WisdomTree, Inc.
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Good day, ladies and gentlemen and welcome to the WisdomTree Q3 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jason Weyeneth, Director of Investor Relations. Sir, you may begin.

[Jason Weyeneth:]

Thank you, good morning. Before we begin, I'd like to reference our legal disclaimer available on 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 31, 2016. 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 CEO, Jonathan Steinberg.

[Jonathan Steinberg:]

Thank you, Jason and good morning everyone. I will begin the call by highlighting some of the progress we’ve made on our strategic initiatives before turning it over to Amit who will walk you through the results. We’ll then open up the lines and take your questions. The rapid evolution of the asset and wealth management industry continues to gain momentum. Firms able to build more holistic relationships with advisors consisting of tech solutions, practice management services and strong performing, competitively priced products will thrive. With the investments we’ve made over the years, WisdomTree is well positioned for where the industry is rapidly headed. In September, we formally rolled out our portfolio analytics tool which we call the digital portfolio developer or DPD for short. Once, a financial advisor enters their portfolio holdings into the tool, they are then able to analyze portfolios, can better understand risks and opportunities, understand how specific changes in the portfolios can improve desired outcomes and stress test portfolios under a variety of market scenarios. What differentiates this tool, in addition to its robust capabilities is the fact that it’s fully digital. Advisors can use it at any time from any device and it allows WisdomTree to educate advisors on the benefits of incorporating WisdomTree funds into their portfolios while improving the productivity and reach of our sales force. Early feedback from advisors has been very strong, with users impressed with the functionality, speed and ease of use. We believe this tool will help drive close into our EPS. Last week, we announced an exciting win related to a model portfolio initiative. In collaboration with IQCIO, we have developed a series of models to be part of a select group of model portfolios available to Envestnet to advisors at key investment services, the insurance in wealth management arm of KeyBank. While still early days, our open architecture approach to model portfolios is resonating and we expect to report more wins in coming quarters. While not necessarily tied to recent technology and solutions initiatives, we are excited to be a significant participant in TD Ameritrade’s new commission-free ETF platform. On the new platform, which went live October 17, WisdomTree has 72 commissioned-free ETFs representing nearly a quarter of the ETFs on the new platform and up from just one fund on Ameritrade’s prior platform. Having the largest smart beta allocation and the majority of our U.S. listed ETF selected for inclusion highlights the all around attractiveness of our product offering. With roughly one trillion of client access on Ameritrade’s platform, this new commission free trading program is an attractive way for us to reach financial advisors and retail investors. While it’s still early and it’s not enough, we are encouraged by the recent wins and the early client feedback we have received on our technology driven pools and solutions. Between DPD or model portfolios, AdvisorEngine and our innovative and differentiated suite of ETFs we believe we have amongst the best technology and solutions offerings to help advisors modernize and grow their business. The success of these initiatives should drive market share gains and profitable growth for WisdomTree. Now I’d like to turn the call over to Amit Muni, WisdomTree’s CFO.

[Amit Muni:]

Thank you, Jon and good morning everyone. Most of our operating data is already known, so I'll quickly go through the important numbers for the quarter. Beginning to slide four, this quarter, we reported stable financial results. Our US AUM grew to 43.4 billion at the end of the third quarter primarily due to positive market movement. As the middle chart reflects, we had outflows in our currency hedged and newest equity DPS which more than offset the inflows into our international and emerging market ETFs. As you can see in the chart on the right, outflows from DXJ and HEDJ expanded sequentially along with continued pressure on the U.S. dollar. Turning to the next slide, we can dig a little deeper into our flows. During the quarter, we saw a strong demand for our international, emerging markets Europe and Japan’s small cap strategies which had aggregate inflows of 440 million. Our suite of emerging market ETFs successfully gathered assets with inflows into seven of ten funds in that category. The flows in these categories were diverse with demand for broad DEM as well as more focused EM strategies. In fact, ten of our ETFs across a broad range of strategies saw greater than 25 million of inflows this quarter. We are encouraged by the continued success in diversifying our flows and stabilizing our asset base as you can on the next slide. We continue to take steps to diversify and broaden our flows into products that fit broad asset allocation strategies in order to stabilize our asset base. As you can see from the chart on this slide, which we first shared last quarter, flows and AUM in our core strategic funds continue to grow. Flows into our core strategic funds generated more than $3.6 billion in net inflows since the start of 2016 representing a 14% annualized organic growth rate. On an AUM basis at the end of the first quarter of last year, 35% of our AUM were in core strategic funds and today we are at similar asset levels but 50% of our AUM are in these core funds. Our initiatives around building ETF models and advisor solutions broadly will continue to help in our diversification efforts. Turning to our non-U.S. business on slide seven. Non-U.S. AUM rose 27% in the third quarter and is up 80% so far this year to just under $2 billion. This quarter, we generated 332 million of flows spread evenly across our Boost ETPs, European listed UCITS and Canadian listed ETFs. Now turning to the financials beginning on slide eight. GAAP net income was $8 million or $0.06 for the quarter, little change sequentially after adjusting for the unusual items and from the year ago quarter. Higher average AUM across our U.S. and non-U.S. business platforms contributed to an increase in revenues excluding the onetime gain in the previous quarter. Turning to the expenses on the next slide. Expenses were up 3.1% to $42.5 million. We accrued higher incentive compensation as we are closer to year end and have more visibility on what we believe our full year compensation will be. As you can see just on the right, compensation as a percent of revenue for our U.S. business was 29.6% for the first nine months of the year which is within the 28% to 31% guidance range that we gave at the beginning of the year. In addition, we had higher fund management cost driven by periodic taxes associated with one of our EM funds as well as higher average AUM. Now turning to the margins on slide 10. Gross margins decreased slightly 2% due to higher fund related cost. We expect gross margins to be around these current levels as we look out over the remainder of the year. On the right, you can see our consolidated pre-tax margins were 26.7% in the third quarter compared to 27.1% in the previous quarter and our U.S. margins were 33.4% after adjusting for the onetime gain. Now to give you an update on where we are so far this quarter. As of yesterday, our U.S. listed AUM is upto $45.8 billion and we have seen October inflows or nearly $400 million. This ends our formal remarks and I will be happy to open up the call and take your questions.

[Operator:]

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

[Craig Siegenthaler:]

Good morning, Jon and Amit I hope you both are doing well. I wanted to start with the technology solutions and I know you just launched DPD and your full suite of technology solutions in Mid-September, but do you expect to see some benefit already in 4Q flows while small, and what type of impact do you expect these offerings including the model portfolio used to have on flows in 2018?

[Kurt MacAlpine:]

Hey, Craig its Kurt MacAlpine here WisdomTree’s Head of Global Distribution. So, on your question on the digital portfolio development tool, as Jon had mentioned the tool itself is designed to support advisors with portfolio construction. So if there is everything from packing and stress test their current holdings to also building new portfolios that are designed to optimize against the number of criteria like income, performance fees or volatility. The primary difference in the tool between our tool and most competing tool in the industry is that it can be done in a completely digital manner, where advisors can access in on our website without having to talk to someone. They can run the portfolios in real time, upload their tickers and conduct and save analysis. We launched this tool only five weeks ago and already we have over 1600 portfolios that have been run by advisors to date. So in addition to helping advisors build the portfolios this tool also gives us a lot of great data, so we can better interact with advisors both in terms of the products while we are having conservations with them around, but also how they intend to use these products in their portfolios. So it is like many of these initiatives very early days as a lot of them have just been rolled out over the past few weeks, but early signs of DPDs success in terms of getting deeper to our clients, better understanding their top process and the products that are important to them, we’ve seen great early success. And in terms of our ability to map it to flows, this year I think it’s still to be determined. We view the high degree of confidence in terms of how we built it to and integrated it that our sales team get real time visibility into the advisors that are using the tool, so they are notified and we do have an opportunity to follow up essentially immediately based up actions before taking in the tool.

[Craig Siegenthaler:]

Got it, thanks Kurt. Second, just on operating leverage of the U.S. business. We’ve seen actually decent revenue growth over the past few quarters but there hasn’t been an improvement in the property margin, you know it’s always a little surprising just given how high your gross margins are. So I just wanted to see why we haven’t seen, maybe even if it’s just a little bit improvement in the operating margin in the past few quarters.

[Amit Muni:]

Yes, Craig I think this quarter particularly we had a little bit of noise around compensation catch ups and we had some periodic taxes around fund cost. But I think just generally speaking we’ve always said that we are not managing the business today to maximize margins. And right now particularly I would say that’s a little bit of a timing issue. You many of the growth initiatives that we’ve spoken about are -- have just launched. So while we are bearing the expense right now, and we haven’t yet seen the revenue comes in. We are very optimistic that, that revenue will be coming in. So right now we are really dealing with that timing mismatch. But I would say as we’ve seen in the past in our business at the AUM scales, there is tremendous operating leverage in the business and as soon as that AUM does begin to scale you will see those results show as you have seen in the past, that operating leverage in the business.

[Craig Siegenthaler:]

Thanks, Amit.

[Operator:]

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

[Bill Katz:]

Okay thanks very much for both the brief comments and as well as taking my questions. So Jon, there’s been a fair amount of Industry consolidation lately in the smart beta space as well as the number of newer entrance. How do you think this plays out on sort of two levels, one you’ve seen some market share gains in the market cap weighted names going through the BlackRocks and the Vanguards, but smart beta seems like a little bit more with open field be at a lot more focus on that, so how do you think it true in terms of volumes and pricing for your business model just given what you are seeing in terms of the consolidation landscape?

[Jonathan Steinberg:]

Hi, I think there were two parts to the question. First was the competition and the second is the recent consolidation. So, with respect to the competition, we were really from the very beginning, very well prepared for what you are seeing today. This is nothing that you are seeing today is a surprise. We’ve always been competing with the established giants and we knew always that other strategic players would come into the market adding necessity overtime. What I would say is that WisdomTree competes to its innovation. We always, it starts with a differentiated products, we have long track records. One point to make is that first move or advantage is a huge advantage and we have lots of first move [ph] over products. So I mean those are really how we compete, and differentiated long term track records definitely helps you against some of the newer smart beta competitions. In terms of the recent consolidation, let me first state the obvious. You know it was good to be an ETF sponsor of scale with proprietary IP [ph] and strong brand recognition. And yes, recent consolidation by INVESCO has been very favourable for WisdomTree from a scarcity value standpoint. But we are focussed on growth, we are focussed on executing our business strategy and we are confident that we have made the right investments, the required investments to capitalize on the secular trends. And we are committed, we are not backing away from we are committed to achieving the inspirational targets that we’ve laid out, the 5% to 7% market share of the flows. However, we acknowledge that we have a fiduciary responsibility. We will always do the right thing and if we can’t drive significant growth from a standalone entity perspective; we’ll look to maximize shareholder value to finding a partner. I think that answers your questions Bill.

[Bill Katz:]

Okay, thanks that does. And I have a quick set of modeling questions if you don’t mind. Can you help us out a little bit on the other line, I know a small and grand scheme of things, versus bouncing around a fair amount over the last couple of quarters, just trying to get a sense of maybe what the right run rate is, and then could you just sort of give us what the catch-up accruals was on the comp lines just we think about. And then more broadly as you think about gross margin into next year as there’s a lot of sort of upfront costs or is that also point of margin expansion as well?

[Jonathan Steinberg:]

Sure. So let me take that backwards. So, on the gross margin on this quarter we had some periodic taxes that we have to pay for our India fund. So that was sort of particularly driver of this quarter. We think it will be around in the 82% range, so that’s you should model that out going forward. I think there’s operating leverage there. As we continue to see growth in our AUM because the fees schedule that we have with our third-party service provider that the AUM does go up, we’ll start to see gross margin start to pick up a bit. On the comp line I think it's important to remember that, we manage the number on an annual basis, right, the biggest driver there is incentive compensation. And so in any particular quarter it reflects the operating results of that quarter as well as how we’re thinking about incentive compensation for the full year. And now that we’re getting closer to the end of the year we have a little more visibility on what we think that incentive compensation will be. And so you have a little bit of that timing catch-up that you see this quarter. But again that's why we give the guidance at the beginning of the year to help you model that out and sort of think about how we’re thinking to that point up for the full year. And on the other line, I think if you just want to model, so that year-to-date number that’s probably not a bad number to think about that for modelling perspective.

[Bill Katz:]

Okay. Thanks for taking all the questions.

[Operator:]

Thank you. Our next question comes from the line of Surinder Thind of Jefferies. Your line is now open.

[Surinder Thind:]

Good morning, guys. First, we start with the kind of big picture question. As we kind of look ahead, where we in the investment sequence at this point? Over the past few years you guys have made a lot of investments. We are beginning to see the partnerships buildup at this point. But how should be kind of think about it in terms of maybe like a three-year strategy or something like that? Because when I look at headcount it's been relatively stable over the last year and it was actually modestly down versus quarter-over-quarter?

[Amit Muni:]

Hi, Surinder, it’s Amit. So, broadly we made a lot of investments over the last several years, and this year we did take that level of investment spending down, because we thought we believe we've made a lot of those investments in the past. And now it's really going to be just for incremental of what we need going forward. I think that general theme will carry forward. Next quarter will give more guidance on what we’re thinking about as investment spending for next year. But where we sit today I really don't see any broad changes to that overall theme of sort of managing it, but not the same level that you see in the prior years.

[Surinder Thind:]

Understood. And then may be turning to the technology portion of the business, more specifically Advisor Engine. Any additional color you can provide there in terms of the conversations you're having with the various financial advisors maybe where we are with that product?

[Kurt MacAlpine:]

Yes, absolutely. It’s Kurt MacAlpine here again. Our investment in Advisor Engine continues to show strong growth in progress since made an initial investment about 11 months ago now. At that point in time the platform had 28 clients using it, those clients were predominantly medium and small RIA's. As of September 30 of this year we had 53 clients on the platform. We’ve expanded that client base to include larger RIAs in addition to the smaller and medium RIAs. We’ve also on boarded or in the process of on boarding independent broker-dealer clients which is a new segment for the platform entering in the later stage discussions with a series of bank trust and bank brokerage platforms. So I think the initial investments from WisdomTree a lot Advisor Engine to compete for larger kind of more flagship mandates, and they’ve made significant investments in the platform itself continuing to expand on the functionality, the usability which is resonated really well. So our distribution team is in the field that actually talking about Advisor Engine when opportunities present itself, and I think we had a good working relationship with them today between our two distribution organization which we can – I think it should be some of the strong client growth too.

[Surinder Thind:]

That's helpful. And maybe one more quick follow-up, just looking at the international business obviously there's been a lot of success over the past year since the reorg, but when I look at Canada its actually extraordinarily well right out of the gate. Can you talk about the success that you’re seeing there. I know it’s really small part of the business right now, but is that part of the partnership that you guys establish there or how should we think about the business?

[Kurt MacAlpine:]

Yes. Its Kurt here again. So regarding Canada, we launched the business about 15 months ago and we built out our distribution team for the following months, and the team really hit the ground from the distribution standpoint only in February of this year. There's a bit of a unique nuance in the Canadian market that in the first 12 months of the fund existence the fund, the track record doesn't show up anywhere. So if an advisor is looking through a database or a platform is looking through database the funds will screen as N/As everywhere. So, I think the success that we realized today that is a function of a couple things. One is building up the distribution team and having a cross-country coverage from that standpoint. The second thing is our initial set of funds have since – have hit their one year track record which allows them to be screened into databases. And I think we are benefiting from just having more consistent and broader conversation in the marketplace. Specifically regarding the Questrade acquisition which you referenced, that deal hasn’t closed yet, so in terms of the assets that we acquired those are not reflected in the growth numbers that we’re showing.

[Surinder Thind:]

Understood. Thank you.

[Operator:]

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

[Chris Shutler:]

Hi, guys. Good morning. Can you just talk about what percent of your assets are in the RIA channel today?

[Amit Muni:]

It’s about a third of our assets today.

[Chris Shutler:]

So – okay, so about a third, and the wirehouses are the vast majority or the rest?

[Amit Muni:]

Yes. It’s really hasn't changed probably since the last time we spoke, roughly a third with the wirehouse, it’s roughly a third with the RIAs. We have about 11%, 12% with institutional about the same percentage from non-U.S. investors and then the balances retail investors.

[Chris Shutler:]

Okay, great. And then can you just talk about the decision that put [Indiscernible] ETF on the TD Ameritrade platform including most of the bigger ETFs while on Schwab you only I think 18 funds mostly smaller ones. And how should we think about financial implications of flows coming on from TD Ameritrade? Thanks.

[Kurt MacAlpine:]

Great. Thanks the question. It’s Kurt here. I’ll answer the first part and then I’ll turn it over to Amit for the second part. So as we think about that the TD Ameritrade commission free program overall, its one we’re very excited about it. As Jon had mentioned in his initial remarks, the platform itself covers both the retail and advisor channels and gives us access to approximately $1 trillion in AUM that exist on the platform today. So despite the fact that industry commission as a whole have decreased this year, the cost of executing trades is still a major pain point for advisors and their clients and many of those have indicated to us that the cost of executing is often a tiebreaker between two funds that are considering. So when TD decided to revamp their platforms from one they had in the past to this one gave us a unique opportunity to capture prominent shelf space as the primary of predominant smart data provider. So Jon mentioned that from one ETF on the program, we now have 72, which will allow advisors both retail investors using TD but also the institutional where they are a client base to execute these strategies completely commission free, either for individual transactions for building model portfolios themselves, but the initial benefit that we get from TD is that it is a platform that's fully integrated with Advisor Engine. So now clients that are using the Advisor Engine platform that custody at TD, now have the ability to build and executes commission free models as well. So in addition to the benefits we’re getting in their channels we also get this additional benefit through Advisor Engine as well.

[Amit Muni:]

Yes. And Chris on the economics, there always some nuances, but it’s not so different than any of the other fee – platform fee that we pay to other firm that we paid that fee too.

[Chris Shutler:]

Okay. And then on that maybe just clarify on the compensation line comments from earlier. If we were to assume flat AUM from here, how should we think about the trajectory of comp in Q4?

[Amit Muni:]

You know, where we sit today, we think we’re going to be – we’ll be within the range. But right now we’re thinking sort of the middle end of the range.

[Chris Shutler:]

Okay. Thank you.

[Operator:]

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

[Mac Sykes:]

Good morning everyone. In terms of the TD Ameritrade agreement can you talk a little bit about how you’re supporting marketing there specifically whether you're working with them, you’re just doing your continuous efforts, just little more color on how you’re thinking about ramping up there?

[Kurt MacAlpine:]

It’s Kurt here again. So in terms of the how we’re looking to tap into the platforms. There’s really two parts to it. There’s marketing efforts that we will do in collaborations with TD. This will range from educating their client base through some of the Advisor and incline portals that will include us being present at the conferences and into industry events and things like that. So, we are definitely working alongside TD to educate their clients both retail and their institutional clients on the platform. But in addition to that as many of you know we built out the robust database over the last number of years where we have a very deep relationships with a lot of advisors that are using the TD platform. These are advisors that we already know and have long-standing relationships with today and we’re going to continue to conduct our own marketing and sales efforts creating awareness of this program and hopefully helping to drive assets as well. And as I mentioned last comments we will also be collaborating with Advisor Engine given how well-integrated they are with TD and any additional benefits that advisors who are using that platform now get that custody with TD as well.

[Mac Sykes:]

And then, my last question is a little more holistic, but you had mentioned how you’re using technology to benefit client’s advisors et cetera that seems to be accelerating in the marketplace. Maybe you could talk a little bit about how you’re seeing technology helping to support margins related to your operation, whether its custody, clearing other back-office functions. Just trying to understand if we can expect some benefits in the material nature as we go forward in terms of your internal operation?

[Jonathan Steinberg:]

Sure. Mac, so our technology efforts have really been focused right now on bringing more topline revenue around building technology and technology enabled solutions for advisors. We have been in the past also trying to implement technology initiatives to bring more automation and more efficiencies to our back-office operations and that's on ongoing thing that we’ll do. But there is efficiencies there. You can change obviously headcount resources that they can get more automated and the like, or not have to bring on as many people as you thought. But that’s an ongoing effort that we've been doing at the firm over the last several years.

[Mac Sykes:]

Great. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of David Unger of Deutsche Bank. Your line is now open.

[David Unger:]

Good morning guys. Just the big picture capital management question as it pertains to tax reform likelihood which will help your bottom-line obviously, portion of that tax savings would you reinvest in the business and maybe would be international investment in another's technology partnership or maybe more into marketing?

[Jonathan Steinberg:]

Good morning, David. So, when we think about capital management, I said, we’ve got three buckets; first is making sure that we have enough money to make investments in the business because we see the tremendous growth that we have in the ETF industry. The second is to have dry powder in case there's some opportunities out there to do some M&A. And then third is to return capital back to our shareholders. And we do that now through dividends and buyback. We just focus more on the dividend side of that equation today. I really don't see any change in that if there's tax reform. Anything would be great, we’ll be a good beneficiary of seeing a reduced tax rate. And it’s just how do we want to play that capital into one of those three buckets. So we’ll have to wait and see at time to see exactly what tax reform is. But there’s really no change in that philosophy. Overall we’re not a type of firm that's going to just like cash build. If we can't find the need for it we’re going to return it back to our shareholders in the most efficient way possible.

[David Unger:]

That's great. That’s great. And then just another big picture question, I think historically your stock is very highly inversely correlated to the yen. We’re starting to see some movement. I just broke through 114. Is there inflection point when you think advisors might step up more to the DXJ and is there anything you would do differently to educate advisors on what's going on over in Japan right now?

[Jonathan Steinberg:]

Hi. This is Jon. So just if you look at Amit’s quarter to-date update you see that flows to DXJ term positively and it's tied to progress on the budget and also on some the ECB, comment. So the strong dollars certainly been helpful in the markets very well educated on the benefits of a strong dollar for Japanese equity, but we always are continuing to educate.

[David Unger:]

Thanks a lot guys.

[Operator:]

Thank you. Our next question comes from the line of Michael Carrier of Bank of America. Your line is now open.

[Jeff Ambrosi:]

Hey, guys. This is Jeff Ambrosi. Thanks for taking my question. Last night the treasury released their asset management report. And in there, there was sort of suggestion to adopt a plain vanilla ETF rule making it easier and less costly for ETF issuers. So I was just wondering to get your thoughts on how that might impact WisdomTree if the rule like that were to happen?

[Jonathan Steinberg:]

Sure. So, over the years ETF sponsors have perceived different forms of exemptive relief from the SEC. In fact, the few years ago the SEC did put out a big proposal rule that said, they would allow managers to launch ETF without getting exemptive relief. But then they pulled it. So, it’s hard to say what if a rule is going to come out on that. But I would say having exemptive relief just one of the competitive advantages that we have in the marketplace as other competitive advantages that we have around having the first mover advantage of our funds, having a tenure track record that has got great performance. We have one of the largest distribution teams in the marketplace today, our product development expertise and our strong on brand, so we’re confident where sit today.

[Jeff Ambrosi:]

Okay. Thank you. That’s helpfully. And then, just a follow-up on the flow. So in 3Q despite the outflows like international asset flows were actually pretty strong. But then if I look quarter to-date it seems like those flows have kind of turned a bit. So, I’m just wondering what change in the last couple of months? And if there any lumpy winds that kind of drove that strength in 3Q?

[Jonathan Steinberg:]

So, for the flows for the international business as you mentioned, they’ve been strong year to-date. In Europe we’ve seen both success in our UCITS and our notes business and then obviously we’ve seen very strong flows relative to the starting point in our Canadian business. I think it’s from a fourth quarter perspective is that you’re referring to. I think it's a little too early to tell in terms where flows will go. So I think there has been some trading activity on both sides, so we benefited from inbound flow and also a little bit of outbound flow as well.

[Jeff Ambrosi:]

Okay. Thank you for taking my questions.

[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. Thanks for taking the question. I know you had indicated I think on the Ameritrade deal that the rev share was not any different than the prior deals. Can you just remind me how you guys account that? Is that account to revenue item or does that flow through as an expense? And if so which line item would we be watching for that?

[Amit Muni:]

Yes. So that flow through has an expense and you'll see that in the third-party sharing line item on the income statement on the expense side.

[Brennan Hawken:]

Okay, great. Thank you. And then on the Canadian fee rate, I know we had the Questrade come in, right. So there was some noise there. But as we think about modeling that on a go forward, I know there’s probably still some catch-up still due to averages. How should we think about sort of stable fee rate in that business going forward?

[Amit Muni:]

Yes. So this quarter you saw fee rate had dropped. We had some – as is normal practice in the Canadian market. We had a management fee rebate to the some of the seeders of our Canadian listed ETFs, so you’ll see that sort of build in. So as that continues to flush through the system and as the business continues to grow you just start to see that sort of start to stabilize to a more average rate that you see for the product there.

[Brennan Hawken:]

So, that you’re saying that all revert back to historical averages or how should we think about it?

[Amit Muni:]

Yes. Once we flow through, once we generally go through the initial fee which we’ll start to see the fee rates come back to more average levels.

[Kurt MacAlpine:]

The only other point to add though is the asset mix in Canada, so we’ve had great success earlier on in 2016 comp funds that we had launched in the market pace. Obviously those come at a lower price point than equity funds, so I think part of it as Amit mentioned is the fee, part of it just the asset mix and the early success we had in fixed income.

[Brennan Hawken:]

Okay. So, I guess, it’s a little difficult to say what the right go forward rate would be just to try to think about how to model this. We have the kind of like stuff flush out. Is that what you guys say?

[Jonathan Steinberg:]

Yes. I think, you have to let it flush out to a little bit. Still small compared to the overall so.

[Brennan Hawken:]

Yes. I’m low on questions at this point. Thanks.

[Jonathan Steinberg:]

Okay.

[Operator:]

Thank you. Our next question comes from the line of Robert Lee of KBW. Your line is now open.

[Andy McLaughlin:]

Hi, everyone. This is Andy McLaughlin filling in Rob Lee. Thanks for taking our question. Lot of our questions have been asked or answered. But just can we get your updated thought or just thoughts in general around pressure to provide seed capital as you guys look to expand?

[Jonathan Steinberg:]

I’m sorry. Repeat the question.

[Andy McLaughlin:]

Just your thoughts around pressure to provide seed capital as you’ll look to expand your offerings?

[Jonathan Steinberg:]

So we have very strong relationship with the market makers, long histories with them. We launch funds. We launch really conviction funds which the seeders really appreciate, and we often supported with aggressive marketing which has become more difficult to establish a new fund in the marketplace from all the new competition. But we continue to be very successful in finding seed. I’m not seeing a change in the model. So things are stable from that perspective.

[Andy McLaughlin:]

Okay, great. Thank you. And then just one other question, you mentioned that if tax reform were to go through, you might look to deploy some of that in M&A sense. What you see is kind of gap or what would you be looking from an M&A sense?

[Amit Muni:]

You know, so when we think about M&A, anything that we can get into an asset class or a geographic things that would help us build scale or help us diversify, those are the types of things that we would look at from an M&A perspective.

[Jonathan Steinberg:]

The only other thing is our recent investments into technology as well which is relatively new additional focus to the firm.

[Andy McLaughlin:]

Great. Thank you.

[Operator:]

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

[Keith Housum:]

Good morning, gentlemen. I guess, most of my questions have been asked as well. But the one that is really in my head right now is, as we look at those various technology solutions you guys have between DPD now and your model portfolios, in your investment Advisor Engine. How many of those are just going to purely paid for by growth in your AUM versus the opportunity to get any potential advisor fees or any other fees outside of just the growth in AUM?

[Jonathan Steinberg:]

So, from the economic side there is – the bulk of it is kind of come in from the core ETF, right. So, how we get models on to some of these initiatives on the Advisor Engine platform, so in technology solutions, all of it is the goal – end goal is to selling our ETF, so that’s where you’ll see the bulk of the economics start to come in. The only thing I would add though is that Advisor Engine is committed to building a profitable business and there is our seeds outside of our ETF deeps on the assets on their platform. So that is a -- should become at some point significant additional source of revenue for the WisdomTree ecosystem.

[Keith Housum:]

Great. Thank you.

[Operator:]

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

[Ryan Bailey:]

Good morning. I was hoping you could spend a little bit of time to talk about your fixed income ETF business. I think part of investors announced acquisition thesis was bullet shares and the self-indexing opportunity there. So how do you see competition in the space and kind of what’s opportunity to grow that business?

[Luciano Siracusano:]

Hi. This is Luciano Siracusano, Chief Investment Strategist. So, within the fixed income front we have had some success in the last few years with a few funds that we created, AGI, which gets you on the higher yield in the over Ag, that’s an index that were able to collaborate on and have a lot of input in terms of trying to enhance the yield on benchmark. We’ve also innovated with dual duration high-yield and that’s a product that seen inflows this year. It's index based, but it's also a product that can potentially take a more inflows in a rising interest rate environment. So I would say, we had pretty decent success over the last two years or some of the newer products again sometime it take a little bit longer to scale to get on platforms, but I think there is growing awareness that we have those in the field and increasingly we’re also incorporating them into our models.

[Ryan Bailey:]

Got it. And then, I guess just a quick question on DPD. So I think you mentioned that the product optimizes portfolio for whatever goal and advisor is using, did that suggests product to use? And if does, are those products -- is DPD open architecture or is it tailored to WisdomTree-specific products?

[Kurt MacAlpine:]

So its Kurt here. So, yes, the tool does suggest products, and it suggests those products along those categories of optimization that I mentioned whether it's income, performance fees or volatility. It is open architecture. So this is not a tool that for every ticker that you put into one firm it automatically translate that ticker to WisdomTree. So it does optimize portfolios which include proprietary WisdomTree strategies as well as third party strategies in there.

[Ryan Bailey:]

Got it. Thank you very much for your time.

[Operator:]

Thank you. We have a follow up question from the line of Craig Siegenthaler of Credit Suisse. Your line is now open.

[Craig Siegenthaler:]

Thanks for taking the follow up. Amit, do you have any early thoughts on how the U.S.comp ratio may look in 2018?

[Amit Muni:]

Too early to tell Craig, we’ll talk about that on our next call where we’ll give guidance for the next year.

[Craig Siegenthaler:]

Got it. And then, on the non-U.S. business which is still unprofitable, do you have any expectations on when that could be profitable and then you know what that would do to your tax rate, just given the nice ramp in flows in the year when we’ve seen here.

[Amit Muni:]

Sure, so you know the management teams of those businesses, were really driving them to get the profitability as soon as possible. We are hoping in the next two, hopefully two, three years, that profitability should hopefully come in. From a tax rate perspective it will be beneficial, because right now we are not getting any of the tax benefit for those international losses from a GAAP perspective, so once they do turn profitable we’ll be able to shield that income for a period of time until we’ve gone through those historical operating losses.

[Jonathan Steinberg:]

And this is Jonathan. Though we are trying Amit was – gave conservative guidance on the profitability. We are optimistic that will start shrinking the losses as we continue to scale.

[Craig Siegenthaler:]

Thanks for taking the follow up.

[Operator:]

Thank you. We have a follow up question from the line of Bill Katz of Citigroup. Your line is now open.

[Bill Katz:]

Okay thanks. Just going back to where we started earlier, you mentioned key bank and then a bunch of others within the pipeline, assume you don’t want to give names, but is there anyway sort to think about the toll address for market of the assets that you might have the opportunity to sort of cross selling to?

[Jonathan Steinberg:]

This is Jon again. Yes, so Envestnet is one of the larger platforms out there. So that once we get our models on to investment, they become visible and accessible by a very large population of our RIAs some kind of broker dealers. So the key there is really connecting with the home offices, getting through the due diligence processes and getting available at the individual front level. So we’ve completed that with key investment services. Their FAs can now buy into our models, we are starting to be able to market and discuss with them, through them in the past few weeks and I think the reception has been very encouraging from the get go. But as we you know expand onto different platforms including the AdvisorEngine we are dealing with a much larger addressable audience and we think that overtime this has been a very significant driver of assets for the industry.

[Amit Muni:]

And just Bill, you know the secular trend is I think the models will be an ever increasing portion of the total flows, though it’s still relatively early days for the industry around this trend.

[Bill Katz:]

Okay, thanks for your patience guys.

[Operator:]

Thank you. This concludes the question and answer session.