Waddell & Reed Financial Inc
Q3 2017 Earnings Call Transcript

Published: 24 Oct 2017

[Operator:]

Good morning ladies and gentlemen and welcome to Waddell & Reed's Third Quarter 2017 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instruction] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note that we do ask that you please limit yourselves to one question and a single follow-up. If you have additional questions, you may rejoin the question queue. Please also note, today’s event is being recorded. And at this time, I 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 Head 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 public filing 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 and relevant supplemental schedules, have been posted on our Investor Relations section of our website at ir.waddell.com.

[Phil Sanders:]

Okay, thanks Nicole. I would like to begin by briefly reviewing our third quarter financial results before sharing some high-level observations on the quarter and expanding on the revised capital return policy we announced this morning. Net income of $38 million or $0.45 per share increased compared to $0.23 or $0.28 per share in the prior quarter. Our operating margin was 19%, up 120 basis points on a sequential quarterly basis. The current quarter benefited from an additional day of revenues and continued cost management discipline. Assets under management ended the quarter at $80.9 billion, up slightly from the prior quarter as the strong market environment more than offset net outflows. Brent will provide additional details on our financial results shortly. As of this morning, total assets under management stand at approximately $81.2 billion. Last quarter we laid out in detail the key initiatives of our corporate plan. The plan centers around four main priorities, strengthen our investment management resources processes and results, reinvigorate our product line and sales, evolve our broker-dealer to a self-sustaining fully competitive and profitable entity, and improve the operating efficiency of our evolving business model. We also indicated that while the strength of our balance sheet provided us the flexibility to continue to pay our current dividend as we transition our business model, the current management team along with the Board of Directors would continue to evaluate our financial outlook growth and investment opportunities to ensure we are managing our capital return policy effectively. As part of this ongoing process and as indicated in our earnings release we are implementing a new capital return policy. Our board approved a reduction in our quarterly dividend from $0.46 per share to $0.25 per share. In conjunction with this dividend adjustment, we also announced our intention to repurchases $250 million of our common stock. Based on our current forecast, we intend to engage in an opportunistic share repurchase plan and reach our buyback goal within two years. We believe this new capital return policy provides a more balanced approach to returning capital to our shareholders, while enhancing financial flexibility and maintaining a very strong balance sheet. We view the adjusted dividend level as being sustainable, while still providing a very competitive current income stream for our shareholders. Additionally, the cash flow savings provides more financial flexibility to fund resources needed to maintain top-flight investment capabilities, provide seed capital for potential new product initiatives, pursue inorganic growth opportunities, and fund accretive share repurchases. In sum, this recalibrated capital return program is supportive of our corporate plan and gives us the ability to execute on our strategy even during times of market stress. Ultimately, we believe this approach will create greater shareholder value over the long-term. Now turning to the quarter, it was a solid quarter from an investment performance perspective as we had a significant number of strategies post returns in the top quartile of their respective peer groups. That said there were still much to be done to improve longer term track records on a broader scale across our product suite. Risk management capabilities are becoming increasingly embedded across our firm and we continue to build on our investment management resources. Over the past year or so we have moved nine different strategies to a team managed approach and hired seven new research analysts. We will continue to focus on resource allocation within the investment management division and are committed to investing in support of key products and growth opportunities. From a flow perspective, it was a mixed quarter as net outflows were slightly worse sequentially on a total company basis despite net outflows in our retail unaffiliated channel continuing to moderate. As we gradually open up the architecture in our broker-dealer, we understand that we will face some natural headwinds. This combined with the current lack of momentum in our institutional channel presents a near-term challenge for our company as we attempt to transition to a positive overall flow dynamic. Tom will put provide additional color on this shortly. Subsequent to quarter-end, we successfully merged nine of our Waddell & Reed Advisors funds into our Ivy funds. Also, as previewed on our last call, we are on track to merge all remaining Waddell & Reed Advisors funds into Ivy funds by the end of the first quarter of 2018 assuming we receive all regulatory and board approvals. We also continue to make progress optimizing the physical distribution footprint of our broker-dealer through our market structure initiatives. As you know, this is the key element to improving the competitiveness of our business model and is one of our main corporate priorities. In just a few minutes Brent will provide some additional details on this, as well as other initiatives intended to improve our overall operating model efficiency. Let me now turn it over to Tom.

[Tom Butch:]

Thanks Phil and good morning everyone. While we experienced net outflows in each our three channels, each channels situation reflected varying dynamics. Outflows increased, but well within expectations in the broker-dealer. Outflows decreased for a sixth consecutive quarter in our retail unaffiliated channel and outflows in institutional reflected continuing challenges there. Looking at channelized sales results, proprietary outflows in the broker-dealer increased as anticipated in-light of the launch in May of a new advisory program incorporating unaffiliated funds. As expected, the uptake of this program among advisors has been strong. Asset migration from existing advisory and aged commissionable shares has been towards the middle of our previously stated expectations of $1 billion to $3 billion over 12 months to 18 months with estimated weekly average migration having run between $30 million and $35 million. In addition, the proportion of flows into the program coming from new sales versus migrating assets has nearly doubled since its inception to about a third of flows at current rate run rate levels, meaning less of the flow into the program is coming from migrating assets. Separately, commissionable sales in the channel were 79% in proprietary funds during the quarter. Channel AUMs at quarter-end was $43.5 billion, up about 1%, compared to $43.1 billion at June 30. Assets under administration increased about 3% to $55.5 billion at quarter-end from $54.1 billion at the end of the second quarter. And advisory AUA increased by over 6% to $20.7 billion at quarter-end, representing 37% of total channel AUA. Advisor headcount decreased by 100 sequentially, with 70% of departing advisors coming from our lowest production tier and 90% coming from the two lawless tiers. This attrition was anticipated within our corporate strategy, which as articulated previously focuses the company primarily on our higher producing advisors. It reflects our much-reduced hiring of advisors new to the business, which historically would have offset that attrition. Due largely to the reduction in the number of lower producing advisors, production per advisor increased 6% sequentially to an annualized $276,000. Our new product platform along with our late July announcement of meaningful changes in advisor compensation, office footprint, and service delivery to advisors appears to have been well received and should, we believe, provide the basis for sound advisor retention and increasing productivity at all advisor tiers over time. In retail intermediary, net outflows continued to decrease driven by the ongoing dissipation of redemptions, which again where at the multi quarter low. Sequential quarterly gross sales dropped by 14%. During the quarter, meaningful sales momentum continued in our international core equity and emerging markets equity products. Expanding the breadth of sales remains at top priority and the key to regaining positive net flows. The strong performance we are experiencing in a number of our products, including high-quality fixed income, small cap equity, a multi-asset offering and others will be essential to this effort. Channel AUM at $31.1 billion was up 2.5% from the prior quarter-end. Institutional outflows mostly reflected significant redemptions in our domestic large cap core equity strategy. The institutional pipeline remains subdued. The remaining book of business remains well diversified by asset type and by client with roughly $6.4 billion book comprising 77 clients. Asset preservation remains the top priority here as key strategies regain performance levels that will invite more opportunity over time. Let me now turn it over to Brent.

[Brent Bloss:]

Thanks Tom and good morning everyone. As Phil noted in his opening remarks, earnings per share during the quarter were $0.45, compared to $0.28 per share in the prior quarter. As a reminder, the second quarter of 2017 included a tax charge of $8.9 million or $0.11 per share related to the implementation of new accounting guidance for share based payments. Sequentially revenues increased by 1%, reflecting the benefit of one additional day in the current period, and operating costs declined by $1.4 million, due to lower underwriting and distribution cost in our unaffiliated channel, as well as an intangible impairment in the prior quarter. The current quarter included increased cost from the accrual of the discretionary 401(k) contribution announced in the prior quarter related to the pension plan freeze, legal costs, and severance costs related to the realignment of the broker-dealer field management and support. These costs were partly offset by lower pension expense resulting from the freeze of the pension plan. Combined, these items resulted in additional expenses in the quarter of approximately $4 million. I wanted to provide some additional guidance on the baseline fixed cost structure as a starting point for the targeted $30 million to $40 million and additional pre-tax income we announced in the second quarter. As a reminder, our discretionary expenses are included in the indirect U&D, compensation and G&A lines on the income statement. As I have indicated in the past, we forecasted our expenses and these three income statement lines for 2017 to be in-line with the run rate for the second half of 2016 as adjusted for certain charges outlined in the fourth quarter 2016 earnings release. The adjusted discretionary expenses for the second half of 2016 totaled approximately $445 million on an annualized basis. To this base, we added $15 million of cost resulting from changes in our equity, stock brands, and the moment of direct U&D cost to indirect in 2017 related to our field management changes. This establishes the baseline for discretionary cost at $460 million. Our forecast for 2017 annual expenses also includes an additional $20 million above this baseline, primarily due to the implementation of Project D and the DOL fiduciary rule, the 401(k) discretionary payment, and fund merger and legal costs that are not part of our ongoing run rate. As I have are highlighted in prior quarters, careful research allocation is central through our strategic plan. We have identified a number of areas in the company where evaluation of our operations are underway, and in August we announced we are working on a series of initiatives expected to add between $30 million to $40 million to pre-tax income in the next 18 months to 24 months. Based on the initial evaluation work, we are comfortable on our ability to reach our targeted savings. During the third quarter, we completed the realignment of the broker-dealer field management and expect to realize $10 million in annualized cost savings. We are in the early stages of evaluating other opportunities across the enterprise that we expect to provide additional cost savings as we focus on approving our operations and services to advisors. As part of the changes, we made to the management structure in our broker-dealer channel, compensation from managers has moved from commissions and overrides, which was captured as direct U&D cost previously to salary and bonus, which will be recorded as indirect U&D cost in the future. As of September 30, we froze our defined benefit pension plan, which will save the company approximately $12 million per year. Early next year, we intend to pay down the $95 million in senior notes that come due on January 13 [ph], which will result in annual interest cost savings of approximately $4.8 million. We also have a laddered fixed income portfolio in place that is expected to increase our investment earnings up to $5 million on an annual basis. This portfolio has a balance of $340 million at the end of September. As previously disclosed, we plan on merging our mutual fund families and have affected the first of two tranches last week. The second tranche is expected to be completed in the first quarter of 2018. Once fully implemented, these mergers will reduce management fee revenues by approximately $12 million. As outlined in our press release and discussed by Phil earlier, we are implementing a revised capital return plan, which will reduce the dividend by 46% provide for an expanded share repurchase program and give us a more flexible capital return plan. We ended the quarter with $896 million in cash and investments, an increase of $12 million since year-end 2006. During the quarter, we returned $42 million to stockholders through a combination of regular quarterly dividends and share repurchases or a year-to-date total of $131 million. Despite having faced the challenging environment, our balance sheet is solid and our business model continues to generate substantial cash flow. I will now turn it back to Phil for closing remarks.

[Phil Sanders:]

Okay. Thanks Brent. Amidst the evolving industry backdrop in a period of unprecedented change for our company in particular, our organization is now fully engaged in implementing the corporate initiatives we laid out last quarter. We are committed to making the changes necessary to transition to a business model built for long-term success. We’re both a highly competitive active manager and broker-dealer are at its foundation. Our financial strength is a key asset for our company as we manage through this transition period and our revised capital return policy is not only fully supportive of our corporate strategy, but will also ensure that we have the flexibility to best take advantage of opportunities to create shareholder value over the long-term. Operator, we will now open the call to questions.

[Operator:]

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

[Glenn Schorr:]

Hi, thank you. So, I appreciate all the commentary around the dividend and the comment about providing the flexibility to reposition going forward. I'm curious, are there - are new things on the product suite and/or sales and distribution side that are being rolled out to help adapt to the industry change now? Or is this more of future financial flexibility; in other words, you've told us what you need to tell us? Answer

[Phil Sanders:]

Glenn this is Phil. I’ll start and if Tom wants to add anything he can. I think it’s more of something we’ve been contemplating for quite some time now as we’ve kind of been evaluating the financial position of the company. We spoke earlier in the year about having a strong balance sheet and the financial flexibility to be patient as we acknowledge what the DOL rules will do for our company, and as we open up - gradually open up the architecture and the broker-dealer I think we are getting a little better read on kind of where those things are selling out. Product development is something where - it’s an ongoing process for us internally and we’ve got a few things that we’re looking at now. We’re not probably in a position to disclose that at this moment. We also want to be flexible and opportunistic when opportunities come our way that are kind of inorganic and this provides a greater degree of flexibility. I don't know - I think that’s kind of where we - how we see it.

[Glenn Schorr:]

Okay, that's cool. On - just a numbers thing. On the - in the revenue commentary, you mentioned the lower 12b-1 fees in the retail unaffiliated and lower frontload commissions in the broker-dealer channel. Can you size either or both of those just so we know how much more pressure we might see on that top line? Like, we can make our guesstimates on flows and markets, but as that runs through the revenue line item, is that a material number still?

[Brent Bloss:]

Now, Glenn you mentioned the 12b-1 fees in the unaffiliated channel, that’s simply due to a reduction in the AUMs over time. So, I mean I think you can trend that out based upon the AUM levels and the percentage you’re seeing as a drop in those share classes that have 12b-1 fees related to them and then what was your other point?

[Glenn Schorr:]

It was really just the same question of both 12b-1 and the lowered load sales commissions running through the revenue line. Like, how we should think about modeling that going forward. So, I think you answered it. Thank you.

[Brent Bloss:]

And Glenn just on the load side, it was down in the current quarter. That number fluctuates somewhat from quarter-to-quarter. It wasn’t down considerably in the quarter, but we are seeing a lot of uptick in the fee-based side of the business as Tom elaborated on just the new navigator product and so probably more sales going to the fee-based platforms, which is expected in the future.

[Glenn Schorr:]

Excellent. All right, thank you.

[Operator:]

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

[Robert Lee:]

Great. Thanks for take my questions. Brent, could you maybe just - I guess I'm still having a little bit of trouble reconciling to the $30 million to $40 million pre-tax target with some of the numbers you gave. If I remember correctly, that $30 million to $40 million was inclusive of the revenue that you will be giving up with the fund mergers. So, it still feels like it's, at least if I add up the numbers you gave, still feels like it's a little short of that $30 million to $40 million. So how should we think about - maybe just update us on some of the - maybe a little more specifics or initiatives where you think you're going to get deeper into that $30 million to $40 million range. Changing real estate footprint, technology, whatever it may be?

[Brent Bloss:]

Yes, good morning Rob. Just in terms of setting it up a little bit, yes, we have included the, so the 12 million in the revenue line, which would go down because of the fund mergers from heading breakpoints. So, if you take that into account the real member for expenses that we’re targeting is more in the $40 million to $50 million range. If you net that, that revenue loss with a $40 million to $50 million target, I have given you the baseline of 460, so at 460 if you take $40 million off of that targeting 420 as a run rate, 420 to 410 in the future as a run rate, we have given you some pieces that I describe as part of - the intro here would be - an additional item would be the 10 million that we disclosed related to market structure from reducing our management infrastructure and the field. We’ve got $5 million reduction due to the pay down of the debt, $5 million pickup, and investment income, and then the $12 million savings that we would expect to include in the run rate for a pension reduction going forward. So, all of those total around the $32 million. So, we’ve already described about $20 million of our run rate savings as part of those items we have disclosed, and yes, we are still continuing to look at other areas of the company, we have a lot of initiatives underway. We expect to have some feedback by the end of this month around, we’ve gone through every area of the company, and actually have a number of initiatives going, but accumulating those savings will probably be better served in the fourth quarter as we hone in on those, but like I said in my commentary, we expect that we will - we’re very comfortable with hitting that 30 to 40 number at this point. And we are looking at, as you mentioned and IT [ph] and other areas in the company where we think we can become more efficient, some more clarity as we move forward here.

[Robert Lee:]

Okay, thanks. And maybe a question for Tom. I'm just curious, and I know it's early days, but you've also launched a lot of - a fair number of new products. And I guess we'll call them smart beta type products in the retail broker-dealer and maybe elsewhere. Again, it’s early days, but are you starting to see any uptake as you open up the platform to some of the newer strategies you've launched?

[Tom Butch:]

Hey Rob, you’re talking I think about the map navigator product, which is the one I referenced in my remarks as being the newest of our advisory programs and as you point out one of the things we did - effectively concurrent with that launch was to add some sub- advised funds that are passive/smart beta-ish. Yes, the uptake of those has been pretty good. I think about 300 million in AUM to date. The program launched in mid-May. And in fact, one of those products has the greatest uptake of any of our proprietary products in that advisory program. So, I think they are performing as we thought they would. It also provides the potential for shelf space for other of our newer strategies and the uptake of those whether managed by ourselves or sub-advised has been similarly within expectations.

[Robert Lee:]

Great. And then maybe, if you could, if I could, just one last question. Clearly, this is a hypothetical, but I'm just curious your thoughts on this. If we get tax reform - big if; no one knows what or if or how much. But supposedly, just hypothetically, if we were to get tax reform, theoretically you guys would be a fairly large beneficiary of that, given that you are largely a US tax payer. What's your overall philosophy about taking all that to the bottom line? Or would you really think of that more as an opportunity, whether it's to step up your rate of investment or even use it to strategically maybe be more aggressive in reducing fee structures on funds? Just trying to get your sense of how you would think about hypothetically if you had that windfall, sharing that with shareholders, so to speak, versus using it for more strategic investment?

[Phil Sanders:]

This is Phil. I don't know, we - well obviously we think about those things we don't spend a whole lot of time thinking about the hypotheticals and when that happens we will react accordingly, but all of those things would be something that we could consider and pursue in different avenues. Obviously, we would be a beneficiary - would be a good thing, and give us more flexibility, but I would just leave it at that. I think it would be yet to be defined, but clearly it would be a good thing.

[Robert Lee:]

Great, thanks for take my questions.

[Operator:]

Our next question comes from Craig Siegenthaler from Credit Suisse. Please go ahead with your question.

[Craig Siegenthaler:]

Thanks, good morning. Good morning Phil, Brent, Tom, Nicole. Hope you’re all doing well. First one here on the retail broker-dealer channel. So, Tom, I heard your comments on the advisor strategy, so appreciate that detail, but where should we expect to see the advisor headcount, which is down almost 20% year-over-year, to sort of trough at? And do you have any visibility on timing too, for when the advisor count here will stabilize?

[Tom Butch:]

It’s a very fair question, which has multiple dimensions. So, let me go at it this way. As we mentioned last time, we have undertaken a strategic overview review of the broker-dealer channel, which as we stated has as its goal to make it a freestanding self-supportive profitable entity over time and concurrent with that or supportive of that our focus is principally on our higher producing advisors who have a disportionate percentage both of sales and of AUM in the channel. We also talked about the fact that we are raising minimums in the channel, given two things that we were one of the firms, which historically brought in a great many people new to the business, and at that time the business was really supportable to that extent because it was focused on capturing proprietary assets. And second, we accommodated those people as they grew through the business. We were low relative to the industry and as we said, we are going to over the next four years raise minimums to what we believe to be more consistent with the industry norms. So, if you look at the business, the advisors with more than 150,000 in annual revenue production represents about 87% of our AUMs and 85% of AUAs. And that’s about half of the total that exist today. So, that other half, we certainly want to do our very best to help them get to the new levels of production and/or become part of teams, but unless they do they are over that span of time at risk for not meeting the new minimums. It would be our hope that we keep as many of our advisors as we can, but the new mat is really one of the functions that will put pressure on the head count number as well the fact that we’re not bringing in the volume of new advisors which in the past we did. That is a conscious strategic decision. So, when the number comes to rest, I don't know, I believe it will probably decline for a number of quarters and I would say that the principal focus from us strategically is maintaining those AUMs focusing on that and maintaining the sales levels and making sure that we’re doing everything we can to do our best job are on behalf of the people who meet the minimums and are here who really drive the bus from that perspective. In no sense are we dismissing those advisors who don't meet that new level because we’re doing everything we can to give them options to continue to be here, but just mathematically that group is the one that is at risk. And so, I think you can expect that the number will decline for a number of quarters moving ahead before it finds its new place, but I would also say that the focus from your perspective might very well be better served to be on asset retention, sales levels, and AUAs.

[Craig Siegenthaler:]

Got it. Thanks, Tom. And just as my follow-up here, we see the proprietary product share slipped to 70% from 83% year-over-year in the retail broker-dealer channel. And I’m just wondering, is a 500-basis-points per-year decline in line with your expectations? And also in your view, is it more likely that this 500-basis-point per-year decline will decrease or increase over the next 12 months, given the tweaks you have made to your offerings and sort of why?

[Tom Butch:]

I would say that it’s substantially within our expectations as I stated, they were particularly directed toward the map navigator program, but I think the number you said the 500 bips is probably within our span of expectation. There are multiple things going on, as I pointed out, we’ve seen no material change in the utilization of unaffiliated products in the proprietary part of the business - or in the commissionable part of the business, which is 40% of the business and the uptake of the unaffiliated funds and the advisory has been pretty much within the span of what we thought. Your forward-looking question is, one which, it’s kind of hard to answer as you would expect whether it will be the same less or more, I think our modelling would call for it to be for proprietary AUMs to decrease on a continuous basis at a moderated level over the next number of quarters. What we have to watch is the trends both in the uptake of the product of the advisory program that has the unaffiliated funds, the relative percentage going into those funds and the exertion of new money versus transferred assets over time, which as I mentioned is already seeming to happen. So, I think our modelling would call for that proportionality to be moving away from us for some period of time, but at the level that’s manageable and predicted.

[Craig Siegenthaler:]

Got it. Thanks for taking my questions.

[Operator:]

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

[Bill Katz:]

Okay. Thanks very much for taking the questions as well. Just coming back to the capital management policy, I was just wondering how you arrived at the $0.25 dividend. And then just based on what you said on the call, as well as what was in the press release, it seems like there might be a need to spend a little bit more. And certainly, some of your peers who have big broker-dealer operations or support those broker-dealer operations are talking about mid- to-high single digit type of core expense growth, I was sort of wondering how you sort of tied the two together?

[Phil Sanders:]

Okay, good morning Bill. This is Phil. I will start may be Brent can add a little bit, I think in terms of how we arrived at the decision, I guess, obviously it was a Board decision and a lot of - as you might imagine a lot of discussion and thought went into this and I think where we really settle out is, at the end of the day there was a feeling that we probably, the dividend payout became kind of - it dominated our total capital return portion. So, we wanted to present a more balanced approach to our capital return program, which offered a competitive income stream for shareholders, but also gave us some flexibility to invest in the business, take advantage of opportunities when they present themselves, and also be active in terms of repurchasing shares and adding some accretive share repurchases. So, it was a combination of that level, which I think just represented a good balance of a lot of these different competing considerations. At the end of the day, this is where we settled out. I think the $1 base in our financial strengths and the cash flow generation of our model, we view it as a sustainable level, which I think is rewarding shareholders and also one that we can deliver on consistently over time even when the market environment becomes a lot more stressful and volatile. We’ve been in a pretty good environment here. As you know, for the last number of years, but obviously that could change anytime, so we feel comfortable where we are. In terms of, may be the investment spending and other types of things I’ll maybe let Brent add a little bit there.

[Brent Bloss:]

Yes, good morning Bill. I think on the investment side Phil highlighted, I think in his opening remarks that we are doing things in our investment management division adding two resources there, as well as the technology in that area as we build out more robust risk management as Phi’s hired a risk manager and well into the plan on the risk side. And then in terms of the broker-dealer we’re really on the back end of the project, the initiatives that we have put in place, but we still think there is more to do in terms of making sure that we’re making business easier for our advisors to do with us, and so there will be some ongoing investment in the broker-dealer as we plan to look at even more efficiencies in that area. So those are a couple of areas of investment that we’re looking at currently.

[Bill Katz:]

Okay. And just a follow-up. If we ran the numbers correct based on what you disclosed for AUM as I guess this morning, it looks like you are a bit higher than $500 million of outflows in the month. I was wondering if you could give some color as to is that a reasonable calculation? And then if that's the case, where you are seeing the attrition?

[Phil Sanders:]

Could you repeat the question Bill?

[Bill Katz:]

Sure. Just trying to figure out what your quarter date flows are? It looks like based on the math that you had somewhere north of $500 million of outflow through the update this morning for the month of October. Just wondering if A, if that's a reasonable estimate; and B, if that is reasonable, where are you seeing the attrition. If you could maybe spread it out across the different distribution segments would be helpful.

[Phil Sanders:]

I think we're trying to reconcile that.

[Brent Bloss:]

Give us one minute.

[Phil Sanders:]

Give us one minute and we will come back to that Bill. I think we disclosed, we ended the quarter at 80.9 billion and then as of this morning 81.2 billion. So, Tom is looking at a couple - give us one minute, we will come back to you Bill an answer that question. Okay.

[Bill Katz:]

Okay. Thank you.

[Phil Sanders:]

All right, thank you.

[Tom Butch:]

We will go to the next question, then we will circle back to Bill.

[Operator:]

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

[Michael Carrier:]

Thanks guys. Brent, just one quick one on the capital policy and just more of a detail question. But in terms of the buybacks, anything changing on like the grants per year? I think you guys historically have been maybe in that like $1 million to $2 million per year. But just so we know from a net basis. And then on the credit facility, it looks like that was just an update, meaning you were looking at everything overall and that was going to expire next year. So, you reengaged on that front and updated that, but just wanted to make sure there was nothing else there on the facility front?

[Brent Bloss:]

Good morning Michael. On the restricted chair front, we issued around 1.6 million [ph] in restricted shares last year, I mean if you do that math based upon the current stock price to about little over $30 million that we would normally, that we did under our prior policy of buying back stock to offset the dilution, so that gives you an idea. I don’t expect that to change much, as we go forward and as you restricted shares somewhere in that neighborhood. On the credit facility it is really just a renewal. That facility has been in place since the company went public in 1998. I mean it is really a backup facility. We have never drawn a time on the facility. So, it’s really there as a backup facility. It can be expanded even though we reduced it from 125 to 100. We can still expand it to 200 million, but our expectations are not to use it, it is just a backstop facility. So, nothing to the renewal of that, just downsizing it a bit because - again we’ve never tapped it in the past.

[Michael Carrier:]

Got it. Makes sense. Okay, and then just as a follow-up. In the advisor channel, when we look at what - a lot of the moving pieces that are going on. And as a part of that distribution becomes open architecture, just wanted to understand, as some of those assets go into third-party funds, how do the economics shift in terms of like the management fee that maybe you obviously you don't get, but the advisor fee or the asset under administration fee you get? And then I guess the cost associated with the asset in a proprietary fund versus a non. So, I know there is a lot of moving pieces, but just trying to look at that net impact as some of the assets shift. Because we can obviously see the flows in the assets, but the economics will matter over time.

[Brent Bloss:]

I will take a shot at it. I think the simplest way to put it is, any migration of assets from our fee-based platforms to the open architecture platform where you are selling into nonproprietary funds, in order to make up the delta from losing the management fee our calculations show that you’d have to sell about 3×321 [ph] of nonproprietary product or proprietary product to make up the economics. So, losing the management fee is obviously a big driver of that. So that is why I think it is important as we look to the future and the broker-dealer is driving the - we have to drive the pie bigger and the AUA number becomes even more important in that channel.

[Michael Carrier:]

Got it, okay. Thank you.

[Tom Butch:]

Hey Bill, this is Tom getting back to your prior question, which I apologize for not A, hearing properly the first time; and B, not having at the ready the second. Looking at October, which I think is the question that you asked, there is nothing that appears to be outstanding in that number. These are, I think in the wholesale and advisor the retail unaffiliated and broker-dealer channels. The results look to be pretty much in line with months of the prior quarter. The largest of the outflow high at this point was in the institutional side, but again even if it does not appear as though on a monthly basis it will be a particularly old size to the months of the prior quarter. So, I would say it is outflows in each of the channels to date not remarkable in any sense driven I think in the largest sense by institutional.

[Phil Sanders:]

Okay. Next question.

[Operator:]

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

[Dan Fannon:]

Thanks. I guess I wanted to talk about gross sales and what you guys are doing to ignite or potentially ignite that dynamic. In particular with the wirehouses, is there - talk about how those relationships have changed. And I guess they've historically been very meaningful for you and how - what you are doing to potentially incentivize those or get those gross sales going.

[Tom Butch:]

Yes, it’s a great question. This is Tom. Broadly in the wirehouses, I think couple of things are worth noting. We are still a major participant in each of them, I think our access, our brand in them remains, each of those remains very strong, couple of the things that have happened as you know is, some of them have gone through our rationalization process, we had some products which predated that and others of lesser importance less important from a sales perspective that also were affected by that, but they remain a very important part of our sales mix. So, I would say that other firms also have become very important, some of the financial planning firms and especially the RA piece of our business have become important. I think as we look towards the near future, couple of things are worth noting. I talked about in my opening remarks, the fact that certain of the other products beyond the two that have really driven sales emerging markets equity and international core equity seem to have the potential to us to be brought into broader distribution. As you know, one of the largest categories that seems to not be subject to some of the pressures that equities domestic equities have been from passive are the high-quality fix, we have a couple good entrants there, which we central to our sales efforts as we go into the fourth quarter and into next year. We have a couple of products that now are maturing and have been in existence long enough to get a better look from our distribution partners. We have searches underway for a number of those products at a number of firms and we are hopeful that those result in getting products into distribution. The third thing I would say is that we’ve made a pretty significant investment in sales and data technologies, which will drive I think more effective and targeted selling as we enter next year and will enable us to be a little more prescriptive relative to where we take our products by firm and by the products that we emphasize. I think the shelf of what we have available to us to take to market is refilling in a constructive way and we now have sort of those sales architecture, and I think to do that in a more effective way going forward. You do talk about the wires and all the firms wanted to - we talk a lot about rationalization one of the other things that has become somewhat a challenge as getting products into new distribution, which used to be a relatively simple process as adjudged by time and market and AUMs or there are many more factors that now go into adding products to platforms and that too has to be a major emphasis of what we do.

[Dan Fannon:]

Great, thanks. And then Brent, just as a follow-up. The one-time items in this quarter, I believe they totaled about $4 million in terms of the expenses. Just curious as we think about - I think a couple of them are headed - are going to continue into the fourth quarter. If you could just highlight what we should think about kind of sequentially for expenses.

[Brent Bloss:]

Yes, I think in terms of the 401(k) contributions, the additional discretionary contribution that we disclosed in the last quarter there was a couple of million related to that in this quarter that will go up by about 4 million in the fourth quarter, also offsetting that though is now that we’ve frozen the pension plan will have a reduction in pension expense of about $3 million in the fourth quarter. So, maybe in additional net 1 million related kind of around the pension freeze. We will continue to have DOL and Project E cost through the end of the year expect those to be in the million-dollar range and I think that - potentially some severance in the fourth quarter, but it was a couple of million I believe in this quarter, but I don't expect, maybe potentially another million in the fourth quarter.

[Dan Fannon:]

Okay, thank you.

[Operator:]

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

[Kenneth Lee:]

Thanks for taking my question. I think in the past, management has stated that the level of cash on balance sheet and most of the investment securities on balance sheet could be used as potential resources for share repurchase. Just want to make sure that’s still the case, and whether the total resource is still a little over $900 million or so?

[Tom Butch:]

Well of the 900 million we have dedicated feed money of little over 300 million we have some obviously some capital requirements because we are a broker-dealer, we have a couple of broker-dealers which allocate another 100 million to that. And then of course we will - we have disclosed we are going to pay down the 95 million in senior notes at the beginning of January 2018. So, giving us a little cushion of working capital of couple hundred million there is probably 300 million available to do - in excess I would expect at this point on the balance sheet.

[Kenneth Lee:]

Okay, great. And just want to follow up on the inorganic growth opportunities that was mentioned earlier. What sorts of opportunities would the company be focused on? Thanks.

[Phil Sanders:]

Well I think we have mentioned in the past, I think we are open - more open, I think given the environment towards opportunities whether it’s smaller firms or boutiques or something like that or a lift outs or certain capabilities or strategies that would be complementary to our product line up in our culture. We've also in the past have worked with partners in different relationships and potentially there could be some opportunities there. So, I think we are taking a look at different things in evaluating them, but obviously we will be selective and want them to be something that will be good for our clients and shareholders, but I think we have the flexibility and the openness to evaluate different things, and I think I will just leave it at that, but we will see what opportunities present themselves.

[Kenneth Lee:]

Okay, thank you.

[Operator:]

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

[Chris Shutler:]

Couple of questions on the advisor channel. First, it sounds like a lot of the smaller advisors are going to have to join teams. Can you just talk about what you are doing to facilitate that process, make it easier for the advisors? And what's the date by which they need to hit the asset cutoff?

[Phil Sanders:]

To answer your question sort of in reverse order, there are multiple changes at each of the next four years and so we’ve consciously tried to grade the new minimums in a manner, which gives advisors the best possible opportunity to meet them. So, they grade in over the next four years. Those are the multiple cut-offs. Second, relative to teaming really that is driven substantially by one, advisors themselves, those who have teams and are looking to fill out their team either with production or particular skill set that may be relevant to the context of what they’re doing perhaps a specialist role and financial planning or a particular product or in technology, advisor technology, whatever it may be and it’s also driven by complex managers. We are also engaging multiple teaming models that give - that time will give the advisors bringing new team members in and those seeking to find teams different ways of structuring that so it’s normally a process that has been driven out in the field. As we mentioned, we have a new market structure wherein we have local market complex managers who will really play, I think an important role in facilitating this in each of our 30 markets.

[Chris Shutler:]

All right, thanks, Tom. And then to follow up on that, how many I guess new experienced advisors are you targeting to add? I know it is sort of an evolving process, but how many do you hope to add, I guess, or targeting to add each year going forward? And how should we think about the transition assistance types of payments that you are making to advisors these days?

[Tom Butch:]

To answer the first question, given everything that has been going on and getting the market structures in place, recruiting has been subdued both for new and experienced folks this year. We had set out with a goal of doing up to 60 experienced people this year. We will not hit that goal and I think as we look to next year, you could sort of use that as a baseline from which to start - was our intent to hire 60 experienced from 100 new advisors this year, effectively two and three respectively by market. Our managers do have the opportunity to create some level of financial incentive to bring people into the market or into their complexes, they are managing each of their own P&L’s and will take that into account. In so doing, you know this waxes and wanes in the industry. We are in a period of it waning, I think, and we have never been in a place where we want to broadly to outsized financial support, but some degree of transition support sometimes does make a difference. What we're really trying to do is put forward our culture, our platform, local leadership, and all the resources we bring to bear. We don't want it to be a purely financial decision.

[Chris Shutler:]

All right, thank you.

[Operator:]

And ladies and gentlemen, we have reached the end of the allotted time for today's question-and-answer session. At this time, I’d like to turn the conference call back over to management for any closing remarks.

[Phil Sanders:]

Okay. Just wanted to thank everybody for joining us today. Obviously, there is a lot of new information here and we will be available for any follow-up. You can reach out to Nicole or the team and look forward to catching up to you soon. Thank you very much.

[Operator:]

And ladies and gentlemen with that we will conclude today's conference call. We do thank you for attending. You may now disconnect your lines.