Waddell & Reed Financial Inc
Q4 2017 Earnings Call Transcript

Published: 30 Jan 2018

[Operator:]

Good morning, and welcome to the Waddell & Reed's Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Nicole Russell, Head of Investor Relations. Please go ahead, sir.

[Nicole Russell:]

Thank you, and on behalf of our management team, I would like to welcome you to our quarterly earnings conference all. Joining me on our call today will be Phil Sanders, our CEO, Brent Bloss, our CFO and COO ; Shawn Mihal who leads our Broker/Dealer, Nikki Newton, who leads our Sales Distributions and Product Development Efforts, and Ben Clouse, our Chief Accounting Officer. Before we begin, I would like to remind you that 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 that we reference in our public filing with the SEC. We assume no duty to update any forward-looking statements. Materials relevant to today's call, including a copy of the press release and supplemental schedules, have been posted on the Investor Relations section of our website at ir.waddell.com. Let me now turn the call over to Phil

[Phil Sanders:]

Thanks, Nicole. Good morning, everyone and thanks for joining us. Today we reported quarterly net income of $30 million or $0.36 per share, which included several items that in aggregate reduce net income by $11 million in earnings per share by $0.13. Brent will expand on our financial results later in the call. Assets under management ended the quarter at $81 billion, largely unchanged compared to the previous quarter. At the close of business yesterday, assets under management were just under $85 billion. I would like to focus my comments this morning primarily on the progress we have made in 2017 and the challenges that remain ahead. The past year was one featuring significant change for our company from a regulatory, operational, and organizational perspective. After undergoing a complete review of all aspects of our operations, and developing a set of corporate strategic initiatives that we’ve discussed in detail on prior calls, we began 2018 with greater clarity and focus. We made significant strides in strengthening our investment management organization by investing in our people, technology, resources, and risk management capabilities. We also made and continued to make meaningful progress toward improving the competitiveness of our broker/dealer through modernized operations and enhanced product offerings that benefit both advisors and clients. Operational efficiency is key to supporting these investments in our asset management and broker/dealer operations and we are well on our way to becoming a more streamlined organization. Despite this progress, we understand there is much more to do and are committed to achieving our objectives. In addition to these developments, we enter the year with key changes to the executive management team and structure that we expect will provide greater support to our growth, productivity, and profitability initiatives. As you know, Brent Bloss was recently named Chief Operating Officer. Brent will be responsible for the day-to-day management of the company’s operations. He will continue his role as CFO through the filing of the company’s 2017 annual report. Ben Clouse, currently, our Chief Accounting Officer will succeed Brent as CFO. Other key appointments include Shawn Mihal, who will lead our Broker/Dealer and Nikki Newton who will be our Sales Distribution and Product Development efforts. I am confident that each of these individuals brings depth of knowledge, expertise and passion that will serve our company, clients and stockholders while as we face the opportunities and challenges in front of us. Finally, we enter 2018 with greater financial flexibility after implementing a new capital return policy which included in an adjustment to our dividend level and the announcement of our intention to opportunistically repurchase $250 million of our stock over the next two years. As previously indicated, we believe this more balanced capital return policy provides greater flexibility to maintain top rate investment capabilities, provides C capital for new product initiatives, pursue inorganic growth opportunities, and fund accretive share repurchases. Importantly, it will also allow us to execute on our corporate strategy even during times of market stress. Clearly, recent tax law changes are a positive for our company and will serve as an additional enhancement to our financial flexibility. Turning back to the quarter at hand, we experienced a modest deterioration in the sales and redemption metrics within our retail unaffiliated channel. After showing meaningful improvement throughout much of last year, our progress stalled in the fourth quarter. While sales momentum remained strong with our emerging markets equity and international core equity products and we are seeing some attraction in our small cap strategies, the broadening out of our sales growth remains a key priority. Realizing that sales and investment performance work hand-in-hand, Nikki and I are working closely together to take a fresh look at everything – fresh look at evaluating both products focus and distribution strategies. Getting the right products in the right distribution channel with the right sales approach is essential. We believe we have opportunities beyond the traditional wholesale channel that we can more fully develop over time. Additionally, better use of technology and data to direct our sales efforts and properly aligned incentives for our people is our primary area of focus. Sales and redemption trends within our broker/dealer were generally consistent with recent trends and our expectations. Shawn will provide some additional color here in just a moment. Consistent and strong investment performance is essential to support our sales effort and here we have more to do. While we have made clear progress, we understand this is not something that happens overnight. We have a healthy number of strategies with competitive track records over multiple time periods, but understand the need for that to translate across a broader array of our product set. Our top 10 investment strategies comprise over 70% of our assets under management at year end and of these top strategies, seven out of ten saw an improvement in both their one and three year track records within their respective Lipper and Morningstar universes. While this is encouraging, we need to continue to drive progress on the performance front. Next month, we will close the mergers of all remaining, Waddell & Reed Advisors Funds into the Ivy Funds providing greater brand leverage and for fund holders cost efficiency. Next month, we will also complete the merger of the Ivy Dividend Opportunities Fund into the Ivy Global Equity Income Fund. As we continue to evaluate our product offerings and move toward team managed portfolios, we anticipate that there will be additional opportunities to rationalize our product line over time. This ongoing review of our product line will also make room for select new product introductions. The key here is to build a framework for long-term success where our product line-up is built around their firm’s competitive strengths is properly resourced and serves client needs. Let me now turn it over to Shawn for an update on the evolution of our broker/dealer business.

[Shawn Mihal:]

Thanks, Phil and good morning. Our broker/dealer ended the quarter with $56 billion in assets under administration. The 2% increase compared to the prior quarter and the 10% increase compared to December 2016. Underwriting distribution revenues were $110 million during the fourth quarter, a 3% increase compared to the third quarter. For the year, U&B revenues were $425 million, compared to $436 million for the $12 month ended December 2016. Average productivity per advisor rose $77,000 during the quarter for an annual total of $270,000 in 2017, up 11% compared to the prior year. Advisor headcount ended the year at 1367, a reduction of approximately 400 advisors since December 2016. Two-thirds of advisors departing over the last 12 months at annual productivity of less than $75,000. As we previously discussed, we have forecasted a decrease of lower performing advisors and a corresponding increasing in average advisor productivity as the broker/dealer continues to evolve respective to our strategy. The key strategic goal set forth by Phil and the executive team is to transform the broker/dealer and show profitable and sustainable entity. Changes associated with the evolution of the broker/dealer are necessary if we have to remain competitive in the future and understandably we’ll come with a period of transition. The two most visible areas were changes are manifest as R&D greater usage of unaffiliated products following the introduction of a new advisory program within the classic channel and the continued decline of advisor headcount associated with increased production standards we are implementing. Project E in which the E stands revolution has set the stage for our future success. Over the last two years, we have undergone significant business process upgrade in the classic channel. We introduced a new advisory program that gives classic advisors greater access to unaffiliated products. We completed a rebranding of Waddell & Reed to provide the strength of recognition of our broker/dealer from our asset manager and we transformed our approach to programs and services to provide greater flexibility of financial advisors and tailoring the services they elect to receive specific to demands of their practice. With the framework now in place, we are focused on enhancing the client experience. We have begun the evaluation of our advisory programs with an end global launching of suite of services that respond to a wide range of needs including low balance accounts, tech savvy investors and high-end, high touch clients. Going hand-in-hand, with these efforts as the desire to maintain advisor satisfaction, we continue to drive systems and platform efficiency that delivers ease of doing business to our financial advisors and to offer a service model that could be tailored to meet their individual needs. Among the greatest change we are seeing so far is the teaming of advisors, which is standard practice for the industry. Our former model retained advisors with lower productivity. However, as we transition toward a self-sustaining business model, we are elevating our minimum productivity level to industry norms. Over the last year, advisor headcount has declined 23% and we expect to see further attrition in 2018 as minimum productivity levels continue to rise. Concurrent with the rationalization of advisors, advisor associates were licensed and support lead advisors increase from 221 to 265, a 20% increase from December 2016 to 2017. This move in a low producing advisors to advisor associate roles has led us to maintain accounts and assets within our broker/dealer despite net advisor headcount attrition assets under administration rose 10%. Now let me turn it over to Brent.

[Brent Bloss:]

Thanks, Shawn, and good morning everyone. I would like to begin my remarks today with an overview of our fourth quarter’s results followed by some brief comments of my transition from CFO to COO. As Phil noted, net income during the quarter was $30 million or $0.36 per diluted share. The quarter included a number of items that have secured underlying operational results. The December enactment of the Tax Cut and chop back required us to revalue our deferred tax assets to reflect a lower federal tax rate in the future. This revaluation resulted in an increase in tax expense of $5.4 million during the quarter. Separately, we recorded an additional $1.8 million in tax expense related to the vesting of share-based compensation during the fourth quarter. The change in pension accounting noted in this morning’s press release resulted in an additional cost of $5.9 million or $4.5 million net of taxes during the quarter. In aggregate, these items lowered net income by $11 million or $0.13 per share during the fourth quarter. Operating revenues of $294 million rose 2% sequentially, benefiting from higher levels of assets under management as financial markets rallied in the year end. Operating expenses were up sequentially due to the pension-related adjustments, which also created changes to our operating results in prior quarters due to the retrospective application of the change to mark-to-market accounting. Progress continues in our efforts to focus on cost efficiencies, as well as prioritizing investments in the business, we are well on our way to achieving our goal to add $30 million to $40 million in pretax income on a runrate basis by 2019. During 2017, we restructured the broker/dealer field organization and froze our pension plans. These two steps have reduced the runrate for operating cost by approximately $20 million. In addition, we paid off half of our senior debt at maturity two weeks ago and continued to invest in a Waddell fixed income investment portfolio to optimize the return on our cash. These actions will collectively result in an additional $10 million to pretax runrate depending on the pace of share repurchases and other cash needs. We have a number of other initiatives underway and we’ll continue to work towards our cost savings goals which we fully expect to realize in our runrate in 2019. As outlined in our release, we expect a significant reduction in our effective income tax rate in 2018 which will enhance our earnings power and gives us additional flexibility and pursuing corporate initiatives. With a strong balance sheet already in place, savings will enhance our ability to make strategic investments in future areas of growth in our business and potentially accelerate the pace of our return of capital to shareholders through opportunistic buybacks. In the coming weeks, the Board – with Board approval, I will transition my responsibilities as CFO to Ben and turn my focus to driving the operational component of our corporate initiative. Ben has been actively involved in all aspects of finance and capital management since his arrival at Waddell & Reed and he maintains a leadership role in our enterprise project management organization helping ensure efficient allocation of corporate resources. Ben is a strong leader with an experienced finance team behind him and I am confident this will be a seamless transition. We have work to do reposition our company for success and continue to seek opportunities to run our operations more efficiently, while also investing in future growth. Enhancements to our capabilities for data and predictive analytics are a must for us to compete into the future. We currently have projects underway to streamline our data aggregation capabilities to put better data and access in place for our investment management and risk teams. We recently converted to a new CRM system in our unaffiliated distribution channel that will allow a more focused sales and retention effort into the future. We also plan to make meaningful investments in our investment management team throughout 2018. Our broker/dealer is undergoing a period of transformational and strategically necessary change. As Shawn discussed earlier, we are making a number of changes in how we can tuck business through our broker/dealer to ensure that we remain competitive and maximize client success. We are fully committed to our brokerage business and we’ll continue to make the necessary investments to make Waddell & Reed a broker of choice for the future. I will now turn it back to Phil for closing remarks.

[Phil Sanders:]

Thanks, Brent. As outlined in our comments, 2017 was a year of significant change for our company. We are making good progress in transitioning our business model one built around a premier asset manager as well as a fully competitive broker/dealer. We understand this is a process that will take time. We believe we have the strategy, financial resources and commitment and dedication of our employees to achieve our goals. Before opening the call for questions, I would like to acknowledge the many contributions Hank Herman made to Waddell & Reed during his 45 year plus association with the company. As you know, Hank will be retiring from his role as Chairman of the Board after our annual Stockholder Meeting in April. We thank him for his dedication and support over the years and we wish him all the best in his retirement. Operator, we would now like to open the call for questions.

[Operator:]

[Operator Instructions] The first question comes from Chris Shutler with William Blair. Please go ahead.

[Chris Shutler:]

Hey guys, good morning. On the institutional pipeline, maybe just talk about that a bit, what strategies, both institutionally and the intermediary channel have the most promise for net inflows in your view?

[Nikki Newton:]

Good morning, Chris. This is Nikki. In the institutional channel, as far as the pipeline, I will start, for 2017 I think it was relatively soft. Although we did have a couple of opportunities in the fourth quarter one which we actually did win and we fund I think here in the first quarter. Secondly, as it relates to intermediary, I think we – for the most part have settled on 2018 with a focus on eight strategies, ranging from large to small and international small caps.

[Chris Shutler:]

Okay, and can you size that one for the first quarter and then I also want to ask in the affiliate broker/dealer channel a couple of questions there. How much of the – what percentage of the commissionable sales were proprietary funds in the quarter? And can you talk about net new asset growth this past year relative to market appreciation?

[Nikki Newton:]

Sure, I’ll answer the first part and I think Shawn will take the second. $50 million was the institutional win.

[Chris Shutler:]

Okay, thanks.

[Shawn Mihal:]

Hi, Chris, this is Shawn. Can you provide that follow-up question one more time?

[Chris Shutler:]

Yes, sure. So, in the broker/dealer channel, the advisor channel, just couple of questions. One was the percentage of commissionable sales coming from proprietary funds and the second one was how much – if you look at the AUA change over the last year, how much of that was kind of net new asset growth or decline and how much was markets?

[Shawn Mihal:]

I don’t have that number in front of me, but it’s something that we’ll go ahead and pull and get back to you.

[Chris Shutler:]

Okay, thank you.

[Operator:]

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

[Craig Siegenthaler:]

Thanks, good morning, Phil, Brent. Hope you guys are doing well.

[Phil Sanders:]

Good morning.

[Brent Bloss:]

Good morning, Craig.

[Craig Siegenthaler:]

So, just to start off, the percentage of proprietary product in the broker/dealer channel, it ticked down to about – we are calculating around 77.1 from 78.4. I am just wondering, can you talk about what moved the share Waddell Funds lower in your broker/dealer platform?

[Shawn Mihal:]

Good morning, Craig, this is Shawn. As we’ve been reporting over the course of last couple of quarters, with the expansion of our advisory offerings in the classic channel and with exposure to unaffiliate products we’ve seen some flows moving from our proprietary asset base, primarily within our MAP program and within our commissionable products, moving into the unaffiliated funds that are associated with the new advisory program in our classic channel. So with that, we are continuing to see some flows that are precipitating there the reduction in overall proprietary assets under management.

[Craig Siegenthaler:]

Got it. And if I kind of think about it the other way, fee-based accounts in this same channel, with your broker/dealer channel, they grew by almost 100 basis points. Can you talk about the underlying sort of programs that are sort of driving that growth and what that could also imply for the share of Waddell & Reed Funds?

[Shawn Mihal:]

Sure, we are seeing a positive growth inside of our classic advisory channel, where we are seeing inside of the program that we launch MAP Navigator last year where we are seeing additional monies flowing into that from other sources as well. So we are seeing an uptick in overall AUA in total inside of our advisory programs. We have also had some limited exposure of some of the classic advisors using another advisory program MAP Latitude that has allowed them to gather some additional assets under management and AUA as well as with regard to acquisition of some opportunities that they didn’t have available to them before. So, those two things collectively are driving the overall increase in AUA inside the broker/dealer channel.

[Craig Siegenthaler:]

Great. Thanks guys.

[Operator:]

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

[Daniel Fannon:]

Thanks. I guess, first, just in terms of 2018 in expenses, Brent, can you kind of talk about there is obviously a lot of moving parts, but if you could talk about the kind of underlying growth rate we can think about the kind of fixed cost base and also give us an update, you’ve made progress on your goals of some of the synergies, but can you give us actual numbers of kind of like the starting point we can think about from a fixed cost base as well ending 2017 and into 2018?

[Brent Bloss:]

Yes, good morning, Dan. In terms of the fixed cost base, I think I’ve guided in the past that that number is about - the base is about $460 million. I disclosed in the last quarter that that would – in 2017 would come in about $20 million higher than that because of special items. But, in the fourth quarter, because of the pension, mark-to-market, there was about a $20 million credit as you’ve probably seen in the financials that were recast. So, we ended at about $460, so that’s still the base. We are working off of. So with the reduction in the pension plan, expense of $10 million, as well as some of the changes we made in our field structure, and our broker/dealer us and other $10 million that we’ve disclosed. So, I look at that base or to guide those fixed cost going forward, at around $440 million range for 2018. We hope to – with some initiatives going on and we’ll give updates as we go here but we are hoping to do better than that even because we have disclosed we want to get to a runrate of $30 million to $40 million decline that fixed cost base by $30 million to $40 million, we hope to achieve that by 2019. Is that helpful?

[Daniel Fannon:]

Yes, but if just sort of thinking about – because obviously markets are being constructive just from a discretionary perspective, I guess, is there that’s an all income that we should think about I guess for 2018 is that you are still tracking to that all in including whatever core expense growth you might have plus these initiatives? Is it, right?

[Brent Bloss:]

Right, that’s built into our forecast, Craig.

[Daniel Fannon:]

Okay. And then, also just on the management fee side, in terms of some of the things you’ve disclosed, that will be coming out. Has that – when did the management fee changes go into effect? Was it partially in the fourth quarter? Is that all kind of coming in 2018 and also there was a comment that potential other fund mergers that you guys will be contemplating as you evaluate your product line-up. Is that something we should also be thinking about for latter part of 2018 or beyond that?

[Brent Bloss:]

Yes, I’ll take the first part of that. Yes, we are – there were some fund mergers in the prior year that are in the runrate management fees currently, but the most significant mergers will be coming up here in February and we are still sticking by our guidance of $10 million to $12 million and reduced management fees from hitting breakpoints once we merge those funds. So you’ll have a revenue decline in 2018 in that range of $10 million to $12 million. And then, Phil, I don’t know, if you want to talk about other mergers?

[Phil Sanders:]

Well, I think those will be kind of reviewed in an ongoing basis. We don’t have anything to announce this morning, but as part of just kind of the realities of the industry we operate in and the consolidation of offerings across platforms and that type of thing, we are always evaluating our products in terms of their viability, their critical mass and acceptance in the marketplace. So this will be – I don’t anticipate anything that would be dramatic in or shattering on a quarter-by-quarter basis. It’s just more of an evolution consistent with what other investment firms are doing in terms of the current industry dynamics. So t hose will be more incremental and evolve over time.

[Daniel Fannon:]

Got it. Thank you.

[Phil Sanders:]

Yes.

[Operator:]

[Operator Instructions] The next question comes from Glenn Schorr with Evercore ISI. Please go ahead. Mr. Schorr, your line is open or perhaps your phone is muted.

[Glenn Schorr:]

Apologies. Curious on what’s going on with some of the largest distributors. I think a quarter two ago, you gave us some details on them calling their product list. It seems some more things in the news just as a general comment. Curious what you’ve seen in the most recent quarter in terms of broker/dealers calling prior, and how it might be impacting you all?

[Nikki Newton:]

Good morning, Glenn, this is Nikki. I don’t think we – I don’t think our expense is much different than anyone else’s. Distributors are calling. Fortunately for us, I don’t think it’s been a meaningful percent of our assets. Certainly not in the fourth and even with the movement that Morgan Stanley recently announced. So, not a meaningful impact at this point.

[Glenn Schorr:]

Okay. And just a quick follow-up on the comment you made, you guys made earlier. I think you said, just under $85 billion as of yesterday, that’s pretty good versus where you went out at the end of the year. Is that mostly markets? Do you have anything you could tell us about flow so far it looks like it could possibly in for positive flows?

[Phil Sanders:]

Well, this is Phil. I’d say, it’s generally market-driven. Equity markets as you know have been strong. The bulk of our assets are equity-driven. In terms of flows, maybe the only color I might offer is that I think, with respect to what we are experiencing, the early part of the year from a wholesale perspective, we’ve seen some sequential improvement in the sales and redemption metrics. And so, as I mentioned, the fourth quarter was a little bit of a setback for us relative to the third quarter. We still are in outflow mode. But the metrics are a little bit sequentially improved versus the fourth quarter. Broker/dealer trends consistent with what we’ve been experiencing nothing too dramatic in institutional. So, the bottom-line, I’d say, still outflow in the month of January, most of the improvement in total assets under management driven by the market.

[Glenn Schorr:]

All right, thanks very much, Phil.

[Phil Sanders:]

Welcome.

[Operator:]

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

[Bill Katz:]

Okay, excuse me, thank you very much. Just in terms of capital management, it looks like you started the repurchase program, how do you think about your – to go for few different things between inorganic growth, C capital, obviously the enhancement of earnings through the lower taxes, how should we think about capital management from here and the timing on the initial $50 million of repurchase?

[Phil Sanders:]

Okay, Bill. This is Phil. I think, we have a fair amount of financial flexibility. So all of those things are – I don’t think any of them are mutually exclusive. But I think you can count on us to be kind of persistent and active in terms of the share repurchase we announced at the end of – towards the end of October. So, as we move through the year, we expect to be active kind on a consistent basis. Obviously, we’ll be selective if we see opportunities has stepped up given share price or market volatility, we can do that if there is opportunities to pull back, we will do that as well. But that’s something we are committed to over the next couple of years. Inorganic growth opportunities, other investments that type of thing, again, our balance sheet remains very strong. The tax law changes are a positive. So, all of these things I think we will be in a position to act accordingly when the opportunities present themselves. And so, I just think it’s hard to predict when these things happen, but I don’t view any of them as mutually exclusive.

[Bill Katz:]

Okay. And then, my follow-ups will be more targeted in nature, I think you mentioned a bit more segmentation within the retail broker/dealer model, potential, I think the low end and the high-end of the client base. Can you talk a little bit about the pricing at – so the advisory fee price you are charging on average and how you saw things at that trends over time, it looks to us to be little bit off market relative to some of your key peers and trying to thinking about just sort of a net economic impact of that segmentation process?

[Shawn Mihal:]

Yes, Bill, good morning, this is Shawn. So, first part of that is just with regard to the overall outlook as suite of advisory programs. We are going and taking a look at what we have currently offer today and for the future so that we can broaden out the suite of advisory programs with respect to being able to have programs available for lower balance type accounts which has been more robust type platforms that we’ve seen come to market. And then expansion on the higher end with regard to greater offerings and the estimates base. We’ve launched an initiative that we announced as part of Project E with invest net, and invest net has a variety of different opportunities around it for the higher end platforms with SMAs. We’ve currently used that some other programs for that in the past but we are looking in for some opportunities there and that we are certainly looking across that spectrum to the lower balance accounts for as the market continues to shift around advisory programs to be enable to provide additional advisory services. We’ve seen a significant uptake in our MAP SPA program which is a model management program. But, it’s not economically viable to rollout to those extremely low balance accounts. We want to try to find some space in that market as well. With regard to advisory fees, our advisory fees, we’ve done some reviews of those and feel that we are competitively priced in that space. Our advisors and their clients have ability to negotiate those fees up to a certain tier point. So each program had some different pricing associated with the functions and features of those programs. We continue to look at advisory fees from competitive natures and obviously the market drives those competitive natures with clients. But representative to our peer groups, we’ve reviewed what’s available in the market respective to our advisory programs and think we continue to be in a space of having competitive fees. We did open as you are likely aware last year to more of a negotiated fee schedule. So historically, we did have a preset fee schedule. The fee schedules that are associated with our advisory programs now are negotiated with clients. So there has been some adjustments being made around those as advisors are competing for business and we anticipate that will continue into the future.

[Bill Katz:]

Okay. Thank you.

[Operator:]

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

[Patrick David:]

Thanks for taking my questions. So, you have been talking about a loss – if I guess, $1 billion to $3 billion of proprietary assets through the opening up of the architecture. Is that broad estimate still the same? How much do you think we are through that now? And going back to that 77.1% proprietary number, you mentioned earlier, where do you think that stabilizes when that whole process shakes out?

[Shawn Mihal:]

Yes, Patrick, this is Shawn. Yes, I think we are tracking. We’ve previously discussed a $1 billion to $3 billion range over the course of about 12 to 18 months as the architecture broadens and that’s been primarily through the MAP Navigator program. And so we think we are still tracking towards that and we’ve seen over the course of about eight months or so since that program was launched in the neighborhood of about $1.4 billion has transferred. But of that, some of that’s rationalized with respect into affiliated products inside of that navigator program. So while we’ve seen the movement of those assets from other proprietary model programs that’s been moving into and offering MAP Navigator that also has affiliated funds. So we’ve seen about $500 million that’s been retained inside of affiliated funds. So with that, we are seeing that’s tracking to what we previously forecasted. We expect and what we’ve been modeling into the future is that there will be a modest decline in exposure of proprietary assets inside the broker channel. The broker/dealer channel as we continue to expand our product offerings with respect to unaffiliated products being inclusive inside there. So we will continue to monitor that as we go forward. But we think we are tracking on target with the estimates that have been provided previously.

[Patrick David:]

Thank you.

[Operator:]

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

[Kenneth Lee:]

Thanks for taking my question. As you think about potentially broadening the asset mix and then overtime at rationalizing some products as well, what are some – in terms of your initial thoughts, what are some potential products or categories that could get introduced or rationalized? And in terms of the new product introductions, with these largely be sort of sub-advice kind of products or more proprietary products? Thanks.

[Phil Sanders:]

This is Phil. I think, as far as new introductions, I think, it would be a combination likely of above some sub-advisory relationships, maybe expanding relationships with existing key partners, that’s a potential opportunity. Also, some organic new product introductions that we will do over time, things that fit with our core – we’re kind of focused on things that we think we do well and we have built a broad level of expertise and when I think about that, I think a lot of the core equity strategies and growth-oriented strategies, the international franchise has continued to do quite well with our core and emerging markets funds. Obviously, we have a strong reputation in the credit side within the fixed income market. So, I think complementary products associated with a lot of those core competencies would probably areas of focus. I think potential rationalization, I don’t want to get into products or specifics, I think just generally speaking over time and consistent with what the question earlier was about platform access and that type of thing, that Nikki was referring to over time, if you’ve got products that aren’t at critical mass and you can’t – don’t see the real opportunity to grow them and expand them, it gets challenging. So we want to always make sure we are constantly reviewing our resource allocation and directing our opportunities to strengthen our products in terms of resources and opportunities and growth potential. So it’s always difficult, I think to predict exactly where it will be, but we are constantly looking at opportunities that are complementary.

[Kenneth Lee:]

Got you. Thanks. And just one bit of housekeeping. In terms of the pension accounting change, it sounds that if there is probably going to be a little bit less volatility around the pension expense, then what was disclosed for the 2017 quarters? Just want to make sure if that’s the case, thanks.

[Ben Clouse:]

Hi, Ken, this is Ben. That’s exactly the case, as we are in the midst of derisking the planned assets, we would expect any significant volatility in that going forward for the planned assets.

[Kenneth Lee:]

Okay, great. Thanks.

[Operator:]

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

[Michael Carrier:]

All right, thanks, guys. Hey, Brent, just maybe just a clarification on the kind of the $20 million of runrate savings that you mentioned with the repositioning of the broker/dealer platform and then the pension changes, is that mostly in like the 4Q runrate? And I think last quarter you mentioned that there would be some – like, kind of one-time charges around the pension, I don’t know if that’s separate from the 5.9 that you mentioned. But, just wanted to try to get an understanding of the fourth quarter, is it pretty good runrate a lot of these things being factored in or are there some other items that were in there?

[Brent Bloss:]

Those items would have been included in the fourth quarter runrate, that’s correct.

[Michael Carrier:]

Okay, all right, got it. And then, Phil, just when I think about what you guys have done on the efficiency side, you made a lot of progress there with the balance sheet and capital return. You’ve kind of repositioned there. Just wanted to get a sense, when you look at the tax benefit that you guys get and whether it’s from an expense standpoint or from a capital standpoint, how do you think about maybe, shifting or transitioning the focus over 2018 and 2019 to more growth opportunities versus maybe the past few years where there is a lot of repositioning, whether it’s because of the platform, some of the industry challenges. Just where you think you are going to spend your time and do you see some opportunities for Waddell?

[Phil Sanders:]

Yes, I think that tailors a little bit to the question earlier. I think, fortunately through this transition period, we have a strong balance sheet and a lot of financial flexibility. So, I think the tax benefit we’ve talked a lot internally what that means for us. I don’t think it really will change fundamentally how we manage the company and what our plans are and how we execute upon our strategic initiatives. But it certainly provides additional flexibility and we are constantly looking for opportunities to begin to offense in terms of growth initiatives. We have spent – we’ve been pretty heavily investing within our investment management capabilities and building on our research staff and I think we’ll continue to do add to that in 2018 that remains a priority. But if we see opportunities as we have mentioned in the past with respect to bring in investment capabilities or small acquisitions or anything that can ignite our growth, and give us an opportunity to play a little bit of offense, that’s something we are open to. It’s just difficult to anticipate the timing on those things. But we are definitely looking and we’ll just see what happens.

[Michael Carrier:]

Okay, thanks a lot.

[Operator:]

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

[Robert Lee:]

Great, thanks. Thank you for taking my questions. Maybe going back to the expense question, I mean, quite frankly I am kind of having trouble with squaring the goal of reducing fixed cost another $20 million with the investment spending on and investment staff, the need to invest in data analytics, and technology and all that. So, maybe it’d be helpful to – if we were to assume flat markets next year, so you kind of take out the impact of market movements on fees and some other expense items, would you expect your expenses to be flat, go down, go up, I mean, how should we really be thinking of your expense pattern – not just fixed cost, but compensation and everything. I think that’s really struggling with the $20 million incremental decline given all the things you have going on and the investments you are talking about making.

[Brent Bloss:]

Well, Rob, this is Brent. I mean, I think we’ve – in 2017, we’ve had a lot, lot going on, as you know with DOL, lots of strategic initiatives in the broker/dealer and such and I think those will continue on into 2018 expenses. So as we forecast out, I mean, we only have so many resources in the company to execute on our initiatives and we think those will be fairly flat expenses going forward into 2018. Now, Phil mentioned, we’ll look at enhancing our investment management capabilities and those which we’ve also built in as part of the plan. Again, there is other initiatives we are looking at efficiencies and others to offset some of the investments we plan to make in 2018. So, at the end of the day, I am still comfortable that $440 million fixed cost estimate is in the ballpark of what 2018 looks like in a stable market here.

[Robert Lee:]

Okay, and maybe as a follow-up, so, and I’ll make it the two-parts and so I’ll squeeze in the third in. If we look at the $239 million of operating expenses this quarter, if we back out the pension expense, part A is that indicative – is that a good runrate for those line items? And then separately, on compensation, given the investments you are looking to make in staff, certain staff or making an investment in staff, and I don’t know if you’ve taken steps to share some of the tax cuts with more broadly, should we be expecting that your compensation line excluding impact of markets would tend to rise – should be going up in 2018?

[Brent Bloss:]

I mean, with – I mean, consistent markets here, I would say that the comp line, given the initiatives we have going on is, will not move, it’s pretty stable with the runrate, as well as those fourth quarter expenses I think are fairly stable with the runrate, although we are still looking at other initiatives, which we’ll update you on as we move throughout 2018. We are still committed to the $30 million to $40 million reduction. We’ve hit $20 million, but we expect to hit $30 million to $40 million end of 2019.

[Robert Lee:]

Okay, thank you for your patience with my questions.

[Operator:]

The next question is a follow-up from Bill Katz with Citi. Please go ahead.

[Bill Katz:]

Okay, excuse me. Thank you very much. I hate to beat a dead horse here on expenses, but equally little baffled here I was going on. So, Brent, just on that last point, I didn’t hear quite exactly the 55.3, is that the right runrate a comp? Or is it 55.3 less the 6 for the pension and then that number is flat, so the comp ratio of about 17% of revenue is the way I’d still think about that line item. I am just a little confused on the dynamics there?

[Brent Bloss:]

Yes, it would be less the pension expense, Bill.

[Bill Katz:]

So, that number you think in absolute sense is flat assuming stable markets?

[Brent Bloss:]

Correct.

[Bill Katz:]

Okay, thank you for that. And then the follow-up just, $30 million, $40 million sort of aggregate range, that does seem to be a bunch of things you are doing on the investment spending cycle. So what would put you through the $30 million, so an incremental $10 million versus an incremental $20 million as you think about the business from here?

[Brent Bloss:]

Well, I think there is still – well, I guess, that there is – those initiatives throughout the company that we are looking at, Shawn and I are taking an active look at the broker/dealer and looking at the structure of that as he mentioned in his opening remarks that, we are looking to make that entity a standalone enterprise. And so, we are looking at several different opportunities there. So I think there is more to come on that front as we continue our evaluation. But I think, you will see most of that come from the broker/dealer in the future.

[Bill Katz:]

But that’s embedded in the $30 million, $40 million or is that incremental offset the…

[Brent Bloss:]

It’s embedded in the $30 million to $40 million.

[Bill Katz:]

Okay. All right. Thank you very much. Also thank you for the patience. Sorry to be so pesky.

[Brent Bloss:]

No, you are fine.

[Operator:]

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

[Mac Sykes:]

Great. Good morning, gentlemen. Maybe I just, one of Bill’s earlier comments, I just want to sort of follow-up. Obviously, the analyst community is pretty focused or probably very focused on flows, but Phil, given your investment background, maybe you could expand on how you think about Waddell’s current intrinsic value exogenous of the current flow dynamics and then how would this way into the repurchase activity?

[Phil Sanders:]

Well, yes, I think, it’s kind of an exoteric question. But I think, the way I think about it is, where we have an opportunity here given our cash balance to opportunistically repurchase shares to be accretive over time. We also have – as opportunities present to us with respect to investment opportunities that will grow our long – enhance our long-term positioning, we have the flexibility to do that. So, every quarter and that all the time we are constantly evaluating the trade-offs with respect to how we allocate capital. We have current dividend level that we adjusted last quarter that I think is a really competitive return to shareholders on an ongoing basis. We have the opportunity over time to do some accretive share repurchases opportunistically. And we will have plenty of time – plenty of resources to invest that can enhance our incremental growth. So, I don’t want to get into the discussion of great detail, but I think this is something we are always looking at along with our Board in terms of how we allocate capital and move forward. So, the good news is, through this transition period, we do have the flexibility to kind of pivot and do different types of things to enhance shareholder value over time.

[Mac Sykes:]

Okay. And then, my follow-up, maybe, you did mentioned that you’re talking about the broker/dealer or the advisors being a standalone item, How would that be different than what it is today?

[Phil Sanders:]

Well, I just make one comment and then if Shawn wants to add anything, I think the comment there would be that, historically, our asset manager and our broker/dealer, our broker/dealer basically existed as an asset gatherer and just brought in assets and the total company benefit from the management fees. I think, in today’s world where clients and advisors want more choice and options, we’ve made a commitment to kind of evolve the broker/dealer to make it a more profitable on a standalone basis, in other words, self-sustaining. So, don’t misinterpret that in terms of our commitment to the broker/dealer because we are strongly committed to that. We are just trying to get it to be more of a competitive in today’s world where clients and advisors want more choice and opportunity. I don’t know, Shawn, if you have anything to add to that.

[Shawn Mihal:]

Yes, thanks, Phil. I agree with Phil’s comments with regard to the makeup of the broker/dealer and the demand that we’ve had there and as we’ve seen through the prior year with launch of some strategic programs such as the MAP Navigator program, we are continuing to look at our focus to evolve the broker/dealer to add more competitive programs to the product shelf as well. That’s demand based upon advisors and retention of advisors, acquisition of advisors and then also from a client perspective and the experience the client is looking for with respect to the product shelf that would be available. So as we are looking to do those things, they transition from an asset gather certainly starts to shift the dynamics of this from an overall aspect of a self-sustaining entity. And as we look to do those things, we have to look at the types of services, everything that we are offering inside the broker/dealer in order to provide these types of services to advisors and clients, but also to sustain the broker/dealer with regard to its profit and loss capabilities. So those will be the things that we are focusing on in putting the appropriate investments into the broker/dealer, where those things makes sense to be able to expand out those offerings to drive competitive natures. We are also focusing on the advisors inside that channel, certainly, as we’ve discussed on this call, and prior calls, the transition to higher performing advisors which is, in the past, we’ve been able to support lower performing advisors that comes at a cost and so as we look to move the broker/dealer to the self-sustaining entity, we also have to align and drive that advisor productivity. So we’ll be working with our advisors to help drive that productivity and retain those high performing advisors with the broker/dealer and also look to recruit high performing advisors into the broker/dealer in the future.

[Mac Sykes:]

Great. Thank you and best to Hank, you did buy him a few coffees over the time. So appreciate it. Thank you.

[Shawn Mihal:]

All right.

[Operator:]

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

[Phil Sanders:]

Okay, well, thank you everybody for joining us and appreciate the interest and we look forward to catching up with you next quarter. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.