Waddell & Reed Financial Inc
Q3 2013 Earnings Call Transcript

Published: 29 Oct 2013

[Operator:]

Good morning. My name is Holly, and I'll be your conference operator today. At this time, we'd like to welcome everyone to the Waddell & Reed Third Quarter 2013 Earnings Conference Call. [Operator Instructions] I'd now like to turn today's conference over to Hank Herrmann, Chairman and Chief Executive Officer of Waddell & Reed. Please go ahead, sir.

[Henry John Herrmann:]

Thank you, Holly. Good morning. With me today are Mike Avery, President; Tom Butch, Chief Marketing Officer; Dan Connealy, Chief Financial Officer; Mike Strohm, Chief Operating Officer; Phil Sanders, Chief Investment Officer; and Nicole McIntosh, our VP of Investor Relations. Nicole, would you read the forward looking statements, please?

[Nicole McIntosh:]

During this call, some of our comments and responses will include forward-looking statements. While we believe, these statements to be reasonable based on the 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 referenced in our public filings with the SEC. We assume no duty to update any forward-looking statements. Materials relevant to today's call, including a copy of today's press release as well as supplemental schedules, have been posted on our website at waddell.com under the Corporate tab.

[Henry John Herrmann:]

Thank you, Nicole. Good morning, everyone. As the results show in this morning's release, business momentum continues, driven by a broad suite of products and solid investment performance. Success is reflected in our financial results as nearly all measures reached new high watermarks during the quarter. In particular, earnings per share of $0.80 rose 19% compared to the previous quarter, excluding cost associated with the launch of our closed-end fund during our second quarter or 31% on a GAAP basis while net income of $68 million rose 19% on an adjusted basis and 32% on a GAAP basis. Operating revenues rose 7[ph] consecutive quarter as assets under management reached a new high. Combined with continued capital cost controls, operating income broke the $100 million mark for the first time and our operating margin expanded to 29.8%. Sales during the quarter were $6.8 billion, unchanged compared to the previous quarter and 25% higher than the third quarter of 2012. Net flows of $1.5 billion were more than doubled those in each of the comparative periods. Flows were positive across both equity and fixed income asset classes during the quarter. At 5.7%, we expect our annualized organic growth rate to once again outpace industry trends and most other asset managers. We are encouraged by the sustainability of sales and flows as well as diversities of funds that continue to make important contribution to our asset base. Sale diversification has been enhanced by investors renewing appetite for equity funds and the spend of competitive funds we manage in this asset class. Important net flows have been captured to 8 to 10 funds with most posting top decile or top quartile performance records. Overall, sales were well balanced with 35% in equity products, 32% in fixed-income products and 31% in hybrid products. Our unique distribution model separates from our peers and allows us to outperform independently -- independent of the market trends. Our Wholesale channels have the capacity reserve[ph] assets quickly by taking rich product line to market through third-party distributors. Our Advisor model provides financial stability through the strength of asset retention and modest organic growth. Our Institutional business while less predictable due to the lumpy nature of flows, remains a good opportunity to accelerate our firm's growth. Sales in our Wholesale channel were $5.2 billion and represent a multi-year quarterly highs surpassed only in the first quarter of 2008, when asset strategy was in the sweet spot of market appetite. Despite what has been a start and stop summer for investors, our breadth of products positioned us well to gather assets during the period. Sales from our Advisors' effort totaled $1.2 billion as they continue to focus on the long-term financial plans and needs of our clients. The channel's redemption rate fell slightly to 8.7% as the asset levels rose and redemption activity remained largely unchanged. Our institutional business saw sales of $385 million, but a promising pipeline of new business didn't fund before quarter end. We expect fourth quarter funding to approximate $1 billion, all of which is expected to come in November and December complex wide [ph] October trends were quite strong both on sales and net flows. Assets under management are now at $118 billion. Operator, at this time, I would like to open the call to questions.

[Operator:]

[Operator Instructions] And our first question will come from the line of Robert Lee with KBW.

[Robert Lee:]

It's actually a question for I guess, maybe for Tom, if he was on. Just kind of curious, within the Advisor channel, can you may be update us on little bit of mix of sales there and I guess, I'm particularly interested in the proportion of sales. And also in AUMs that's currently in more of your fee-based product?

[Henry John Herrmann:]

Sure Rob. I think, the 2 questions or the 2 parts of your question are interrelated because as you rightly point out as a percentage of revenues, as a percentage of sales, and as a percentage of AUMs fee-based business in the form of an asset allocation product, which by its very nature allocates across a span of products and doesn't concentrate in any of them continues to grow as a percentage of the business with about 42% of revenues, 29% of AUMs and 0.5%-ish of sales, going into the fee-based products. So there are 2 parts of the same question, really. And a lot of that statistics are available to you. And so the channel by its very nature does not and has not really emphasized one product over another, but rather has quite consciously allocated the clients across span of products.

[Robert Lee:]

All right, great. And then maybe question on the kind of the balance sheet and capital management. I mean, clearly, cash balance has continued to build and of the $600 million odd of cash, can you maybe update us on what you consider of that to be true kind of excess cash and maybe, current thoughts on I mean, cash balances are above where they were 1 year ago before you paid the special. So how should we be -- any thoughts that we could see more of that?

[Daniel Paul Connealy:]

Rob, this is Dan. I think, about $100 million is in the broker/dealers and wouldn't be considered excess cash and the balance might be considered available.

[Robert Lee:]

Okay. And then maybe just as a follow on. I mean, what it feels to be appetite for becoming a more regular -- specials becoming a more regular occurrence, I guess, so to speak?

[Daniel Paul Connealy:]

If they're every year, they're not special Rob. So we're probably not looking at that right now. But we'll make our decision available by mid-December.

[Robert Lee:]

Okay, great. And one last question maybe for you Dan. I notice that the tax rate was -- seemed a little low compared to where at least it was last quarter and I don't know if that's related to applying some of the capital loss carryforwards you had, against the gains, I mean, which will you be thinking of that going forward?

[Daniel Paul Connealy:]

Well, most of that Rob, you are right, is the capital gains, which don't retract to tax due to the carryforward. But we also have this statute of limitations toll on a couple of returns and a few adjustments, minor adjustments. But most of it has to do with investment income.

[Robert Lee:]

And is there much of the capital loss left carryforward?

[Daniel Paul Connealy:]

Yes, we have probably of $30 million plus still available. You only have 5 years to use it. So we will be looking for opportunities to use that as we have these gains in our portfolio.

[Operator:]

And your next question will come from the line of Michael Kim from Sandler O'Neill.

[Michael S. Kim:]

First, Hank, can you just give us some color around the mix of the $1 billion of institutional wins that you expect to fund later this quarter? Just in terms of the underlying strategies?

[Thomas William Butch:]

Mike, it's Tom. I'll take that. A large portion of it would be mid-cap growth and correctly would round it up.

[Michael S. Kim:]

Okay. And then in terms of margins, more broadly, you now reached the 30% number but if I look at sort of the underlying mix of your asset base, the equity component is still running below where it was a few years ago. So assuming investors continue to move up the risk curve and that drives the more favorable mix for your asset base. How are you thinking about sort of the next goal, if you will, for margins particularly as the Wholesale business continues to scale?

[Henry John Herrmann:]

Well, the CFO last time got in trouble for giving you a target. So we're not going to give you anymore targets. But we do say that we want to expand our margins over time not in a straight line, but over time and as we get a larger base of assets that makes it more likely that we will do so. I think, they're going to get to our 30% target here in the fourth quarter barring any unusual decline in the S&P and I continue to think, we're in a position where we can manage the indirect expenses in the broker/dealer distribution system to a point where we can keep growing in line with normal market action and to the extent we get something better than normal market action margins should move up. There are some other things that are incorporated in that as well and that's the relationship between fees and costs as the market's moving higher, we're sort of getting a little tipping point benefits. So I don't have a target number, but I still think, if you look at the industry average for public companies, it's still 20% higher than where we are today. It's something like that. And internally, I aspire to be at least an average participant as that down[ph].

[Michael S. Kim:]

Okay, that's great. And then, finally, Hank, I understand, not wanting to get sort of too far over your skews in terms of thinking about the distribution margin. But just focusing on the Advisors channel, the margin has remained positive here for 4 consecutive quarters and it seems like the shift in favor of sort of asset-based fees will continue. So just wondering if there's anything structural or seasonal, that might suggest the margins aren't sustainable at these levels?

[Henry John Herrmann:]

I don't want to get over my skews, but no.

[Operator:]

And your next question will come from the line of William Katz, Citigroup.

[William R. Katz:]

Lot of my questions have been asked. But just coming back to either expense growth or capital management. Are there any major reasons you couldn't have a special this point in time given your underlying profitability and diversification, and just pure level of free cash flow. On the expense side, as you look out into 2014, are there any unusual items that you need to accrue for?

[Henry John Herrmann:]

Bill, try me again. I statistically didn't understand the first part of your question. So I don't want to.

[William R. Katz:]

Sure, on the capital management, I'm sort of curious what would be clued as special dividend at this point in time, just given the greater diversification scale of the business and free cash flow, relative to prior cycles?

[Henry John Herrmann:]

Conservative nature of the board. And the fact that we deliberately called it special, first time around and if it happens every year at the same time, it's not special. But just keep in mind that no matter what happens, we all recognize that we have excess cash and it's a discussion that the board has at every meeting, as to what we should or shouldn't do.

[William R. Katz:]

Okay. And then on the expense side, I was sort of curious, as you think about the margins to trying and get it the other way, are there any major expense needs you need -- that you're looking out into 2014 relative to where we are right now?

[Henry John Herrmann:]

Well, we're undergoing a real review of our IT and restructuring it. So there could be a little upward pressure on expenses from that. But we'll have our budget available a little later and we'll be able to comment on that in future.

[William R. Katz:]

Okay. And then just finally, as you think about the -- you mentioned tipping point in the distribution, sounds like you have a little more room on the Advisor side. But on the Wholesale side, where can that go? It's been a sort of nice trend if you will, so any kind of natural buffer here that would create some kind of sort of limitation in terms of income or margin improvement or could that still migrate to a much lower drag?

[Daniel Paul Connealy:]

Well, basically, the higher the assets under management, the more pressure to lower that margin number, because you have 12b-1 fees pressuring on both sides. They are in the the revenue, they are in the expense. So one reason you're seeing that margin look more attractive is because we're growing our assets in the Wholesale channel.

[Operator:]

And your next question will come from the line of Cynthia Mayer, BofA Merrill Lynch.

[Cynthia Mayer:]

So just in terms of the flows, I guess, the release notes solid sustained flow across equity and fixed in the quarter. I'm just wondering how things are looking in 4Q? Are people still interested in things like the delta between 2Q and 3Q is really an improvement in fixed income flows? And I'm wondering if you're seeing any shift in that or it's still sort of a good mix between the two?

[Daniel Paul Connealy:]

I think it's still a good mix. I think and again commenting on the breadth, I think the incremental is coming from greater acceptance of equity funds and the fact we have very good performance in certain of the categories. So of course, the fixed income side remains substantially driven by our high income product. So it's I think, more of the same with that which has been working with incremental flow in a few things which are starting to accelerate.

[Henry John Herrmann:]

Cynthia, Hank. We haven't seen a great rotation whatever that means, but there is no doubt that people are moving further at the risk curve and is manifesting on the equity side of the house. I think, if we think about net flows in the third quarter, and maybe, if you could see, assets strat first -- high incomes first, science and tech is second and asset strat is third and then, there is 5 or 6 others that are in important positive flow position. And the mix is moving toward equities. As it flows in October, I really made a point at the very end of my remarks, talking about institutional channel and our expectations for the quarter, come in November and December because October was pretty much more of the same as the first 2 quarters. But I do think, we're going to see pretty good inflows early in November and December. I make that point because now I want to flow back to retail and tell you that in the month of October, so far, the net number's significantly higher than what we had been experiencing on a daily basis, going into the fourth quarter. So there definitely has been and is probably also been reflected in the industries statistics that now you see. But I just want to make the point that there has been a material upward slope in the amount of the gross sales and net flows.

[Cynthia Mayer:]

Okay. And I'm on the billion to fund is that mostly sub advise like variable annuity or defined-benefit or some other type of separate account?

[Daniel Paul Connealy:]

Largest piece is sub-advised.

[Cynthia Mayer:]

It's sub-advised. Okay. and then in terms of expenses, comp was a little bit higher but not that much higher considering how many things you have that are top decile on a 1 and 3-year basis. Do you expect this step up in 4Q as you take into account the strong performance or is it where it's going to be more or less other than sort of typical growth?

[Daniel Paul Connealy:]

Cynthia, this is Dan and you're right. It really pivot on what the size of the bonuses are and there was some adjustment for that in the third quarter. We're estimating the comp will probably be somewhere between $52 million and $53 million in the fourth quarter.

[Cynthia Mayer:]

Okay. And on distribution on the Wholesale channel, looks like the indirect costs declined this quarter versus last quarter. Was there anything unusual which would cause that to decline or is -- can you hold this level going forward?

[Daniel Paul Connealy:]

I think, most of that was the national advertising, the brand awareness that we've been doing. We didn't have as much of that in this quarter.

[Cynthia Mayer:]

Okay. And last thing is, looks like your redemption rate was down across all 3 channels. And I think it might have been down a little bit in the industry too, but was there anything in particular, other than the performance that would cause it to be down? Do you think of that as seasonal or is that a trend?

[Daniel Paul Connealy:]

A part of it was very strong sales in the asset growth that incurred in the channels, so that would make the same level of absolute redemptions be a smaller percent.

[Operator:]

And your next question will come from the line of Craig Siegenthaler, Crédit Suisse.

[Craig Siegenthaler:]

First, just on the comp guidance, Dan, you just gave. So I used $52 million to $53 million, the midpoint of that is about 11% over the second quarter '13 comp level. I'm just wondering if you could talk about what pieces are growing that in terms of base count increases from new bodies incentive comp due to a good year. Maybe, you could talk about the pieces that are causing that growth.

[Daniel Paul Connealy:]

Well, we're just looking forward to the process of evaluation for bonuses at the end of the year. Can't really be measured until the year is over. But so far, it looks pretty good. And I think, it would be prudent to just expect that the incentive comp will go up some in the fourth quarter.

[Craig Siegenthaler:]

Okay. Got it. On the G&A side I may have missed it, but did you provide any specific guidance around a good G&A run rate to think about next quarter?

[Daniel Paul Connealy:]

Well, we haven't done that yet. But Craig, I would say, it would be $22 million to $23 million, if our projections are right.

[Craig Siegenthaler:]

Okay, got it. And just one final question. I realize this is a difficult one. But under normal conditions, where lets just say you continue to grow at 5% organic, the markets rise is about 8%. Do you expect, given the expenses to grow faster or slower than U&D revenues?

[Daniel Paul Connealy:]

No. I think it will probably kind of as far as the director go along with the revenues. But positively[ph], we have grown a little bit faster.

[Craig Siegenthaler:]

Do you expect U&D margin to be relatively stable over the next year or so?

[Daniel Paul Connealy:]

Well, in the Advisor channel, I would say perhaps so. In the Wholesale channel, I would say it would be more likely that the margin would improve if we are able to grow assets in that channel and if we're not able to, it will be the reverse.

[Operator:]

And your next question comes from the line of Daniel Fannon, Jefferies.

[Daniel Thomas Fannon:]

I guess Hank, the enthusiasm around flows thus far in the fourth quarter, doesn't really seem to reflect the asset strategy at least some of the commentary, I look at the performance in pretty much every benchmark and it looks really strong. If that were to improve, is that additive to kind of your outlook for flows?

[Henry John Herrmann:]

I think the answer to that would be yes, and I think the flow pattern is moving in the right direction. And as you rightly pointed out, relative to its peer group Lipper or Morningstar, it is outperforming and so I think that the trend is quite favorable in flows. And I think the answer to your question is there for, yes.

[Daniel Paul Connealy:]

Off the top of my head, Dan, I think, on net flows basis, it's been sequential improvement from the first to the second to the third.

[Marc S. Irizarry:]

Great. And then just kind of thinking about the high-income product and given, also very strong performance. But as we look at potentially higher interest rates at some point, I mean, do you anticipate or I guess, how do you think about demand for that product in that environment?

[Henry John Herrmann:]

Well, if it's a creeping crate[ph] kind of interest rate rise, I think that enthusiasm or at least acceptance of high-yield product could continue as you see peoples swap out of short into mediate investment grade credits into high-yield. So the process has been underway likely will continue. If there's a sharp rise in rates all bets are off in a lot of ways.

[Operator:]

And your next question comes from the line of Eric Berg, RBC Capital Markets.

[Eric N. Berg:]

2 questions. Let be both directed to Hank. Waddell was not the only company that has some very pockets of excellence in terms of investment performance. I know that Leg's [ph] equity investment performance has improved, Columbia has had excellent performance. Yet, in general, the trend across the industry has been for a large-cap outflows. Understanding that it going to be hard for you to be impartial. I would like you to try your best and answer the question, what is that you folks are doing in the wholesale side of your business that is allowing you to bring in net money when others continue to suffer outflows? And then I have one more.

[Henry John Herrmann:]

Eric, thank you very much for that kind question but you directed it to the wrong person, I'm going to ask Tom to respond because he has got his fingers on the pulse and is responsible for the success we're having.

[Thomas William Butch:]

Eric, good to talk to you. As we've discussed in the past, I think our credibility as a manager, has been tested for some time and it gives us the ability to present stories across asset classes, that enable us to broaden the spend of what we're doing. I think, if you look at the composition of our flows, you could argue that they are driven by things at which we are deemed to be uniquely capable, well above flexible science and technology, high income, mid-cap growth, I think we will agree that none of these are commoditized categories. And they provide the fundamental bases for the growth we've seen. I'm at categories, that perhaps, aren't as differentiated as those, therefore come back into investor acceptance. I think we have opportunity to be first in the door to express our capabilities in those as well. And so I think, its the long-term track record, the way we've taken it to market and the degree to which success in a differentiated categories, if you will, has given us the permission to take our story into other categories. And I think, per your point, if indeed, investor acceptance of equities continues to grow. There is a lot more in the store which we should be able to capably take to market over time. I hope that's responsive to your question.

[Eric N. Berg:]

It is. Very helpful and clear answer. My second question really is one that has been asked before, but I'd like to repeat it, which is in earlier conference calls, my question gets to the extraordinary importance of asset strategy. It's sort of a high class problem. Its success has resulted in it being pretty much as dominant as ever having and/or playing an inordinate role in your asset mix what is it? Or close to a third or in that neighborhood according to the release of your $118 billion in assets, or what might gave[ph] one manager and a team one fund. Do you have a conscious program to reduce that percentage? Is that one of your goals and does it concern you that you have them?

[Henry John Herrmann:]

I got two things that I want to break it into 2 parts. Mike has been out talking sort of marketing role here recently talking to a lot of wholesalers and a lot of advisors. So he probably has some feedback in terms of what they're interested in, why they are focused on this product? And then, Tom and I maybe will try to work on the second part of the question.

[Michael L. Avery:]

Eric, this is Mike. When we talk to clients, potential clients, generally, what they are most interested in is a product that has the flexibility to go across different asset classes. And I think, right now, the financial advisor is dealing with the question that Hank alluded to earlier and that is what should be my appropriate allocation mix, should I be going from fixed income to equities, what should I do? And inflection points like you were at this year, where as Daniel was kind enough to refer to the fact that we are underperforming S&P 500, thanks you Daniel. We're seeing flows Daniel because people look to us as an organization and this product in particular as a transitional vehicle when they're not quite sure what to do to be honest about it. And I think that there is a lot of anxiety on the part of the financial advisors in general even though the equity market is up a lot. But there is a lot of anxiety because the financial advisors have this sense of uncertainty attributable to what got the market to the current level. And they are very aware that monitory policy has played a big role in that and they're very conscious of the fact that we may be in for a period where fixed income as well as equity, market returns become much more volatile. So they're driven or drawn to a product that has the capability, has the mandate to look across the span of asset classes and come up with what we believe to be an optical mix. And we do, as Hank referred to, we do a lot of work not only as a team but also Tom's wholesalers in educating financial advisors on why the market is doing what it's doing, what we're thinking about asset allocation, and I think that helps a lot in terms of being a differentiator, if you will, in times when financial advisor is troubled about the direction they should take their client's money.

[Daniel Paul Connealy:]

If I could add a couple of things. As an addendum to my first point and the one that Mike has just made, success we have had an asset's strategy has for example, in the context if we rightly identified of investor uncertainty and attractions to sort of allocated products or hybrid product has really given us permission, again, to take our balance product to market and it's having a sales year that is the best it had and might have continuous upside from there. So again, I think quite a part from it's being a disproportionate amount of sales and I'll give you some data on that in just a second, it has really effectively opened doors both in light categories that we take to market and more private for the product line. Just to give you some sense of proportion I'm looking at some data going back a few years and if we were having this conversation 5-years ago today, asset strategy would have represented 73% of IV fund sales that year using IV fund as a good proxy, I think for the enterprise as a whole. Had we gone back 3 years, it would have represented 59% and today, it represents 30%. So, the high-class problems which you referred has I think, turned into a high-class opportunity.

[Operator:]

Your next question comes from the line of Mark Irizarry, Goldman Sachs.

[Marc S. Irizarry:]

I guess, this is for the sort of jump off. But if you think about some of the themes out there in the business, [indiscernible] ETFs and maybe, smart beta and alternative strategies, particularly in retail. I'm curious how you guys are thinking about your current products set today and maybe about some of the strategies that you maybe seed and/or think about I don't know maybe get a view on maybe acquiring businesses or talent to sort of fill in some product gaps.

[Thomas William Butch:]

Mark, this is Tom. That's ample risk for a thesis I think. But let me give you a couple of observations. There is passive, there is active. We are active, we're high active share, generally speaking and that's the way we think we help our advisors and their clients win and the active castes[ph] battle leaves plenty of room for us to win on that premise. Relative to the products set itself, the whole earth[ph] question is really interesting question and I think, it's continuing to evolve and I don't really know what the rate gradation of that bucket is. Certainly, there are the emerging things like long-short and global macro and managed futures and that helps. I think the substance of the asset in the broad earth[ph] bucket continues to be things like global allocation, real estate, particularly global real estate, emerging markets, equity and debt and we are or will be well prepared in that largest segment of the category. So I think, it's still an evolving question but if you look at the reality of where the assets live in the earth world that's really where they live.

[Michael L. Avery:]

Mark, this is Mike again. This is kind of related to Eric's question, but when we have an opportunity to be in front of our clients either in person or on calls. We love the ETF question, or the smart beta question, we love those questions and the reason is, it's because people hear that and it gives you a chance to educate them. And I often will get or we as a team will get, Mike, I can do what you do with ETFs. And I will say, you absolutely could replicate what we do and if you don't know how, I will even help you do it but what you can't do is determine what that allocation will look like 6, 9, 1 year, 3 years from now and you can't do it for only 55 basis points. So, when those questions come up, it's a great opportunity to talk about our processes as an organization. Our focus forward as opposed to replicating something looking backwards, and as Tom alluded to, it gives us an opportunity to put in front of people a number of different products, that are doing well with the people who think about the world looking ahead and thinking about what allocation should be, what security will work well going forward. And that's very difficult to replicate if you are doing that on your own for the low fee that we charge people. So we love those questions. And there is as you were alluded to the smart beta thing, there's always something new that's gives grist for the mill.

[Marc S. Irizarry:]

Okay. And then just one more on the sustainability of the U&D margins. If you just look at the leverage that they got on the U&D side, it was obviously, pretty big this quarter. I guess, the question is, are there some areas when you look ahead, that maybe, now that you have sort of reached this tipping point where maybe you'll think about opting the investment in the future as the technology, where some of those expense pockets that if we're thinking ahead that you might be over time wrapping up some of the investments.

[Henry John Herrmann:]

well, probably the one area where it will be possible in the next year or 2 to have some more expenses most likely is in the area of IT. It's undergoing a transformation and in early stages, a lot of that's not capitalized, so it can be a little higher.

[Daniel Paul Connealy:]

I think things we look at brand investment and we look at wholesaler scale. Those are things that are always on our minds. I don't think we will dramatically change the composition or size of the wholesaler for us but we've said in the past that we're not wholly at scale but that's not one big swipe of expense. I don't think and remindful of the need to continue to invest in the brand. But again, I don't think that's a huge outsize blowout number.

[Operator:]

And your next question is a follow-up question from the line of William Katz with Citigroup.

[William R. Katz:]

Just 2 actually questions. One is what percentage of your advisor clients now have an S allocation product? And then in terms of the fourth quarter G&A guidance of 20 to 23, is there anything unusual just given the year end , strength of the year type thing or is that a good base to grow from -- into 2014?

[Daniel Paul Connealy:]

Well, I'll take the second part first. It just represents that the fourth quarter is always the time when we have to refine a lot of estimates because they're based on projected sales levels, et cetera. So it's often -- we often need to adjust those and the way the year's going, it's more likely they may be adjusted a little bit higher. But that doesn't necessarily mean that the first quarter is going to be at that level.

[Henry John Herrmann:]

We're going to continue to manage expenses as close to 7% increase that you were just simply saying is a normal market action. And we always look at that on a quarterly basis. It always leaves our sales with enough flexibility, such that if we need to make adjustments on a downside, we can do it. On the up side, we don't necessarily follow the market. We have a strong market this year is indicative of it. We just grew expenses in line with what we had planned, pretty much at the beginning of the year. And that plan was based on what we thought we should be to doing. And we're going to stick with that kind of approach. And so what I'm trying not to be too cute here but if fiat money continues to benefit all of us and markets continue to appreciate, I think, we would do a good job keeping expense growth below the revenue.

[William R. Katz:]

And then just on the percentage of Advisor AUM or clients that has the S allocation product at this point?

[Daniel Paul Connealy:]

I said the number before Bill, maybe you missed it as being 29% of Advisor AUM is in fee-based product.

[William R. Katz:]

I apologize.

[Operator:]

[Operator Instructions] And your next question is a follow-up question from the line of Robert Lee, KBW.

[Robert Lee:]

Actually, Bill just asked my question. Thanks, anyway.

[Operator:]

And at this time, there are no further questions. I'd like to turn the conference now back over to management for closing remarks.

[Henry John Herrmann:]

We appreciate your time very much. We look forward to talking to you at the end of the fourth quarter. Please take care.

[Operator:]

And thank you for your participation in today's conference call. You may now disconnect.