25% or so kind of gross advisor sales is what you expect to migrate towards third-party product, is that kind of still your expectation or is there anything as time has moved forward kind of evolved make you think that that numbers high or low?

[Tom Butch:]

So I would say we are roughly in that ballpark, Rob. And if I might, it might be collectively helpful to just step back and try to go through this. I know it’s hard without a visual, but if you think about the existing classic advisory program MAP, which has $14.5 billion in it. The first question is, how much of that will migrate to these two new programs, one being MAP Navigator, the semi-open architecture program and the second being MAP Direct. And I know the nomenclature is hard to keep up with, but that’s the one that is a discretionary home-office driven model portfolio program. So we would say that sort of a base case would be 30% migration, 25%, 30% and if you took a very aggressive case at 50%. And so you take that percentage of the 14.5% and times it by 0.8 thinking that that which goes from MAP, 80% of it goes to Navigator, again the semi-open architecture program, 20% to Direct. And that gets you to if you just apply the math, that gets you to some – to the base case of about $3.5 billion going over to Navigator and then you have to make your best assumptions as to what percentage of that goes to non-proprietary and again we think that base case would be about 30%. So there is three or four stops along the way, which gets you to a destination where if you take that base case and carry it through, the asset migration is somewhere around $1 billion. If you say, 30% moves to Navigator and 30% of that goes non-proprietary and you can toggle this other ways if 30% were to go and higher percentage goes that number goes up. And then if you take an aggressive case and you say that, let’s say, half of it goes and half of it goes non-proprietary, you come to a different number. But I think it’s probably worth pointing out that if you took that aggressive case, which we believe to be aggressive, which has 50% leaves MAP and goes into this amalgam of MAP and Direct and most of it goes into MAP under that aggressive case. And then you say the most aggressive scenario for migration once they takes place, you are still roughly at – you are well under a quarter of the assets in MAP at that most aggressive scenario migrating to non-proprietary products. And again, if you take lesser assumptions along that pathway, the number goes down from there. So I think the key variables, again are how much leaves MAP in the first place and the attractiveness of MAP itself, we think is enhanced by the addition of the index products. And then once it leaves and that percentage, which goes to Navigator how much migrates to the non-proprietary product and again our base case would be 30 and 30 and you can toggle up and down from there. Again, these are fluid estimates and the real-world adoption of this will be tell-tale later in the second quarter. But that’s our best thinking right now. And I know without a piece of paper that’s hard, but I hope that was helpful.

[Robert Lee:]

It was. Thank you.

[Operator:]

Our next question comes from Chris Shutler from William Blair. Please go ahead with your question.

[Chris Shutler:]

Great. Thanks. Brent, just a couple of clean-up financial questions first, could you just reiterate what you said about expenses in 2017 and then how should we think about the 2017 tax rate based on the RSUs?

[Brent Bloss:]

So in terms of the expense run rates, what I said was that the run rates in the third and fourth quarter after the restructuring that took place in the second quarter, we expect to hold our fixed expenses flat at this point. Again, we will continue to evaluate the business. And I think history shows that we have stood ready to make adjustments should things turn down. So on that front yes, we are trying to keep things flat on the expense side, the controllable expenses. What – what was your question, again on RSUs?

[Chris Shutler:]

Just what – how we should think about tax rate based on the restricted stock you expect to vest?

[Brent Bloss:]

On the vesting, it’s hard to put a number on, it will depend on where the stock price actually is when those shares vest throughout 2017. But again some of those shares were granted at much higher prices, so the benefits that went through the income statement are much higher and now that you have to flow those you have to back those out of the income statement going forward based on the actual vest date price. I mean if the price were to stay stable to where it’s at today, it could toggle between probably 300 basis points and 400 basis points higher, but that’s only an estimate at this point.

[Chris Shutler:]

Okay.

[Brent Bloss:]

Again, the economics are the same. The cash flow ramifications remain the same. This was just a new reporting requirement.

[Chris Shutler:]

Yes. Understood, it’s just a GAAP issue. And then I guess secondly, maybe just on Project E that – so it sounds like that’s been delayed a bit, just talk about what still has to be implemented the timeline and then once it is all implemented, what should we think about for the ongoing expense and is it asset based?

[Tom Butch:]

I will start. It’s Tom and pass it onto Brent. In certain sense, Project E and our DOL initiative have been conjoined into one. And though Project E predated the DOL rule, it is in many ways responsive to it. I delay – the implementation of the asset based programs that we have talked about today is delayed a couple of months that owed to, I think two things, mostly our strong belief that the addition of Wilshire [ph] was a very important component for the program and for our advisors and that has taken time to think through and get contracts and start to frame out how that will work. So – and the second is just the technology resources attaching to these programs, but I think it’s more the former in getting the program just right. I think it’s a worthy delay in that sense. There were four components in Project E. One was platform moving towards straight through processing. Those technologies were in place and are up and running. Second was product, I have talked about that in terms of these fee based programs. Third was brand and the separation of the investment management and broker-dealer brand that essentially is accomplished. And the fourth is services and programs that we provide to our advisors and trying to move away from a singular approach to a more ala carte approach. That one always was going to be the last. So timing wise I think we are pretty much or very much in the ballpark of where we are. Brent?

[Brent Bloss:]

Yes. In terms of expenses, the ongoing cost of these initiatives will be seen in our indirect distribution costs and expect that to be around an additional $7 million during 2017. But you have to remember that Tom has talked about these different fee based programs that we are putting in place. So the plan is that these expenses will be more than offset by program fees related to these new fee based products. So these technology costs primarily will be offset by increased program fees going forward.

[Chris Shutler:]

Okay, great. I am just trying to understand of the $7 million, how much of that is one-time versus ongoing?

[Brent Bloss:]

That’s ongoing. As I have mentioned before, there is about $4 million, probably one-time just implementation costs that will be incurred to get all these platforms in place through probably the middle of the year.

[Chris Shutler:]

Okay. Thanks a lot guys.

[Operator:]

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

[William Katz:]

Okay. Thank you very much for taking the question this morning. I got a couple if you don’t mind, the first one is just trying to following all the math on the migration within the asset allocation with the inclusion of index. I guess, the broader question is, why do you think the attrition will be limited only to the allocation product, it seems like with a pretty high fee rate and while performing its kind of little better. The broader takeaway here is industry level migration to much lower cost products. So why wouldn’t you just see a more – a bigger uptake more broadly for index, which you might further compress the fee rate, I am just trying to understand those, your thinking there?

[Tom Butch:]

Thanks Bill. It’s Tom. Our thinking really evolves from our long-term experience. The non-advisory portion of our classic channel has long offered multiple fund families. We have the selling agreements with 100 fund families. And the adoption of product there has consistently – even in light of that favored the home team product or the proprietary product. So this change, we think really in it’s first instance is contained in ring fence within the advisory programs. Again, we will see how that evolves, but the availability of those products has been there since, at least the last decade. And so the adoption statistics are what we are basing our thinking on.

[William Katz:]

What was the percent of proprietary sales this quarter in the affiliated channel?

[Brent Bloss:]

If you have another question, we have someone looking that up.

[William Katz:]

Okay. Thank you. On the capital management policy, maybe Phil for yourself, so I appreciate that you – if you strip out the charge in this quarter you earned a bit more than your dividend but if you sort of think through your guidance on flows, the longer term outlook for fee rates against sort of stating fixed expense base, putting markets aside, it would seem like you are not going to earn your dividend over the next couple of quarters, so what’s the rationale for holding at these levels, is it a financial one the – from evaluation perspective on the stock, is it strategic as it relates to the messaging that you might be providing to distributors just if you would have to cut the dividend, just trying to get your understanding on how do you think about capital management from here?

[Phil Sanders:]

Sure. Bill, this is Phil. I think it’s a combination of a lot of those things. I mean as Brent pointed out, the balance sheet is very strong. The cash levels are high and we have a lot of flexibility. I think we acknowledge that there it’s kind of a fluid process and there is a lot of – it’s going to be a transition year. And so I think until we see how some of these things play out with more conviction and more evidence and everything we are kind of inclined. We are under no financial stress at this point, doesn’t place any financial stress on the company. We continue to pay the dividend, it’s an important part of our capital return policy and our employees and our shareholders and so forth and it’s something that we have the ability to pay. I think we are just waiting for a little more clarification. Obviously, we will see how the situation unfolds. As we have said in the past, if we come to a conclusion that the earnings power of the company will not support it over the longer term, then we are not likely to do it in a way and maintain this in a way that we would continuously depend to our cash balance for that. But at this point in time, we are under no stress or urgencies – urgency to make that decision with all – the lack of clarity at this point. Obviously, this is something that the Board reviews on an ongoing basis and we will continue to monitor going forward.

[William Katz:]

Got it, okay. And just one last one for me. Thanks for taking all these questions. If I look at your FA count and then advisors from your sort of consolidated broker-dealer metrics, that number has been flat to trending down a little bit, I think a bunch of your peers have sort of been reporting much more robust in net growth and to net flows, what’s been driving the decay, is there some seasonality here, is there some pruning of less performing financial advisors and how do you think interplay is between the forward look of FAs versus the sort of proprietary versus non-proprietary sales mix?

[Tom Butch:]

I didn’t quite get your last question. But in terms of general guidance, I think as you point out, we have been sort of in a period of no growth or a very level advisor count for some time and we don’t expect a material change to that in the near-term. As it is obvious, we have an enormous number of initiatives underway in the broker-dealer and we have been focused on doing that as well as we can and maybe a little less focused on advisor count as a result. Secondly, as we have said in the recent past or the past for some time now, our focus is much more on the quality of recruit than it is on the numbers of recruits and productivity, your plan about pruning productivity is our central focus rather than adding sheer numbers. So I would expect – I don’t have an expectation and we don’t have an expectation that that number will shoot nor is dramatically at anytime in the near future and it may actually stay where it is or declined slightly.

[William Katz:]

Okay. Thanks for taking my questions.

[Operator:]

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

[Michael Carrier:]

Alright. Thanks a lot. Hi Brent, I know there is a lot of moving parts, but I just wanted hear on the expense one more time, I think you mentioned, if we look at where the expense run rate is right now, let’s say, between 2.25 and 2.30, kind of all-in on an adjusted, I just wanted to understand as we go into like the first half of ‘17 based on maybe that being the core versus some of the items that you mentioned in terms of whether DOL or Project E expenses, is that in there or would that be in addition and then if DOL does get delayed, how much flexibility do you have to like pull things back we need to take more time for the spending? Thanks.

[Brent Bloss:]

Yes. Michael, thanks for the question. Yes, the DOL and Project E are not included in that flat run rate. And on the second part, we have some flexibility. Certainly, we are pressing hard here to get to April 10. And if they were a delay, we would certainly pull back resources and reassess some of the decisions that we made along the way. So I think the $8 million to $10 million I gave you on DOL, we could definitely manage that number down in the event that the DOL rule got kicked to the future.

[Michael Carrier:]

Okay. Thanks. And then Tom or Phil, just could you gave some good color on some products that you are starting to see increased traction and then you also talked about some of the changes that are taken place in terms of fund screening, I just wanted to get a sense when I look at everything that’s going and what we have seen on flows from a fee rate standpoint because of mix and where you are seeing the outflows, the fee rate has been going up, but just wanted to understand when you think about the outlook, have there been like pricing changes just given that we have seen industry trends and then as that the fund screening kicks in, does that create any pressures in terms of assets moving around, just given where maybe some of the funds rank versus others?

[Phil Sanders:]

Why don’t – maybe Tom, you start and then I will add in any other thoughts or comments...

[Tom Butch:]

You bet. In terms of – I believe your first question had to do with pricing changes and have we changed pricing in any sense. We have a product committee that meets monthly to consider all things attaching the product line, new product development, changes to the existing products and we have in the recent past pruned expenses in a couple of cases reasonably aggressively on products where we think we have a real opportunity to accelerate growth that are still being consumed by buyers of active and where we have a very competitive product. I think to that extent, that thinking has been selective rather than aggregate and I think it’s probably the way that we will continue to approach that. Was there any other question embedded in that one, and then I can go to screening?

[Michael Carrier:]

Yes. I think that was good on the pricing side. And then the second part was yes, just on the screening?

[Tom Butch:]

Okay. And then, so relative to screening, yes it could put assets in motion. But remember that in the first instance, the screening will likely manifest itself most and what already is a new program. So as I tried to explain in that potential migration scenario, those will all be entering that program new and so it’s not so much, a massive migration scenario as it is settling into a new product platform. But yes, I think just based on the numbers we put forward, there will be more movement among our own fund family and between active and passive and with unaffiliated funds.

[Phil Sanders:]

The only thing I would add to that is just keep in mind that what we are talking about here is screening with the MAP advisory programs and so what were the assets that we are talking about here would just be a subset of the overall funds assets. And the other thing I would point out is this process is an ongoing and fluid process and so the screening would be happening on a quarterly basis and so when a fund moves off, it could potentially move back on and there will be all of this opportunity. So once we level set this and get the program going, then it will be kind of an ongoing process where funds can move on and off the platform and reinforce the confidence, I guess of the advisors and so forth. So it’s obviously a lot of moving parts, it’s difficult to forecast exactly, but that’s kind of how we see it playing out.

[Michael Carrier:]

Okay. Thanks a lot.

[Operator:]

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

[Patrick Davitt:]

Hey. Good morning. Thanks. A couple of quick follow-ups, the $7 million of indirect distribution, should we assume that includes kind of the incremental cost of the fund screening and model portfolios?

[Tom Butch:]

Yes. That’s included in the – yes, that’s – yes, you are exactly right. That’s included in that incremental cost.

[Patrick Davitt:]

Okay. And then on the DOL, I think in the past you have said a lot of these broader architecture changes would probably happen regardless of what happens to the rule, could you give us an idea of maybe where you have a bit more flex specifically if it’s repealed?

[Phil Sanders:]

I guess this is the piece that we most would focus on as this process is screening. We think it’s inherent in the architecture of the asset allocation fee-based programs, but its adoption more broadly is something that we would think about where there to be a delay.

[Patrick Davitt:]

Okay. Thank you. And then finally, I appreciate all the color on the sales rate in January, could you give us an idea more broadly of how the net flow picture looks relative to the run rate last color – last quarter?

[Phil Sanders:]

Yes. I can. The short answer is that in the wholesale channel, it looks favorable. And I think we actually we talked about that in our opening remarks. And in the advisors channel, it looks somewhat unfavorable. And in institutional, it’s sort of plus/minus.

[Patrick Davitt:]

Thank you.

[Operator:]

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

[Mac Sykes:]

Great. Good morning everyone. If the corporate tax rates were lower by 1%, I calculated a positive impact of about $0.03 per share on 2017 consensus, $0.30 per share of the impact for a 10% decline in the corporate versus 2017 consensus, do I have that right?

[Brent Bloss:]

Mac, I don’t have that math in front of me, but it’s something that we can follow back up on. I can work on that and touch base with Nicole.

[Mac Sykes:]

And then…

[Brent Bloss:]

It seems in the ballpark though.

[Mac Sykes:]

Okay, thank you. Has that come up in any of your thinking about dividend coverage?

[Brent Bloss:]

Certainly, cash flow component we think about, yes.

[Mac Sykes:]

And then on the...

[Brent Bloss:]

It’s not currently embedded in our strategy around that, but yes, it’s something we think about.

[Mac Sykes:]

And then with sort of recent calls, we have heard a lot about the importance of scale as industry braces with various challenges, you have pivoted your advisor business, I think you have an unappreciated balance sheet and now there is a potential earnings impact from the change in the corporate tax rates we just mentioned, so the clarity is looming now on DOL regulations and also continued consolidation expected given the scale comments, why shouldn’t we expect larger firms to approach you on a strategic basis?

[Phil Sanders:]

Well, this is Phil, obviously, we are not going to comment on any speculation around strategic activities, so our focus right now is really we got lot in our play. We are focusing on operational improvements, investment performance improvements, compliance with new regulations and you highlighted some of the strengths of our company in terms of the balance sheet and the long heritage and so forth and we agree with that. But obviously, we are going to carefully evaluate any opportunities that come our way, but not in a position to comment on any potential speculation with respect to strategic alternatives.

[Mac Sykes:]

Thanks.

[Operator:]

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

[Robert Lee:]

Yes. Hi. Thanks. And I guess a little bit of maybe beating a dead horse, but on – back with capital management, the dividend, just to clarify I guess that you are really looking at your cash generation as opposed to GAAP earnings, so is it fair to say that your cash generation per quarter if we just think as say non-cash equity comp would be an incremental $0.09 or so a quarter, does that seem right?

[Brent Bloss:]

Yes. Rob, you are on the right track. It’s definitely a non-cash component that’s significant above our earnings. So it’s about $50 million I believe on a run rate basis. So yes, that adds to the available cash.

[Robert Lee:]

Great, just want to clarify that. Thank you.

[Brent Bloss:]

Yes.

[Operator:]

And ladies and gentlemen, at this time I am showing no additional questions, I would like to turn the conference call back over to management for any closing remarks.

[Phil Sanders:]

I think Tom had one point to clarify or add.

[Tom Butch:]

Thank you, Phil. Bill in response to your question about proprietary as a percentage of sales, we unearthed the classic number, this of course would be exclusive of the choice side, which is far more diversified, but of far lesser scale. On the classic side which is everything we talked about today relative to the new programs, it was 92%.

[Phil Sanders:]

Okay. Thank you, Tom. And just one other comment just in response to a question or couple of questions earlier just in light of some context around flows and kind of where we stand today. The total company AUMs as of this morning were approximately $81 billion. So with that, thank you for joining us this morning. And we appreciate all the interest in the questions and look forward to talking to you soon. Thank you.

[Operator:]

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