Q2 2020 Waddell & Reed Financial Inc Earnings Call
[music].
Welcome to the Waddell <unk> Reed financial second quarter, 2020, <unk> earnings Conference call.
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I would now like to turn the conference over to Mike Daly, Vice President Investor Relations. Please go ahead.
Thank you on behalf of our management team I'd like to walk him you talk quarterly earnings conference call joining.
Joining me on our call today, our Phil Sanders, our CEO, Brent Bloss, our president Ben Crowdstar CFO, Dan Hansen, our CIO, Shaun <unk> President of our wealth management business, what Ellen rethink Amy Scotland, President of I'd be distributors, Inc.
Before we begin I would like to remind you that some of our comments and responses may include forward looking statements and non-GAAP financial measures. We believe these forward looking statements to be reasonable based on information that is currently available to us actual results could materially differ from those expressed or implied due to a number of factors that we referenced in our public filings with the S.
See you.
Yes, or no duty to update any forward looking statements.
Materials role that today's call, including a copy of the press release that contains a description of these non-GAAP financial measures and a reconciliation to GAAP and supplemental schedules have been posted on the Investor Relations section of our website <unk> Dot Waddell dot com.
I'd now like turn the call in Brazil.
Good morning, Thanks for joining us.
The second quarter brought our country the economy and the stock market something unusual journey as we started the period and the depth of a dramatic downturn amid the global pandemic.
Despite the ongoing health pandemic social unrest in the U.S.
And economic uncertainty throughout.
Period, U.S. stock market returned one of the strongest quarters since 1998.
Thanks in part to abroad, and rapid Central Bank policy stimulus investors have generally been covered much of what was lost through the downturn earlier this year.
Historically.
Typical market recovery from a recession has taken two to three years or more.
Yes recovery to date has progressed quickly although what sustainability remains in question.
Enthusiasm about a gradual reopening up the economy has been muted by ongoing uncertainty regarding the resurgence of public health risks and more parts of the country and a concern that Q3 and Q4 couldn't be more challenging from a public health perspective.
Broadly the financial markets remain strong.
Concern about another downturn remains we do expect to see continued market leadership from companies with high quality business models, which have delivered more consistent results.
We believe this type of market environment as well suited for the idea probes to active in Boston.
Yeah, that's based on fundamentals business models management leadership and valuation.
At the same time within our wealth management business, our affiliated advisors focus on delivering disciplined financial advice and long term personal financial planning is as valuable as ever and helping clients achieve their financial goals.
For our enterprises, the whole across the changing circumstances, our shift to our remote work environment has not altered the comprehensive capability of our teams for the quality of service, we are delivering to clients and our wealth management affiliated advisors.
Colin 19 steering committee and enterprise preparedness teams continue to meet regularly to effectively navigate these meet times.
Evaluate options for returning say figured the workplace over time.
As we mentioned another last earnings call, we have taken a holistic approach to managing through this environment with all stakeholders in mind.
Clients affiliated advisors employees shareholders and our community.
Regardless of circumstances or environment, we are committed to steadily executing on our long term vision and growth strategy.
As a reminder that strategy consists of six key strategic enablers.
Hi, there products and pricing continued focus on strong core processors and performance metrics.
The ability to leverage technology and analytics as a strategic asset across the organization.
Having a girls culture and a more agile organization.
Sharpening our brand awareness in the marketplace, and finally, effectively allocating capital through internal investment initiatives as well as taking advantage of potential dislocations an acquisition opportunities in the asset management and wealth management industries.
I'd like to highlight some of the major steps we took over the course over the quarter on these key focus areas.
But then product and pricing, we supported clients by introducing new products in both businesses.
Our asset management business, we introduced two additional strategies in a model delivery format, bringing our total offering tonight.
These strategies are available in third party retail separately managed accounts and unified managed accounts.
We believe the opportunity in this space going forward is strong as wealth managers and financial professionals increasingly turn to model delivery because it provides them greater flexibility and vehicles as they provide financial plans for their clients.
76% of our assets under management are now price at or below their respective peer median after the fee reductions that went into effect. This quarter on a core bond and March cap growth products as well as finalizing the closure of certain legacy I'm used to share classes.
In our wealth management business, we introduced the high net worth suite of products and services designed to meet the needs of more affluent clients, while enabling affiliated advisors.
You operate a holistic flexible approach to complex financial situations.
We also introduced new separately managed accounts strategies in partnership with a range of institutional money managers, allowing affiliated advisors to offer the direct ownership structure transparency.
Tax strategy options and other benefits so that's amazed to clients who may benefit.
Within technology and analytics, we have filled the newly created position of Chief analytics Officer.
This will spearhead our efforts across the enterprise focused on our enterprise wide data analytics and artificial intelligence furnishings.
We have also continued with our wealth management and asset management technology platform initiatives with the goal of improving our affiliated adviser and client experience is enhancing sales enablement and improving internal operations.
Lastly, we implemented additional digital and technology capabilities for employees throughout the quarter for continued operational productivity and efficiency, while we navigate the work from home environment.
We also made progress enhancing core processors and operating performance during the quarter.
In our asset management, and you're not in our asset manager, we strengthened our institutional distribution model by launching new technology to create a more seamless client experience to support our continued progress in reducing how you when freedoms redemptions.
Our wealth manager, we implemented a remote recurring process that allowed us to maintain advisor recruiting activities. Despite the challenges associated with told the 90.
We expect these innovations will benefit our recruiting efforts even in a more normal environment as we are able to leverage technology to more nimbly and quickly evaluate candidates in our strong pipeline.
Our entire wealth management team.
So did an extraordinary job converting our annual vision conference two and virtual format under challenging circumstances.
Our annual conference has been part of our culture for more than 50 consecutive years and we did not want to let this year's plans for shared content and experiences be diminished due to the pandemic.
Our team was able to quickly pivot to leverage technology enabled solutions and create an interactive virtual today experience that was attended by nearly 1500 advisers partners in home office staff.
In an effort to further drive our growth culture and organizational agility, we took additional actions to advance advance our diversity and inclusion initiatives.
We've made great strides to ensure we have a true cultural belongs within our organization.
However, especially with recent events across the country over the past few months. We also know that we as a society and industry in a company need to do more moving for.
Additional actions and steps we have recently completed indoor announced include.
Conducting additional all employee learning session.
Called days of understanding focused on racial diversity and justice.
These sessions include guest speakers from a local communities.
Also beginning in 2021, we will observe Jim team.
Each year as a paid company holiday, yes will provide our employees the opposite.
Pardon me Mr. conference operator, we appear to have lost a Mr. Standards location is someone else would like to pick up or I can put the call back on hold your choice.
Okay, we'll put the call back on hold until just set ourselves back at normal please.
Okay can you on I'll continue on and it's Ben.
Thank you Sir.
You bet.
Apologize for the interruption, everyone I'll pick up where felt locked up and hopefully he will join us.
As we progress into 2020 and 2021, we will hire two newly created roles entirely dedicated to diversity and inclusion.
First I hadn't diversity and inclusion responsible for developing and delivering on the next evolution of our comprehensive diversity and inclusion strategy that is aligned with our purpose vision mission.
So you end business goals across the organization.
The second role will focus on diversity outreach on sourcing.
They will work across the organization to enhance our community and industry diversity outreach and sourcing efforts, including the diversity of candidate schools for employment and affiliated advisors as well as minority and women owned vendors and business partners.
In addition to the coping 19 related donations. We made earlier this year. We have recently provided support two organizations to help focus on racial justice and diversity and better support our local underserved communities.
With respect to brand we have launched a full brand to review that will include all three of our brands across the enterprise.
This is a multiyear effort and we launched the first phase of this initiative in the second quarter and are partnering with a premier well respected global brand agency on this phase of the project.
Lastly in terms of capital allocation, our balance sheet enables us to maintain a regular capital return to shareholders by way of dividends and share buybacks, while also positioning us to pursue and finance strategic M&A opportunities arise.
In support of these efforts, we announced a during the quarter that we have filled a newly created position.
Nice present, an acquisition strategy and integration.
We have been clear that inorganic growth is a key component of our strategy and this position will play a vital role as we continually evaluate acquisition opportunities across wealth management and asset management.
All of this progress highlights just some of the ongoing work, we're continuing to deliver on our long term vision and growth strategy.
We continue to see evidence of progress across the enterprise and believed that our strategic positioning our robust capital position and most importantly, the resilience and adaptability of our people positions us well for growth in the future.
Turning to a few details within both our asset management and wealth management businesses now.
Maybe investments net flows improved this quarter aided by meaningfully lower redemption against our $2 billion in gross sales.
In fact, redemptions improved 24% compared to the first quarter and 19% compared to the same quarter in 2019.
Sales continue to be strong in our midcap suite with both strategies in no positive flow for the quarter.
Well short term performance has improved we continue to see outflows in our international core strategy.
Distribution teams are working well remotely and continue to make traction across channels since we realigned the structure of our sales teams.
We continue to focus on providing our clients with high quality service that meets their unique needs.
Well its highlight and provide access to our intellectual capital, while keeping the safety and wellness of our employees and clients as our top priority.
Turning to investment performance.
Second quarter of this year was one of the best quarters for U.S. equities since 1998.
The catalyst for the strong quarter, what's the resurgence in risk appetite in the market. Following the securities repurchase program Securities purchase programs announced by the Fed March 23rd which marked the bottom in the first quarter Hello.
Equity markets in particular were driven by low quality factors, which over the long term have proven to be detrimental compounded returns.
Our commitment to institutional caliber processes means that while we are mindful of short term market dynamics, we remain focused on the long term and maintain discipline and consistency in volatile times, such as we have seen in the first half of the year.
Well absolute returns were strong active managers generally did not keep pace with benchmarks in the second quarter.
We maintained strong long term relative performance across our quality oriented growth franchises, owing to our long term commitment to finding and investing in companies with differentiated long term growth prospects.
Our international core equity strategy, which as we have previously noted has been challenged by negative flows has more recently seen its relative value discipline result in improved investment performance.
We continue to focus on delivering long term success and communicate our discipline to our clients through our fundamental research and insights as we have through many market cycles.
As we consistently enhance our institutional caliber and best then and distribution capabilities, our near term focus will be on driving sales across a wide Burke.
I'd breadth of distribution opportunities, while sustaining long term performance improvement.
Turning to the wealth management business.
It has held true to form this year as a consistent and stable aspect of our enterprise that individuals and families and businesses continue to find value in personal financial planning guidance from professional advisors.
As we've shared in the past the wealth management business is a key driver to our long term vision and growth strategy.
We've seen strong advisor recruiting results this year.
And we think our differentiated service and support model combined with our technology package and full product suite are resonating with these newly added advisors as well as other advisors in our recruiting pipeline.
We also have been pleased to see continued strong growth in advisory assets with the sixth straight quarter, a positive net advisory flows.
The fact that these inflows occurred despite a challenging market backdrop illustrates the wealth managers ability to capture assets through market cycles.
On the technology front, we further expanded our waddell one centralized digital data platform by introducing a comprehensive web based and cloud accessible integrated database, along with additional repository of processes procedures and other information both.
Which are now available to all affiliated financial advisors.
Now I'll turn to financial results.
We reported net income of 25 million or 38 cents per share compared to 22 million or 32 cents per share in the prior quarter.
As was expected revenues dropped due to the sharp decrease in asset levels as we headed into the second quarter.
Lower operating expenses, partially offset the lower revenue and were 7.9 million better while investment income improved to 22.9 million due to unrealized investment gains on our corporate and seed investment portfolios, none of our hedging strategy.
Wealth management assets under administration ended the quarter at 59 billion, an increased 14% compared to the prior quarter, primarily due to the market rebound.
Net new assets improved compared to the first quarter, partially from stronger advisory sales as well as lower brokerage account redemptions.
As you saw in the release, we've updated our definition of net new assets to include dividends and interest, which aligns with how others in the industry report this metric versus including it in market action.
We have included a schedule presenting than historical data on our IR website. So you can see the impact of this change.
Notwithstanding the updated net new assets definition. This quarter continued a multi quarter growth trend and net new advisory assets with 3.3% annualized growth and an all time high balance of 27.2 billion in advisory assets at quarter end.
Our progress transforming the wealth management business continued in the quarter and we were pleased to have another 11 advisors affiliate with firm.
As you know, we just recently reinvigorated active recruiting efforts and we've been pleased with the progress thus far in the year. Despite the challenges that remote recruiting brands.
Since the beginning of the year 21 advisors have affiliated with what I wouldn't read with combined prior from assets under administration totaling over 1.4 billion.
This strong recruiting combined with continued low attrition resulted in the advisor count Inflecting modestly this quarter and stabilizing 1317 affiliated advisors and associates at June Thirtyth.
Advisor productivity remain consistent as well at an average of over 460000 in total gross revenue.
We believe our differentiated service and support model combined with our technology package and full products. We are resonating with these newly added advisors advisors in our recruiting pipeline and our legacy advisors.
Ivy investments under management ended the quarter at 65 billion, an increase of 16% from the prior quarter, while average assets under management of 61.7 billion were down 7%.
I would only add to the to the detail on flows earlier in the call that we've been encouraged with the steady continuous improvement inflows and while it's still early the potential of our redefine sales strategy has thus far proven worthwhile.
Turning to the financial results total revenue for the quarter was 240 million and decreased compared to the prior quarter, primarily due to the lower asset levels.
Investment management fees were also lower due to a lower effective management fee rate, resulting from mix shifts as well as the targeted fee reductions implemented in the quarter on our large cap growth and core bond products.
You indeed fees were lower as well due to lower advisory fees and service and distribution fees due to lower asset levels.
In addition sales commissions were lower 5.7 million as a result of reduced sales activity across insurance product line.
Operating expenses totaled 216.4 million and decreased 7.9 million compared to the prior quarter.
Distribution costs were lower 12.2 million due to the lower revenues, while controllable costs increased 4.9 million due to higher compensation.
Gionee and technology costs.
Patient increased as a result of the mark to market increases on equity compensation and our deferred compensation plan both in due to the market rebound.
DNA expenses were higher 1.9 million.
As we redeployed travel and entertainment savings.
Into strategic initiatives across the organization.
Technology costs also increased due to new software solutions deployed during the year.
Well, we did take several incremental actions to reduce controllable expenses through the first six months of the year.
We were clear in our last earnings call that we would continue to take it long term view and invest in the areas. We think will allow us to come out of the pandemic in a strong position.
And drive our long term growth strategy.
While we will continue to closely monitor expenses for opportunities to drive additional efficiencies. We do expect it controllable expense run rate to return to our prior guidance range of 105 to 106 billion per quarter for the remainder of this year.
Merely related to continued strategic project investments, but of course subject to the broader market environment.
The effective income tax rate was 25.3% for the quarter and was lower due to volatility of forecasted earnings despite including discrete tax expense of 1.3 million related to shortfalls from the vesting of restricted shares.
Based on current asset levels, and the resulting forecast we expect the tax rate to be at the high end of our prior guided range of 24% to 26% for the balance of the year.
Cash and investment balances increased modestly compared to the prior quarter due to unrealized gains on the investment portfolio as well as operating cash flows, which were partially offset by share repurchases and dividends.
We continue to be pleased with the strength of the balance sheet as we execute on our organic growth plans, while maintaining the flexibility to pursue inorganic opportunities all while maintaining an active shareholder capital return program.
Finally, we completed the settlement of our pension plan, which removes a 194 million dollar gross liabilities from the firm.
We reviewed we viewed to this action as a win for both the company from a reduced cost of record keeping and compliance perspective as well as for participants who are able to access their balances and direct them in accordance with their overall retirement plan.
We still maintain a competitive defined contribution plan, which we enhanced as part of this transition to include a discretionary company contribution component. In addition to the matching component.
Operator, we would now like to open the call for questions and I'm told that Phil has rejoined US. Yes. He has we will now begin the question answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset but.
More pressing the keys to withdraw your question. Please press Star then too.
Please limit your questions to one with a single follow up at this time, we will pause momentarily to assemble a roster.
The first question is from Glenn Schorr with Evercore. Please go ahead.
Mr. Shore. Your line is open do you haven't muted on your end.
Thank you very much I appreciate it.
Okay. So I wanted to ask a question on that you're hiring.
Of the executive on the M&A from we've seen a little bit of a pick up back in activity lately in the industry. So curious what you're seeing overall.
And then you specifically back with the balance sheet stronger I'm curious on how you balance healthy tension.
Well wanting to probably bought something thats in favor higher season in flowing but the higher valuation.
And your willingness to do so in this market. Thanks.
Okay. Thanks, Glenn This is Phil my apologies for dropping off earlier and thanks to Banford, taking over I guess this is.
I like the challenges of working from home at different times, but.
I'd say.
Maybe I'll start and <unk> and ban I don't know if you want to add in this I think.
As the market has rebounded there's been a little bit more activity in terms of its timing a little bit and obviously this we've made no secret of the fact that overtime as we've kinda transformed the business model.
Along with our strong capital position, we have the ability to.
Jumpstart, our growth through acquisition opportunities or and strategic investments and that type of thing I think as you said it it will be I think on the asset manager side. It would likely be more specific what specific strategies are relatively focus areas that can augment existing strength.
Our broad enough portfolio as you said either uncorrelated asset classes that we don't currently provide or itself I think within the fixed income area. That's not been a huge areas of expertise for our company historically, we've been more equity minded. So I think there's opportunities on the margin.
The active there I do think acquisitions and the asset management area that you present.
Some specific challenges with respect to culture and.
Integration and we want to certainly be mindful of that I would also say that you know <unk> on the wealth management side I think that that is also an area that we're very interested yet we've made significant progress in transforming the business model within our wealth management transition to an open architecture platform as you've seen on the rest.
Results, we've now really made a.
Significant improvement with respect to the.
Stabilizing the advisor count we're optimistic that we can grow that business going forward. So there's opportunities to to scale that part of our company as well, which I think would be a long term stabilizer to the overall business model and then finally I'd just say obviously share buybacks remains an area of focus as well.
And we can be opportunistic there so I'd say in this environment. It's it's a good athlete now we have a real strengthened our balance sheet in the financial profile and provides us a lot of opportunity flexible and take advantage of potential dislocations in this industry. So.
My stop there Ben I don't know if there's anything else you want to had in terms of how we see that.
I think those wells said, so I would add one thing which is a we're very pleased to have charlotte's join us who will be focused in particular on on M&A opportunities and his addition, as well as that focuses is part of our our continued strategic plan.
We have laid out so we're just marching forward in that respect.
Okay, and then I think you wanted to make one point.
Yeah, I'll, just add up wind, Glenn and Glenn you rightly pointed out there are areas in the market that are hot they're going to trade at higher valuation. The equally interesting part of that equation is there the other areas of the market where the market. You know has a less demanding view of it because you know in some cases potentially a short term.
Dislocation challenging whatnot, and making very well be an opportunity. So the attitude. We take it is there a strategic fit with our investment capability within the asset management you know M&A.
Oh rubric does that advance our core who we are as Ivy as fundamental active investors of as an institutional Talbot platform and we complement and advance that quite entity.
Through our inorganic levers and if so you know valuation clearly is a part of all that but just as there are hot areas in the market there's areas.
To add up.
To add value by by taking a longer view.
Alright, thanks, so much all that guys.
The next question is from dad fed and with Jefferies and company. Please go ahead.
Oh. Thanks, So just wanted to talk about the advisor backlog and kind of outlook for advisor growth.
If you could just talking about where that sits today and I know you mentioned recruiting is getting a little bit easier, but also talk about the typical profile of the advisor that's coming on your parts were no year to date, the 21, I think new advisors.
Sure Sean do you want to take that one.
Yeah. Thanks bone Dan. Thanks for your question, Yeah, we're continuing to see even in rest of the Cobra 19 impacts in the pandemic done and having to do some alternate type approaches with regard to recruiting virtually we're still seeing a strong pipeline that's coming through the organization, we're actually and we.
Look at the overall backgrounds and there the typical profile our average recruiting has been right about that 400000, and we take the 21 advisors for the 2020 year average productivity is about 390000, so consistent with that target that we laid out there with trying to recruit towards that more.
Hi, producing type advisor targeting around 400000 production.
With that we're seeing a relatively diverse background coming from a variety of different firms I'm independents banks.
Some wire house as well as on the are a channel so relatively diverse group that's coming into the organization, but consistent with what our value proposition has band, which has been focused on the build out of our competitive technology package, but more about the overarching support model that we've been providing two.
Our advisors with.
Detailed practice development services advanced sales on Diamond service or things that nature that it really driven the experience with those advisors. So we're seeing quite a bit of background. There that's driving that competitiveness around the multitude of different aspects of advisors that are coming into the organization I'm again, the pipeline has remained strong for us.
We've been seeing five advisors onboard in the month of July here with bringing in assets in that range of about 1.5 million prior from trailing.
TG are sort of growth revenue. So the pipelines remaining active and we're working through some of the complexities related to the called the 19th.
Okay. Thank you.
Your next question is from my carrier with Bank of America. Please go ahead.
Hi, good morning, and expand the questions.
Maybe first one just on the net flows during the unaffiliated you channel you guys saw its a good improvement that we can see the trend in terms of that you need to low redemptions stills are fairly steady but anything.
Of particular driving that just in terms of like certain products or certain platforms.
You noticed on like a significant change obviously the industry trends you know that better but just wanted to see if there was anything specific.
Ill.
Any do you want to touch on that.
Yeah. Good morning, good morning, everybody and thanks, Mike for the question I.
I would say, yes, you're right into the industry flows just generally got better, especially as it related to redemption, but.
When we look at edit product by product and you know with the Phil mentioned in his script of the improving short term performance of international core with it with the relative value strategy coming back in favor and we thought the decrease redemption in that strategy that was a big driver, but we really.
Thought across the board and more heavily in you know the strategies, where we focus our sales efforts. So it really was across the board, but led by international core.
Okay. That's just a quick follow up some under fee rate you guys mentioned the price changes if you refer everyone to mix this quarter create a lot of volatility I don't know if you can parse that out you any terms the impact, but just trying to get a sense, though you know what's more normal just given the pretty significant move you do in the quarter.
I don't know that Ben do you want to try to take that.
Sure I wouldn't show would be I would be happy too yes.
Piece of that of course, where the where the new fee waivers that we added on large cap growth and core bond and again, we expect to have an annualized impact of a one to two cents. So of course the quarter was.
A proportional piece of those the other thing going on there was mix in particular ice or international core equity flows as Amy alluded to that shifted our fee rate a little bit and then we are you know as our as are many others.
Making up some [noise].
Some of the rate on money market, just due to the low rate environment that also had a very small impacted the quarter.
Thanks, a lot.
The next question is from Bill Katz with Citigroup. Please go ahead.
Okay. Thank you very much for taking the questions. So just coming back to your distribution margin a little bit appreciate is probably some moving parts and there quarter to quarter, but does it like it a squeeze down a little bit in terms of profitability could you talk a little bit about what might be driving that as a sort of unusual items. In there is that sort of a REIT would it be thinking about looking ahead.
Okay, then you want to take a crack at that.
Yeah, I think good morning, Bill I think.
Part of that of course were lower asset levels in particular, starting at at the beginning of the period, which which probably had the most significant impact on both wealth and asset management.
As a reminder, most of our advisory assets in the wealth business, our our build out the first of the monk based on asset levels and so some of that is just the way the calculations work and and movement of course during the quarter was quite significant.
As you all know we also had a little bit of a decline in sales in insurance products again in the wealth business that we mentioned in her comments that were contributing to that.
Okay. That's helpful. And then just as I think about.
The pipeline you'd mentioned, it's pretty good when you can you talk a little bit about which segments within the wealth management business, the you're really seeing the greatest opportunity set right now.
Okay Bill are you referenced.
Potential M&A opportunities and our that type of thing.
Well sure those if it was actually more of an organic oh argument, but I did want to double down to you'll get a question, but if you want to answer it that way to I'd be city opened to your your views yeah, well, Sean why don't we talk about what you're seeing in terms of on recruiting front and the opportunities to add to our advisor count overtime.
Yeah, Hey, good morning Bill.
The pipeline we've been working is been relatively fluid for us we look really across the segment. Most predominantly it's the other independent channels. So other independent firms, where we're seeing most inflows of advisors coming into the of why don't reorganization and I think what's resonating there is really the you overarching.
Package that we've assembled here competitive technology payout breads overarching product and open architecture, a development on our advisory programs that we've been working on over the past several quarters, but it's really resonating around additional support models with advanced sales support through our well solutions group the materiality.
Our practice development team as well as field support that we have embedded out there we've done a lot over the course of 2022 and still maintain service levels and support models in light of coal the 19 and evaluating the situation and doing a variety of different type of virtual opportunities, including the migration.
One of our in person conference onto a virtual based conference that had a lot of success associated with it so.
So all those things are resonating with advisors and promoting that opportunity to organically grow the organization with obviously seeing the inflection point.
Modestly here this past quarter with an uptick in advisor headcount just a modest uptake, but it's the first a head count increase since the fourth quarter 2015. So.
A lot of the work that's been done over the last several quarters and couple of years to really drive to the competitiveness of the from his resignation and what we're seeing from those other independent firms as either coming from larger firms, where the support isn't as robust with regard to that more dedicated type of support I mentioned through the various different personal services, where we can't compete obviously the.
Technology, and and payout rates and things like that but really giving that to those devices that are not getting that that's for the larger firms or at the lower smaller firms I'm, having the opportunity to provide those overarching competitive packages with the support programs that I mentioned is really what's driving that and maybe off differ back over.
Two or so and then on the inorganic M&A side.
Okay. Thanks, Sean banded you want to make a point there.
Yeah, Yeah, Bill I would add.
Just sean's comments just from a product perspective, a in addition to to the point Sean maybe in regard to advisors were certainly focused on our advisory suite of products, which as you know we've expanded the grown men and as you heard on my comments were.
We're very pleased with the asset growth there.
On the M&A side, just adding to fills earlier comments in the wealth business, it's really about driving more scale. So we believe we have a a best in class. Greg we are in the process of building out our technology to.
To also be best in class that have made a huge amount of progress there, but believe we now have the infrastructure in place to support greater scale more advisors with the platform that we've put together.
Okay. That's helpful. If I know violating the code here because I have to squeeze one more question. Then just I appreciate that your flows have gotten better sequentially, but when you look month to month like Juhas little bit of a step back month on the retail side can you maybe talk a little bit what might have happened there despite sort of very elevated until engagement just more broadly and then how things looking at the July.
Oh.
Any do you want to take that.
Sure sure Yeah. So bill Yeah, we did see a little bit of a step back in in June It was actually more of an increase in redemptions and in that month than it was a decrease in sale. When you look at July you're seeing.
I guess trends on par with Jan maybe slightly better do you to better redemption.
But you know I think what we're seeing is a little bit of seasonality I just going into the summer time, My second quarter. It generally you know one of our one of our second quarter for the year in the third is typically the worse. So we're seeing we're seeing a little bit of seasonality and then we've also seen that return to a fixed income.
Have you fixed income flow, especially across the intermediary marketplace.
Oh I would say you know just to add a little bit more to that bill first some context, when you look across our institutional channel as we know it it's a lumpy channel that can have big inflow big out well, we've had two consecutive quarters of no client no client losses and continue to see the pipeline.
And growing there and I think that's an important point to make because.
From a long term flow perspective, you have a lot of institutional overlay in the intermediary and retail marketplace and we've we've had some positive markers that expats with some of those gatekeepers on that side of the business.
During the quarter had to semi finals, and one finals presentations, so definitely progress on outside of the business as well, which will help the overall well profile.
Okay. Thanks for answering all the questions sport.
Right.
Your next question is from Michael Cypress with Morgan Stanley. Please go ahead.
Hey, good morning, Thanks for taking the question just wanted to ask about Hum profitability about 10% operating margin in the quarter here down from around 15% or somewhere I think you've been operating for a number of quarters. Arguably this current quarter impacted by the lower average you I'm level. So I guess is there a minimum level of profitability that you're kind of keeping in mind.
Here that you're managing the business too and it had a floor. If if you will and if it falls below which you consider more strategic changes. So just curious how you're thinking about that and as you look out over the next couple of years, what's the right level of operating margin or pretax margin for went down over the next couple of years, how are you thinking about that.
Okay, and then do you want to address that.
There's been an online.
Mr causes still connected.
Perhaps commuters phone.
Yeah.
Let's see here.
Maybe I'll just at a at a high level, Michael I'd say I think with respect to the short term volatility in profitability I would say I think we've been pretty clear, we're managing the company for the for the longer term and the strength of.
The balance sheet and the financials allow us to.
End of make the strategic investments, we need to do that to kind of get us where we need to be over over the long over the long term. So we're not going to overreact to short term volatility in the market and a lot of as you pointed out a lot of that profitability metric was influenced by asset levels in that type of thing, but as we move forward.
We think that will.
Operating overtime, we have a long term opportunity here in terms of strengthening the profitability in the wealth management aspect of our business and and we'll get to more competitive levels with respect to the enterprise over time, let me see if ban is back on banner you back on.
I don't know I think I think just trying to get back on Michael So maybe we'll go next like Manhattan Circle back and when he reconnection can come back to that question.
Yeah, sure and I'm happy to follow up offline as well, maybe just a quick follow up on the retail distribution initiative for the new vehicles that you're up breeds in the marketplace on SMH model delivery, just curious how you're thinking about the opportunity set there how much is that contributing would you say today to AOL and flows and as you look out what are sort of the next things on your.
If you do less there.
Sure.
Oh, sorry, Yeah, Hi, Mike <unk> <unk>.
Yeah, so as it relates to the model liver your estimate portfolios today, it's contributing very little to the overall flow in the U.S. picture, you'll recall that we launched the first seven model delivery portfolio last may so just a little bit over a year ago, we've seen some pretty good price.
I thought they are a part of the business been getting a couple of a couple of additional model placement and.
ER and opportunities, which have a huge opportunity to drive plus so I'll give an example, one of the contracts that we find last last quarter.
<unk> is on model provider that has over 100 Bank trust that utilize that platform. So the ability to drive flow that direction is going to be fairly substantial you know the work that we're still in the midst of is working with our broker dealer distribution part.
Nurse for placement there and you know the point of that is they'd be able to offer the flexibility of vehicles to their advisor basis based on whatever program they might be out and model delivery certainly wanted as especially when you look across the domestic equity asset class.
As you know I think from a product development standpoint, we focused and we're kind of focused in a couple of areas. Certainly we're taking a look at the he asked structures whether it fully transparent source that meet transparent on its still a discussion and a decision for us to make but making sure that we're paying attention to the new where.
Vehicles out there in the marketplace that that might be garnering flow and then when you partner that with potential at our current active capabilities that we have an incubator portfolios or potential.
Acquisition, our talent additions and other spaces could certainly.
But ability for us to launch a theory that he asked as well.
Great. Thanks, Thank you.
Michael we do have a.
Ben back on the line, so I might just to add asking dad and question.
Any perspective with respect to your question, but the short term different profitability given the market so off.
Good morning, sorry about that Michael.
Or back to technical difficulty I I apologize I Didnt hear the answer I would just give you heard me my context.
As a reminder, we operate two lines of business asset management, well sort of course, you're looking at a at a blended margin.
We've talked about before we have a number of initiatives that we're pursuing to drive margin improvement I don't think we clearly have any particular floor and as we talked about in the first quarter. We identified a number of savings initiatives are things to enhance the margin, but at the same time.
Very much focused on the long term and investments we continue to make in our business that we are very much aligned as a management team and with our board on that.
So I apologize, if that's duplicative, but hopefully that that helps.
Great. Thank you so much appreciate the color.
The next question is from Robert Lee with KBW. Please go ahead.
Hi, good morning, Thanks for taking my question.
Just first question.
No comments on its Benson.
Guided controllable items.
Or is just trying to get to.
If you would you think beyond the next couple of closing next year I'm not understanding that your.
The process headquarters.
Yeah, that's been made so.
There are any piece that you feel like.
And allergies and or otherwise.
C.
These are fall off.
No.
Moving to 2021 at this point or.
Are you.
Or is this really at least right now.
Hmm.
Run rate kind of normal.
Leashing Road.
Okay. Thanks for the question Robert Ben you want to address that.
Yeah, Good morning, Robert.
Obviously, the farther out you know we look the less precise we couldn't be I agree with your.
No promise that inflation is a good proxy for expense growth of course, we will continue to book to offset that through efficiency efforts in regard to the allergy spend I referenced on the investments, we're making bear that will continue into 21 at least.
For the first part of 21 in particular to our wealth management business. Some of those technology investments are in areas work flow and Onboarding and things were doing to drive a better adviser client experience that will result in some.
Deficiencies ultimately once fully implemented I would also remind you of our ongoing real estate transition.
Which we will largely have concluded by the end of this year that will also drive some margin improvement for us into 2021.
Okay, great and maybe as a follow up just.
And the wealth management business.
Maybe update us on.
Oh, Waddell audits or any kind of in sales and that so.
Below our.
Just observations on it seems like conventionally.
Okay.
Then there, but maybe that sales in the wealth management channel of I'd bottles.
No moderated or so are you seeing just.
I think in bars allocate more more English.
The third party.
Products.
And you bring into new advisory you know, what's kind of your expectation over time.
As it relates to there.
Their ability to sell more one bill.
Got you build that into your.
You can now.
Yes.
John you want to take a crack at that one.
Yeah, I'll, maybe started off in certainly Ben and or others. Amy you may want to comment as well as we look at this with regard to just inside the wealth management business.
Our overall ratio of affiliated funds or was that about 64.8% the prior quarter was about 64.3%. So.
Not much change between the quarters, but when we look back.
A little further the the ratios at this time last year was about 67.6%. So what we're really seeing is with regard to new sales going forward as we open. The architecture is that new sales are going into a broader product set.
So with existing advisors legacy advisors as well as new advisors that are joining the organization, having a broader product set me that sales are going to a broader space of opportunities. There. So we do.
Looking at reasonably what those expectations are for sales arm of affiliated funds going forward, but we know that those sales are going to on new sales basis continue to reduce in some regard with regard to the open architecture the platform. So.
And on that wealth management side, we do expect to see that that rates continue to show.
That's we've seen here over the course of last year, just based on primarily new sales going forward, there likely will be some minor migration of assets that we've seen over the course over the last time here, but.
At least new sales going forward to a broader products that will lead to a more dispersion in that affiliated fund product mix and I might just turn it over to a ban or two Amy to to talk about the the IB side.
Yeah, Hi, this is aimia all God make a couple of comments here, yes, I would agree with everything that Sean but as the advisors. It within the wealth manager have at more selection across their advisory platform.
Particular, a we have a range of market share, depending on which product that they're using and so you know I would expect it to see continued.
A mix shift a blast unaffiliated.
Our up more on affiliated funds being utilized inside of that base. However, as the wealth manager continues to grow and recruit new advisors potential acquisition. We do you have the ability to compete in spite of that adviser basis, well my expectation would be you know that we were.
But that it looks very similar to what does and in our unaffiliated partners, where you're more competitive products can bring in up to 10 to 10% to 15% market share in a fully are open architecture and it and it would move down from there so.
So it would just really be dependent on which product they're using inside of the wealth manager and then on the competitiveness of our individual strategy is whether or not.
Great. Thank for taking my question.
One last point I would add on that which we we've seen a bit of already but certainly over the longer term our wealth management business provides greater.
Balance and stability to our overall from revenue as those assets are more resilient during periods of volatility.
And the work we've done in transitioning the business model and wealth has certainly helped those dynamics for that so that's another aspect of that as well.
Great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Phil Sanders for any closing remarks.
Okay. Thank you appreciate everybody joining us the my apologies again for the technical difficulties at the start the call but.
As you can see we've undergone quite a bit of a business model transformation over the last couple of years, but given our strong capital position.
Really feel comfortable with it the state of the World. These days with respect to our model in house involved.
And our ability to invest and continuing to build out our institutional institutional caliber asset manager as well as now be positioned to really grow the wealth manager overtime and the power of that business model through the combination of both an asset manager and the wealth managers supported by a shared services function real.
He is quite unique in the industry and one that gives us.
A lot of confidence in terms of arpus ability to grow in the future. So with that I will conclude him just again, thanks, everybody and have a great day. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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