WisdomTree, Inc.
Q2 2018 Earnings Call Transcript

Published: 27 Jul 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the WisdomTree Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Jason Weyeneth, Director of Investor Relations. You may begin.

[Jason Weyeneth:]

Good morning. Before we begin, I'd like to reference our legal disclaimer available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including, but not limited to, the risks set forth in this presentation and in the Risk Factors section of WisdomTree's annual report on Form 10-K for the year ended December 31st, 2017 and quarterly report on Form 10-Q for the quarter ended March 31st, 2018. WisdomTree assumes no duty and does not undertake to update any forward-looking statements. Now it's my pleasure to turn the call over to WisdomTree's CFO, Amit Muni.

[Amit Muni:]

Thank you, Jason, and good morning, everyone. Since our operating date is already known I will quickly go through the importance items for the quarter and discuss some updated guidance around expenses. I will then turn the call over to Kurt MacAlpine for some comments on our recent partnerships announcements and then Jon offer some closing comments before opening it up for Q&A. Beginning on Slide 3, our global AUM was $60 billion at the end of the second quarter reflecting the April close of our acquisition of ETF Securities, partly offset by outflows in market depreciation. Despite the strengthening of the US dollar, increased political and economic uncertainty in Europe and growth concerns in Japan still continue to outflows from HEDJ and DXJ. As the chart in the middle shows, momentum continues to build around our fixed-income strategies, which posted higher inflows for the fifth straight quarter. The chart on the right breaks down our flows by listing region with Canada continuing to show strong organic growth. Turning to the US segment flow highlights on Slide 4; while the overall US segment endured outflows from HEDJ and DXJ, we continue to see the benefits of low breadth and depth from our strategic initiatives around advisor solutions, investments in technology and new distribution channels and partnerships. A number of fund with creations on a daily basis remains above historical levels and the percentage of our assets in core funds continue to grow generating inflows for the 10th straight quarter despite the fact that the second quarter flows for the industry were down 11% from the first quarter. At the fund level, we saw strong demand for our short duration fixed-income strategies including our zero duration high-yield strategy HYZD, and our floating rate treasury strategy USFR. USFR generated a $167 million of inflows during the quarter, and is the asset and liquidity leader in a category that can generate significant demand. We saw a rebound in US equities flows with our quality dividend growth, mid and small-cap strategies generating solid inflows. Despite emerging markets shifting out of favor on the back of the strengthening dollar, our strong performing and differentiated emerging markets fund, which excludes state-owned enterprises, XSOE, continues to resonate with investors and took in $59 million during the second quarter. Let's take a look at our international segment flows on Slide 5. Our international segment had slight outflows as strength in Canada was more than offset by outflows from European listed products. The Canadian franchise generated inflows of $98 million, driven by our suite of quality dividend growth ETFs bringing total AUM to over $400 million in the first two years since we launched products in the region. Our European UCITS products generated inflows of a $141 million, or 67% annualized organic growth. These results are particularly strong in the context of European ETF market flows, which slow to just $3 billion industry wide amidst political and economic uncertainty. Strong performance of our enhanced commodity fund WCOA drove strong inflows which marked the fixed rate quarter of inflows for that fund. Successful product launches also contributed to growth. We launched a UCITS version of our first to market S&P 500 Put/Write strategy, which generated immediate interest in the marketplace, and represents another example of leveraging successful products in one region to multiple markets. We also successfully launched the world's first contingent convertible bond ETF and have seen some early traction in the market, as it provides investors with a diversified exposure to an otherwise difficult strategy to access. The ETF security strategies we acquired had net outflows during the period post deal, close to roughly $250 million as modest gold inflows were more than offset by sentiment-driven oil and silver outflows. Now turning to the financial results on Slide 6. Revenues in the quarter grew 26% from the first quarter to $75 million and net income grew to $17 million reflecting the accretion from the ETF securities transaction, which closed in the second week of April. We had two non-GAAP items this quarter. First, we recorded a $10 million pretax gains associated with marking-to-market, the fair value of our gold commitment payments, and second we incurred $8 million of acquisition-related costs. Adjusting for these items, we are in $14 million or $0.09 a share in the quarter. Turning to the US segment on our next slide. Gross margins were 83.4%; down slightly reflecting lower average US listed AUM in the quarter. Based on current AUM levels, we expect gross margin to remain around similar levels. Adjusted operating margins for the US segment increased from the first quarter to 32.4%. Total US segment expenses excluding acquisition-related cost declined 5% sequentially to $35.9 million. The decline was primarily driven by lower incentive compensation. The compensation ratio for the first half of the year was 28%, the middle of the range for the full year guidance of 27% to 29%. Turing to Slide 8. I would like to update you on some initiatives that will result in an update to our cost guidance for the second half of the year, and also carry forward into 2019. First, we are changing our distribution approach to Japan by expanding our relationship with Premia Partners. As a result, we will wind down our existing sales office in Japan, which will yield savings of approximately $4 million annually. We announced the marketing relationship with Premia earlier this year, where they would represent us in specific Asian countries. We are very pleased to now be expanding that into Japan. This approach in Asia is similar to the very successful distribution of course we have taken for years in Latin America with the Compass Group. And we believe it will drive stronger results at a lower cost. Second as you know, we have made investments over the last several years building an industry leading approach to marketing and distribution through the years of data intelligence, AI and predictive analytics. These initiatives allow us a better track client engagement at different levels. As a result, we are generating efficiencies which will yield savings of approximately $3 million. So in total we will be realizing cost savings of nearly $7 million of which $2 million would be recognized in the second half of this year and the full effect into 2019. These savings represent approximately 7% of our current consensus earnings in 2019. While we continue to invest in our business to drive future growth, we anticipate recognizing additional efficiencies as we get into 2019. Now turning to our international segments on Slide 9. The international segment’s generating operating income of $4.1 million, driven by the results of the ETF Securities acquisition. Revenue jumped to $21 million reflecting the April 11th deal close. I like to spend a moment now highlighting some of the changes to our international segment financial statements, starting with the contractual gold payment. This expense results from a commitment we assumed through the acquisition of ETF Securities, where we are obligated to pay a fee similar to a royalty on the physical gold ETF based on the average daily spot price of gold. For the second quarter, this expense amounted to $2.7 million for the 89% of the quarter we owned ETF Securities. Related to this, we recorded the fair value of this obligation as a liability on our balance sheet. The mark-to-market of this liability between periods flow through the non-operating section of our income statement, as a revaluation of deferred considerations. Given the decline in gold prices during the second quarter, the value of the liability declined, therefore we recorded a gain of $10 million. Finally, you’ll notice the inclusion of interest expense in other operating expenses. The $2.1 million expense shown in the international segment, relates only to the term loan raised to acquire ETF Securities. This amount is below the guidance we provided in May due to a lower LIBOR rate than what we had projected. I'd lastly also like to highlight that we have recognized the majority of the $5 million of identified cost synergies from the acquisitions, which is ahead of pace than we had initially outlined. Now it’s my pleasure to turn the call over to Kurt MacAlpine, our Global Head of Distribution.

[Kurt MacAlpine:]

Thank you, Amit. Good morning everyone. Over the past 12 to 18 months, we’ve spent a lot of time discussing the investments that we’ve made in technology and distribution, and the expected impact it would have on our relationships with our clients and prospects. We made these investments with two primary objectives in mind; to be the preferred business partner and the primary product provider for intermediary platforms and advisors. The combination of our technology driven asset allocation tools, which includes our digital portfolio developer tool, our open architecture model portfolios, and award winning advisor solutions program, the investment in AdvisorEngine, and our data intelligence capabilities have positioned us well to achieve these objectives. The capabilities that we bring to the table today, and the resulting conversations we’re having with platforms and advisors have transformed how we go to market. While it takes time to build better advisor relationships and negotiate platform opportunities, we’ve already announced significant wins globally such as our relationship with TD Ameritrade that have already meaningfully impacted the breadth and depth of our flows. In the second quarter alone, we’ve entered into four types of new strategic relationships that we’re excited to share with you today. First, we entered into a strategic agreement with Cetera Financial Group, which is the second largest independent financial advisor network in the nation, with 7,900 advisors managing $240 billion in client assets. As part of this agreement WisdomTree ETFs would be the first and currently only ETFs available as part of Cetera’s no transaction fee platform. And we’ll be delivering our Advisor Solutions program to their platform and financial advisors. We believe this is a ground-breaking relationship in our industry, as it is the first time that an ETF sponsor has partnered directly with an independent broker dealer in this capacity. We believe strategic relationships, like this, could help unlock additional growth opportunities for WisdomTree [Indiscernible] segment of the market. Second, we continue to realize strong success with our asset allocation initiatives, and are pleased to announce that our model portfolios are now available for execution on two new platforms this quarter, the Orange Network and Interactive Brokers. Third, when early stages of realizing the distribution benefits of ETF securities acquisition. In additions to having our usage funds approved on a number of new European platforms this quarter, we’ve also signed an agreement to be a participant on Swissquote’s commission -free ETFs trading platform. Switzerland is a large offshore market for ETFs, where we have significant assets today and Swissquote is the largest online platform in the market. Fourth, we’re beginning to realize the distribution synergies associated with our investment in AdvisorEngine. In the past quarter alone, we established three new strategic relationships with AdvisorEngine clients, where we have seen a significant increase and our assets at these firms. We’ve also signed in new agreements with a leading platform where they’ll be adopting the AdvisorEngine platform and using WisdomTree model portfolios. We’re looking forward to publicly announcing this relationship in the coming weeks. The negative market sentiment relating to our largest exposures has continued to significantly impact our top-line flow numbers, which is unfortunately masking the success we’re having in building new strategic relationships. We believe that over time, the deals we currently have signed, plus those we have in the pipeline, will have an increasing impact on our flows. I’d now like to turn the call over to Jon.

[Jonathan Steinberg:]

Thank you Kurt, and good morning, everyone. As the chart on Slide 11 shows, DXJ and HEDJ remain a frustrating headwind, but it is important not to lose sight of the underlying growth our platform has exhibited over time. Over the past 12 years our global position in the industry has never been stronger than it is today. The enhancements and investments we’ve made in our distribution strategy are now translating into formalized strategic relationships, and it is the underpinning for exciting future growth, both in the US and abroad. In Europe, the integration of ETFS is well under way; our European operations are now profitable, so we are fully equipped now to drive growth in the region. In Canada, we are generating excellent organic growth and establishing ourselves in a market we believe is poised for continued growth. As Amit highlighted, technology and data investments made over the past few years, are driving cost efficiencies across our platform, and we expect to drive more cost efficiencies over time. These technology investments and our Advisor Solutions program, is allowing us to connect with clients and prospects in a way that wasn’t possible a few years ago. The conversations we’re having today are unlike any we’ve had before. In addition to the relationship we just announced with Cetera, a clear example of this is the temporarily undisclosed independent broker deal that Kurt just highlighted that will be adopting AdvisorEngine platform. And making WisdomTree models available to the nearly 3,000 advisors. This is an important win that provides a cornerstone client for AdvisorEngine, while also showing the strategic value of our investments in the firm. The ability to have holistic discussions at the executive level around technology to more efficiently running their business, asset allocation products to drive better outcomes for their clients. And Advisor Solutions to improve the effectiveness and productivity of their advisors is powerful. And it is clearly resonating with executives across a broad spectrum of firms as demonstrated by our recent announcements. Platform agreements like these as well as the preferred access like Cetera and TD are all an important source of future diversified flow. Nothing is as important as the long-term investment solutions. And we continue to prove that we are at the forefront of product innovation. As an example, our US multifactor fund crossed its one year performance anniversary at the end of June, having outperformed the 10 largest multifactor funds in the industry on an absolute and risk adjusted basis. This is an important suite for WisdomTree and we have recently launched similar products in Europe. And we’ll be expanding the product suite in United States in the very near future. Our Dynamic Long/ Short and Dynamic Bearish ETFs both launched at the end of 2015 ranking the top percentile since inception. Liquid alternative strategies will prove an area of significant growth for the ETF industry. And WisdomTree is an innovation and performance leader in the category. This is what modern output looks like. It’s the totality of the quality of our investment strategies, the non-product solutions we can provide clients, and the global reach we have, particularly following the ETF Securities acquisition that positions us for the next wave of growth. As I said earlier, we have never been better positioned than we are today. Thank you for your interest in WisdomTree and we will take your questions.

[Operator:]

[Operator Instructions] Our first question comes from Craig Siegenthaler of Credit Suisse. Your line is now open.

[Craig Siegenthaler:]

Thanks, good morning. Jon. This is more of an industry-specific question than really kind of WisdomTree. But we have watched institutional investors, tactical investors, and also the smart beta segment really take a pause in 2018. We saw with Invesco, we saw with BlackRock in the results this quarter, too. I'm just wondering on your -- what is your perspective on this trend, and could we see a rebound in the second half?

[Jonathan Steinberg:]

Yes, industry slow -- the industry saw a slowdown in flows and it's global. I mean Europe has been particularly pronounced this quarter, prior quarters were running something like $20 billion to $25 billion a flow, and in this quarter came in at $3 billion. So I think the markets have been volatile, higher interest rates and so the trade war concerns haven’t settled with investors, and investors expressed their confidence, or lack of confidence through ETFs more quickly than they do through other structures But I really don’t think anything is going to derail the growth of ETFs longer term, I think this is just market sentiment related. With respect to sort of smart beta and those types of strategies, this has really been a momentum market since 2009, and you’re seeing that momentum has been very hard to beat. I think if there is a correction, you’ll see alternative weighting, smart beta, modern alpha, liquid alts, things that minimize volatility, really picking up steam to the advantage of WisdomTree and some other players.

[Craig Siegenthaler:]

Great. And then just as my follow-up, on the robo-advisors and other tools offered by AdvisorEngine, can you update us on if there are any additional advisory firms that have signed up recently to use these tools? And also how should we think about AdvisorEngine and then the model portfolios contributing to flows over the next 12 months?

[Kurt MacAlpine:]

Sure Craig, its Kurt MacAlpine here. So, on your first question, so AdvisorEngine, as you know, acquired the Junxure platform, which is one of the leading CRMs for wealth managers in the industry, which has over 1,500 firms managing over $600 billion of assets earlier this year. Since that acquisition from a reporting standpoint, they report the assets and then the relationships in aggregate. What I can let you know is the platform itself continues to realize strong growth, on-boarding a number of clients over the past few months, including the large client that we’re looking for to disclosing in the coming weeks to all of you as well. If you think about the model portfolios. Was your question more about model portfolios on AdvisorEngine or just the model portfolio initiative in general?

[Craig Siegenthaler:]

It was actually both efforts, which are, like, separate from WisdomTree's legacy core business, and how they will contribute to flows to the cross-sell over the next 12 months.

[Kurt MacAlpine:]

Great. So, if you think about our model portfolio initiative more broadly, we’re still in the very early stages of beginning to monetize this investment, kind of officially commercializing the portfolios late last year. Since then we’ve already experienced very strong growth in our assets, tracking our models, and over time we expect that this model portfolio initiative will be a significant contributor to both the consistency of our flows, but also the diversification of our flows going forward. I mean, despite only launching this last year, we already have the models available for execution today, on TD Ameritrade, Envestnet, Orange, Interactive Brokers and then obviously through AdvisorEngine as well. So, I think the strong start that we’d experienced and the strong adoption on platforms is really a testament to how we construct these portfolios. The combination of running on open architecture, the blending of alpha and beta into one portfolio and the strong track record. So we are really optimistic about the go-forward prospects for the models.

[Jonathan Steinberg:]

Let me just, one addition Craig so the last piece of models would be third-party models. And really particularly around the retail space, the adoption of what people call smart beta has really been minimal to date. But we are hearing and expecting that will change maybe in the second half or significantly in 2019. So we do think that the totality of all models ours and third-parties will continue to show a substantial growth for WisdomTree.

[Operator:]

Thank you, our next question from the line of Bill Katz of Citigroup. Your line is now open.

[Brian Wu:]

Hi, good morning. This is Brian Wu filling in for Bill. Wondering if you could provide some color on your expectations for growth, fee rates, and margins related to the Cetera partnership. Thank you.

[Amit Muni:]

So, Brian, we don’t disclose the fees that we, that we pay in light of these partnerships. Now the expense that we do have goes to our third-party sharing line and we've given guidance around that, and we expect it to be about 3% of our revenues.

[Operator:]

Thank you, our next question comes from Chris Shutler of William Blair. Your line is now open.

[Chris Shutler:]

Hey, guys, good morning. I also wanted to ask about the Cetera agreement. So can you just help us understand where on their platform those ETFs are going to sit? So I'm guessing you envision advisors mainly would use the ETFs in the fee-based parts of their book. I just want to confirm that's correct. And then any sense of how many ETFs would be available, and is the agreement exclusive?

[Kurt MacAlpine:]

Sure. Let me take them one by one. So first off, in terms of where ETFs are available for execution. So we have joined a no transaction fee program as the first and currently only ETF sponsor on that platform. That encompasses all of Cetera’s various broker dealers. They have six of those in total with nationwide coverage. So the 7,900 advisors mapped to one of those six broker dealers, and regardless of which one that you are part of. You are able to access our strategies. Historically, ETFs have played particularly well in discretionary and fee based our managed money portions of the portfolio. And Cetera had the large managed money component on their platform overall. But they are available for execution in both, transaction based accounts and fee based accounts. Regarding your question on exclusivity, the way that we think of it is we’re the first and only kind of currently in the platform today.

[Chris Shutler:]

And will it be all of the ETFs Kurt?

[Kurt MacAlpine:]

Yes, sorry about that, I missed that part of it, yes, all of our ETFs are available which is actually very unique. If you looked at ETF kind of commission free or no transaction fee relationships. And if you look across the various platforms, so most of them have a subset of products from a particular sponsor. But yes, all of our ETFs will be available on the Cetera platform which is also very unique.

[Chris Shutler:]

All right, great. And then on the advisor agreement -- or AdvisorEngine agreement with this 3,000-advisor IBD, should we think of you as replacing any legacy technology providers? Or is AdvisorEngine sitting on top of whatever the advisors are using?

[Kurt MacAlpine:]

I’d say it’s the combination of both. For some advisors that are already using an existing kind of technology or fee based platform, this would and could act as a replacement for it. But we also expect given the comments Jon made on just strength of model portfolios, and asset allocation strategies in general, that a relationship like this that allows an advisor to fully digitize their business. And benefit from open architecture models would drive a lot of new growth to the platform as well. So I think we see it as an opportunity in both to replace existing managers and platforms. And also to generate new interest.

[Jonathan Steinberg:]

But I think Chris he is asking that would AdvisorEngine be replacing other technologies and at the start of the side by side but over time according to their management, we would expect them to encourage a switchover to AdvisorEngine.

[Chris Shutler:]

Okay that's encouraging, thanks a lot.

[Operator:]

Thank you. Our next comes from Brian Bedell of Deutsche Bank. Your line is now open.

[Brian Bedell:]

Great, and thanks, good morning, guys. Maybe just come back to the whole concept and strategy of -- really what I'm getting at is the open architecture versus exclusivity. And so very encouraging that you are announcing a lot of new agreements; it's been going on for a little while here. But maybe as you think about how you are tackling these new -- how you are getting into these new partnerships, both from a technology angle; so, think about it from AdvisorEngine's angle and then also from your product. What is your view of how important open architecture is going to be from availability of ETFs on the agreements? And then also as your AdvisorEngine competes against, say, other established platforms like Aladdin for Wealth or Jemstep, or even internal -- other internal model portfolio construction. How do you see the technology competing on an open architecture versus sort of an exclusivity basis?

[Kurt MacAlpine:]

Hey there, it's Kurt MacAlpine. So first off when you are thinking about open architecture as it relates to model portfolios so we believe-- our intent with our model portfolios is to act in many capacities as the investment engine for a particular RA or a client or a firm of that nature. When you think about how people build portfolios themselves, very rarely do they build their own portfolios only using the products of one underlying asset management. So when you look at how most asset managers' builder their model portfolios, they build them only using their own products. So for us, it was very important when we launched this initiative to build portfolios that reflect how investors actually want their portfolios built. And in our opinion, that's kind of best-of-breed regardless of manager. So for us, it is very unique in the industry to be building an open architecture, but we actually feel it aligns much better with how advisor's platforms and investors prefer to construct their portfolios. So I think that decision aligns better with how they operate and it allowed us to get off to a strong start both in terms of asset gathering, but also our assets on particular platforms. As you think about open architecture related to our technology investments, so particularly AdvisorEngine, part of the appeal when we made the initial investment in AdvisorEngine at the end of 2016 was the flexibility of the platform. We found that a lot of the other platforms in the industry were too rigid. So by that I mean either they weren't-- they've required an advisor to fundamentally change how they were doing business. So, for example, they would have to change their trading tools; they might have to have their CRM, they might have to change their goals-based planning in order to use or adopt that technology. So AdvisorEngine which aligns very well with how we think about the world preferred to build an open architecture platform with completely modular components. So if a particular oriented advisor or a firm on-board an AdvisorEngine, it's up to them to choose which components of the platform that they want, and it's been built in a way that has seamless integration across proprietary capabilities and third-party capabilities as well. And I think this-- this is quite unique as well on their side and I think is playing really well which is helping to drive the strong adoption because it's allowing asset managers or wealth managers in this case to continue to operate their business and they want while realizing that digital experience for their clients.

[Brian Bedell:]

Great, that's helpful. And maybe just -- I don't know if you have a -- it's probably too early to ask this, but a range of market share within your agreements in terms of what proportion of that open architecture you think WisdomTree can grab. And then just one other follow-up. You mentioned data intelligence, the initiative there. What portion of your AUM base are you able to analyze at this stage?

[Kurt MacAlpine:]

Great. So first off on the open architecture model portfolios and we really build them with an open architecture lens in mind. So it starts with the end-client objectives. What are they looking to achieve and then we will build the portfolio accordingly. So some of those portfolios have a very high share of WisdomTree, others have a more modest share of WisdomTree. But it's really based upon the objectives that the client is looking to achieve, and the risk tolerance and things like that that go into that decision making. So really do truly build them open architecture for them. Regarding the data intelligent efforts, we talked a lot about this on previous calls around the efforts we've made around putting, building or establishing one integrated database. So right now we are able to-- from an individual client perspective, we really have a holistic view. So what does that mean? It means we have all of their-- our sales interactions captured via our sales force capability. In that database, we have all of our marketing and tracking intelligence efforts tracking there as well. All of the public filings around assets and flows that are available in the industry plus the data agreements we have with a number of strategic relationships as well. So all of that is put into one integrated database where we are able to see at the client level not only the activities in the engagement, but also the assets and the flows from them. We also, last year, enrolled it out late last year-- collaborated with IBM Watson. So we are the first and only asset manager using Watson's capabilities in the distribution process. What's that allowed us to do in addition to having a machine learning model that helps determine who best-- who we should be targeting, what we should be targeting them with, and then specifically how we should be targeting. It also came with a lot of demographic data and information on this particular advisor and clients; it's very helpful to our segmentation and prioritization effort. So I would say the way to think about the data intelligence effort is we are now in the execution phase. Obviously, we are continuing to add on and strengthen the capabilities, but it's been up and running in our inner distribution organization for the last few months.

[Brian Bedell:]

In the level of observations -- and when you say client, that's at the intermediary level, not at the actual holder -- the actual personal individual holding that ETF. Is that correct?

[Kurt MacAlpine:]

Correct. Yes at the financial advisor level.

[Operator:]

Thank you. Our next question comes from the line of Michael Cyprys of Morgan Stanley. Your line is now open.

[Michael Cyprys:]

Hey. Good morning. Thanks for taking the question. I just wanted to circle back on Japan, being it's a little bit of a change in approach. I was just wondering if you could share just a little bit more color around closing the office and the new marketing agreement. And maybe just your perspective on what's changed relative to your expectations when you first went into Japan.

[Kurt MacAlpine:]

Sure. So it's Kurt MacAlpine here again. As you think about the Japan strategy, this is a different approach for us to Japan. So the way that we think about it is, it allows us to keep kind of the on the ground presence and the optimality in the Japan market, while doing it in a more cost-effective manner for WisdomTree and its shareholder. So the relationship that we are pursuing-- so before as you probably know we had a physical presence in Japan with our own dedicated team. We are now, as Amit had mentioned earlier, incorporating Japan distribution into our relationship with Premia Partners, who has been our distributor in Asia ex-Japan since earlier this year. So, for us it allows us to maintain optionality on the market, continue to engage with the clients that our teams laid a nice foundation for, but to do it in a much more cost effective manner for us. If you think about what's changed, I don't think anything has changed in particular on the Japan market. I would say that the rate and pace of regulatory reform was probably slower than everyone would have liked. We remain confident that it's going to happen and we want to make sure that we are set up for success when it does happen. So I think the combination of the intellectual property that we offer, plus the ongoing and continued presence via Premia Partners will position us well to achieve this once that change happens.

[Michael Cyprys:]

Okay, great. And just moving to the US, we saw an SEC proposal on a rule on ETFs to streamline the issuance process there. Just curious, what sort of changes, if any, you need to make to your existing lineup of ETFs, and how you are thinking about the competitive dynamics and strategic implications of that rule set. Does it lower barriers to entry? How are you thinking about that?

[Jonathan Steinberg:]

So the rules really were a net positive for WisdomTree. There was some equalization that others got with respect to some creation and redemption basket flexibility that we have. But we also picked up significant greater flexibility around index-based product with a vast majority of our revenue, and assets lie, those so benefits that an iShares or some of the earliest competitors had that first in self indexing was hampered with meaning us. So net-net, I think it's a straight positive.

[Operator:]

Thank you. Our next question comes from the line of Brennan Hawken of UBS. Your line is now open.

[Brennan Hawken:]

Hey good morning, guys. Thanks for taking the questions. Just wanted to clarify on the comment on third-party distribution costs. I think previously you had indicated the US -- those US costs would be 2.6% to 3% of investment advisory fees. Is that now just 3%? And as you guys are able to generate more success in landing these deals, should we assume there's upside to that guidance if those assets continue to grow proportionally?

[Amit Muni:]

Hey Brenn, it's Amit. Yes, so right now you can see it's running at about 3%. We had given guidance about 2.6% to 3%. The reason it's running a little bit on the higher end of that range is --not because the expense is higher, you can actually see sequentially the expense is down. In fact the revenues have come down because of the outflows that we have seen in HEDJ and DXJ, and the fact that those two funds don't really make up the large percentage of some of these platform deals that we have. So, I think you using a 3% number for your models going forward, it's probably a good number to use. If we do see some of those trends changing, we will give update guidance on that.

[Brent Harkin:]

Okay. And then early days, but what are your initial thoughts on the de facto hedge from the ETF Securities commodities products? And it looks like both of the suites, the currency hedged and the commodities, are in outflow quarter-to-date. So what do you think might be happening in July that has caused that hedge to be less effective? Understood that it's a short window, right? I mean, we're not even dealing with a month. But it would be helpful, I think, to hear your thoughts on that.

[Jeremy Schwartz:]

Hi, this is Jeremy Schwartz, Director of Research. So from a pure asset class level, one of the things that hampered gold demand, you'd say, so you had rising interest rates and rising interest rates is one of the negative offsets for gold. So in the second quarter you saw a very strong dollar 5% move higher in the dollar and that was sort of negative for commodities, negative for gold. So you saw relationship there. And you hadn't seen the strong dollar trends are yet to sort of renewed interest and currency hedging just given the global trade uncertainties. And so now we do think you're right that there is natural weak dollar hedge from gold itself towards sort of general currency hedging family. But the sort of unique nature of the market environment so far hasn't seen that really come to fruition yet.

[Operator:]

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Your line is now open.

[Unidentified Analyst:]

Good morning. This is actually Ryan on behalf of Alex. So, actually kind of a follow-up to the prior question; As you think about timing of potential synergies of having the combined platform to ETF securities, when-- when you are kind of thinking that there might be upwards in that distribution and gross sales?

[Kurt MacAlpine:]

Sure. It's Kurt here. So, from a distribution and marketing standpoint if you think about the acquisition just having closed this quarter, we have been focused on integrating the team, getting the team members cross trained on the new products that each of them are assuming, given we have folks from legacy WisdomTree and legacy ETF. Making new client introductions and getting our UCITS approved on platforms for ETF securities has had access historically where WisdomTree didn't have it. In addition to that, we are in the process of streamlining the brands into one brand which will be using WisdomTree across all the range of the products as expected to happen this fall. So I would say, look it is very early days; I am very optimistic given how well the team has done things since the integration has happened, the adoption that we've see on the platforms that have set our UCITS products up for strong success going forward. So, I don't think it'll be-- we are certainly in the early days, but I am optimistic that we will start to see uplift in the near future.

[Unidentified Analyst:]

Got it. Okay. Thank you. And then maybe just another quick question on Cetera, it might be a little bit challenging one to answer, but as we think about ETF usage on that platform in general, do you have any sense maybe more on qualitative around how much ETFs are currently used?

[Kurt MacAlpine:]

Sure. So in terms of the specific breakdown of the platforms, I can't share Cetera's ETF usage versus other structures. Part of what excites me about the opportunity for us to collaborate with Cetera and then the IBD community in general, as if you look at ETF adoption by IBDs or Independent Broker-Dealers, it's actually been lower than what we've seen in another channel, the RAs, the wirehouse channel and in some institutional segments as well. So, I am excited because this platform allows us to participate in a no transaction fee platform, be a partner of Cetera overall which will give us a great form to go out and engage with and interact with the advisors that affiliate with all the different broker-dealers. So I think this should be a great catalyst for us to certainly increase awareness to WisdomTree, have us-- give us a platform for us to tell the story about our strategies and I think we are very well set up for success. Often, if you look at the types of strategies that resonate with IBDs and this isn't a Cetera specific comment, but just about independent broker-dealers in general. A lot of them are seeking alpha generating strategies, and if you think about our modern alpha approach to investing. I mean this is what we do. So, while the structure may be newer to independent broker-dealers in general, the philosophy around alpha generation in our case modern alpha is something that resonates very well. So I think this relationship sets us up well to-- for success.

[Operator:]

Thank you. Our next question comes from the line of Keith Housum of Northcoast Research. Your line is now open.

[Keith Housum:]

Good morning, guys. Thanks for taking my question. The first question regarding the average advisory fee drops year-over-year from 50 basis points to 48. Is that more reflective of the mix of the ETFs? Or is that attributable to the ETF acquisition, or just some commentary on the decrease in the basis fee?

[Jonathan Steinberg:]

Well there were some certainly some slight overall decrease in fee capture with ETFs that they were at a slightly lower fee captured than the broad traditional WisdomTree platform. In terms-- and then most -- the rest of it just to do with the mix. So as an example, the quarter in terms of flows for us in the US was led by domestic fixed income, and so it tends to be at a lower fee rate. But it's really the asset mix that is driving that.

[Keith Housum:]

Okay, great. And then just coming back to the AdvisorEngine questions that were previous -- in previous quarters, you guys had given some metrics in terms of the client additions that AdvisorEngine has gone through. Is there any metrics you guys can give us an idea about how AdvisorEngine has been growing over the past year?

[Kurt MacAlpine:]

I mean, certainly so. I mean the number of client update was kind of tied to how AdvisorEngine had disclosed their clients, which they did on a standalone basis prior to the Junxure acquisition which has been integrated since then. I can tell you just kind of speaking about the overall trend, the adoption of the platform continue to remain strong. AdvisorEngine had rolled out kind of a new-- kind of version 2.0 of their platform earlier this quarter, which has sparked strong adoption and firms that had previously signed for the platform that were waiting for Version 2.0 to come out, are now transitioning on to that platform. So in the last quarters both the number of firms using the platforms has increased the assets on that platform has increased. The pipeline as it has for the last while continues to remain strong, and continues to grow in. As we continue to demonstrate through more clients on the platform, but notable wins like the one we are going to be disclosing in a few weeks, just continue to reinforce the strength and the power of the platform and set us up well to grow going forward.

[Keith Housum:]

Okay. I appreciate that. And then Amit, just a little bit of a housekeeping item here. Other income was up significantly compared to prior periods. And I understand from your guys' release that was creation redemptions from the ETF Securities acquisition. Would we expect that to continue? Or is that just a one-time blip in other income this quarter?

[Amit Muni:]

No. That's to continue. So it's just a different revenue stream that the ETF Securities business had where they break up their creation redemption fee. They have a separate fee for that. So that should be an ongoing item.

[Operator:]

Thank you. Our next question comes from the line of Mac Sykes of Gabelli. Your line is now open.

[Mac Sykes:]

Good morning. Thanks for taking my questions. I just had two questions. I'll just say them first. First, do you think the proposals that Mike had just talked about affect your operating costs at all, going forward, in terms of some of those SEC adoptions? And then I've asked this in the past; but maybe you could just give us an update on where you see the industry in terms of potential innovation share of the overall market? So what I'm trying to understand is in terms of your growth going forward, how much of that do you see as new products that you've innovated on versus just taking additional share of adoption of the overall market? Thanks.

[Jonathan Steinberg:]

So with respect to implementing whatever the-- as the proposal from the SEC stands today we will have a really almost no cost effect-- no cost effect of that-- of the new proposed SEC will on us. And in terms of future product, we do believe that the-- well, we believe that significant flow will come from future products particularly post some sort of correction, which will really play into or push into active strategies, transparent to active strategies, things like the multi-factors which we discussed earlier. The liquid alt strategies, the new rising rate fixed income-- we are very, very optimistic about future flow from new products or relatively new products. But we are incredibly well-- incredibly encouraged by with the last three or four quarters how well historical product has flown, whether its things like a DEM or DGS. Some of our historical flow leaders are also continuing to flow. So it seems balanced, but we are very excited about the new product.

[Operator:]

Thank you. Our next question comes from the lien of Bill Katz with Citigroup. Your line is now open.

[Brian Wu:]

Hi. This is Brian again. Thanks for taking my follow-up. Just a quick modeling question. For the US comp ratio guide, is this gross or net of anticipated savings?

[Amit Muni:]

So the guidance that we've given, so, yes, we gave guidance about 27% to 29%. We're running right now at about 28%. I expect us to be in that middle of that range for the rest of 2018. And then obviously for 2019 because we do have the operating leverage in that-- in the comp line as the revenues increase. I would expect it to --that range to drop in future periods. But we'll give updated guidance on that when we do our Q4 call.

[Brian Wu:]

Great, thanks. And then one more. For non-comp expenses in second-half 2018, could you provide some color on the outlook for that?

[Amit Muni:]

So generally speaking we --if you look at our historical trends, you can see that we generally have a slowdown in certain of our spending in Q3. But I don't see any major changes from what you see from the first half to the second half absent some of the cost initiatives that we disclosed in today's call.

[Operator:]

Thank you our next question comes from the line of Michael Carrier, Bank of America Merrill Lynch. Your line is now open.

[Unidentified Analyst:]

Hey, guys, this is actually Jeff stepping in for Mike. Thanks for taking my question. Regarding the $7 million of annual cost saves you guys now see. Do you expect to realize all of that or is it possible that you may deploy some of that into a new growth opportunity that may have previously been on the back burner?

[Jonathan Steinberg:]

No. I think we expect all of that to flow to our bottom line. And this is just a matter --we have efficiencies. The fact that we're gaining leverage and able to allocate some resources in other ways. We expect all those savings to flow right to the bottom line.

[Operator:]

Thank you. That is all the questions we have. I'd like to hand the call back over to Jon, WisdomTree's CEO for closing remarks.

[Jonathan Steinberg:]

I just want to thank you all for your participation today. We look forward to speaking to you next quarter. Thank you. Have a good day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.