Q3 2020 IGM Financial Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the I.G.M. financial third quarter 2020 earnings results call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions.
To join the question queue you May Press Star then one on your telephone keypad.
Should you need assistance during the conference call you May signal, an operator by pressing star and zero I would now like turn the conference over to Keith Potter Senior Vice President Finance. Please go ahead. Thank.
Thank you Carol and good morning, and welcome to I can't financials, 2023rd quarter earnings call. Joining me on the call today are James O'sullivan, President and CEO abide you have for national emergent <unk>, President and CEO abide you wealth management.
Mcinerney, President and CEO of Mckenzie investments I look cool executive Vice President and CFO abide you have financial before we get started to like to draw your attention to the cautions concerning forward looking statements on slide three of the presentation.
On slide four summarizes non IFRS financial measures used in this material.
Slide five we provide a west of documents that are available to the public on our web site related to third quarter results fried you have financial and with that I'll turn it over to James.
Well, thank you Keith and good morning, everyone.
Let me begin by acknowledging the trying times that we continue to navigate.
I'm sincerely, thank our employees consultants and advisors.
Our ongoing efforts to stay focused on our clients well, taking proper care of themselves and their families.
We had an opportunity to update our board of directors yesterday on wellness broadly and they enthusiastically support ongoing initiatives to be supportive in these times.
I'd also like to acknowledge Jeff Carney and thank him for his leadership over these past several years.
Its greatest contribution in my opinion is the executive management team that he assembled.
I'm impressed by the mix of long tenured I G M and knew the idea it's.
It's a purposeful mix of industry experience and geographic experience.
I'm looking forward to working with them as we execute our strategy and continue to build momentum in our businesses.
Now I'm excited to be here for several reasons.
First on the list is the core purpose of this organization, helping Canadians achieve security in their financial lives.
This purpose is motivating and animates all that we do.
Second it's a high quality and scale of this organization and its affiliation with power Corp, and the quality of people throughout.
As we indicated on September 14th our overarching message is one of continuity and building on momentum there.
There will be no hardships left or right.
Hi, G.M. has articulated a clear strategy over the past three years, and we will continue to execute against it.
Hi, gene wealth is well positioned for success Canadian.
Canadians want financial advice need financial advice and will pay a fair price for financial advice I.
I believe that a strong client advisor relationship growth.
Grounded in a dynamic living financial plan supported by strong managed solutions is a winning formula.
Hi, Ci wealth will continue to serve more Canadians, particularly in the mass affluent and high net worth segments of the marketplace.
Mackenzie investments is knocking on the door of $200 billion of assets under management.
It enjoy scale and strong investment performance.
Particularly excited about its growth prospects in China in Ats alternatives and socially responsible investing.
Combined with new distribution opportunities, particularly in the retirement space. It is very well positioned for growth.
And I P C with almost 30 billion of assets will be a leader in new emerging industry models, that's advisor practices transition.
Overall, we're excited as a team to be here.
Our focus areas will be net flows net sales and discipline and expense growth.
Let's see we will grow earnings for our shareholders.
Turning to slide seven.
Overall I would describe this as a strong quarter with more potential upside as our businesses work towards their full stride.
We achieved record AIU M&A in the quarter of 196.4 billion.
Reflecting strong net sales and client investment returns.
Investment funds net sales of 610 million are up significantly from 103 million last year and overall total net flows were 408 million, including record high flows at Mckenzie.
Hi, James Q3 earnings per share were 80 cents and adjusted earnings per share were 90 cents up 17% from Q2.
And I'd like to point out the second highest quarterly adjusted EPS in company history.
EPS includes a non I FRS adjustment consisting us.
Restructuring and other charges.
One thing from our ongoing multi year initiatives to modernize our technology platform.
Costs relating to the GLC acquisition.
And personnel changes.
This was partially offset by a gain on sale from personal capital.
We continue to make great progress on our strategic transformation and I will speak more to this in just a moment.
It's been a very busy quarter in the new strategic investment and other segment.
With the acquisition of an interest in Northleaf capital partners.
Closing of the personal capital sale.
Increase in fair value of our well sample stage to $550 million.
And the continued strong earnings growth of China, AMC relative to Q3 of last year.
We discussed the GLC transaction on the Q2 call and.
And Barry will provide highlights on Northleaf capital partners later in this call.
Turning to slide eight on investment returns.
Q3 saw solid equity market increases across most major market indices.
With lower volatility continuing.
While fixed income markets remained flat.
Overall, I jams average client investment return of 4.2% was strong during the quarter.
October saw mixed performance in capital markets, resulting in an average client return of negative 1.9%.
All of which has more than reversed so far in November.
Turning to slide nine Q3 long term mutual fund net sales were $5.8 billion for the total industry.
And 0.6 billion for the advice channel.
This result is roughly in line with the 10 year average for the third quarter and as an improvement relative to 2018 and 2019.
Slide 10 is a quick reminder, from our October 7th press release and October 8th webcast, where we have defined our three new reportable segments.
We've made these changes to help stakeholders better understand our business lines and assess components of value across wealth management asset management and strategic investment and other.
Turning to slide 11 on our results for the third quarter.
Rich, Hey, you M&A up $194.9 billion increased 5.5% year over year.
Hi, Champs Q3, 2020 adjusted earnings per share of 90 cents was.
It was up 17% from Q2.
And 6% from last year.
You can see on slide 12 fit the quarter over quarter increase and adjusted EBIT was driven by strong earnings growth across the wealth management and asset management segments.
Relative to the prior year asset management earnings increased 16.7%.
China AMC contribution to GMV, EBIT increased 36.4% year over year.
Great West Life Co earnings also improved over this time period.
Slide 13 outlines the strong improvement in net flows for Q3.
And year to date across all segments.
Consolidated net inflows of $408 million. During Q3, 2020 were up 1.5 billion year over year.
A solid result.
Turning to slide 14, well.
Well simple has demonstrated a strong track record of growth.
And shown an ability to attract capital and they built a strong challenge our culture.
A way has nearly doubled year over year, reaching 8.3 billion as of September 32020.
The October equity fund raising.
Reflects the substantial increase in wealth symbols valuation.
Now at 1.5 billion.
As a result, we marked up to fair value of our investment to $550 million.
Hi, GM remained the largest shareholder with a 36% pro forma fully diluted ownership.
And the power groups collective ownership is 62%.
Turning to slide 15 for an update on our very important transformation initiatives.
At Investor Day in 2017, we announced a five year plan to modernize our technology and operations.
The initiatives listed on this slide are split by our two main objectives.
To enhance back office efficiency.
And elevate the client and advisor experience.
Our transformation program is on track.
We introduced important initiatives in the second half of 2019.
And we're now implementing a series of new back office initiatives, including accelerating end to end automation of some business processes partnering with Capco.
Outsourcing end user services partnering with source rock technology.
Outsourcing, our mainframe posting to idea.
Overall, the back office transformation remains focused on leveraging the scale and expertise of leading providers.
Automating business processes and improving efficiencies.
We're proud of the significant milestones weve achieved so far and look forward to building. Upon this solid foundation as we move forward.
With that I'll now turn it over to Damon Murchison.
Thank you I, Thank you James and good morning, everyone.
Before I get started on the quarterly results I'd like to share some some early perspectives.
Context, my background in financial services lies in banking insurance independent and integrated so I have a deep knowledge of the various models in the country.
Sure my role with a strong knowledge base of I'd wealth management and its culture, having worked with them in different capacities over the past 18 years first.
First off I strongly believe that I'd wells has unique value proposition for mass affluent and high net worth Canadians that gives us a strong foundation to compete we are well positioned based on our ability to create unique client experience thats personalized throughout the clients like lies at the heart of this is what we call gamma.
<unk> commitment to deliver a dynamic living plan that connects decline short term with their long term plan. That's constructed by an advisor that has expertise the ability to deliver on the plan and a willingness to work with that client for life.
All this is backed by a comprehensive suite of well constructed managed solutions that are competitively priced and leverage some of the largest and best known investment managers globally.
A key competitive advantage for us that will allow us to win our distribution strength, we have the benefit of scale with over 3300 consultants across the country that are located in communities where their clients are located we have a central focus on the client and delivering high quality living plans through a credit and financial planners, who have access to excellent support.
Industry, leading tools and training.
We also have advisors, who are driven by entrepreneurship with strong ties to the communities and a desire to work with their clients for like five.
Finally, we are transforming operation and Digitalizing, an automated workflows to increase the productivity of our advisor network and elevate the client experience something thats smaller competitors may not be able to do.
Our key opportunity now is to leverage the investments to create a need to integrate needed capacity within our advisor network.
We have gone through a period of significant transformational change and although we still have the initiatives in flight.
We have the necessary platforms today, and tools and technology to free up capacity within our network and leverage those new capabilities to increase our share of wallet and acquire new clients in our key target segments.
Finally, we are well positioned for the future of advice. The advice channel is dominant in Canada. We don't expect this to change in a meaningful way.
Well it has market share of anywhere between 2% to 5% in our key target segments, depending on which segment you're talking about so there's lots of room to increase our share. It only takes a small amount of share gains to to achieve significant growth, we feel that gamma which is our focus to dynamic customized financial advice will be one of the models that shows.
Growth in the years to Tom, which is which matches well with our vision to be the financial planning company of choice in our goal to increase our market share of discretion and wealth assets.
So now, let's turn to slide 17 and goals are rising wealth managements Q3 2020 highlights.
Anyway at the end of September was 97.5 billion up 3.9% during the quarter.
Year to date net flows reached 310 million at the end of September and we saw inflows improved improved to negative 9 million in the quarter up from negative 233 million last year. Most interesting part of our Q3 results on a month as our month to month trends in gross inflows, while coal would cause a little bit of a slowdown in new household.
Acquisition between March and July this year, we saw significant shift in momentum starting in August continued in September and also continued in in October momentum in in the fourth quarter is off to a great start with October gross inflows.
Best in our history.
I will also speak to the Gulf of of our consultant that work in in a moment.
Turning to slide 18.
Quite slows in anyway.
When you take a look at the metrics you could inc., we do remember that includes client in time transfers into our platform from competing firms.
We also we earn advisory fees on most of these assets. The net activity of these incoming transfers is partially reflected in our third party funds and securities ROE of the net flows table located in the middle of the slide relative to last year net flows for the quarter improved by 224 million and an annualized a you a redemption rate for the third quarter down noticed.
From 2019, reflecting strong client asset retention.
Turning to slide 19.
Well go sales were flat relative to last year for the quarter overall the chart on the right demonstrates the improvement in gross sales momentum that I talked about that took place apart partway through the third quarter as we look at October and the girl sales momentum accelerated it was a key driver of $111 million in positive net inflows during the month, which was our second best October.
In the past decade at this pace is on track to reach an all time record high in gross sales and a respectable net flows for the year. Despite the pandemic.
Moving to slide 20.
And our consulting network, Arkansas elaborate grew during the third quarter driven by the strongest recruiting we've experienced since Q4 2017.
Offices, which reflects advisors with four years experience and four years or more experienced increased 18 56 in the quarter, reflecting stronger could've been up experienced advisors and the successful graduation of a of advisors less than four years to four years plus range. In addition, we also have grown our newer cogent associates during the period were optimistic for the country.
You need success going forward for a number reasons. Firstly, we continue to have a strong pipeline of high quality recruits as the investments we've made over the past two years and build confidence in our team and its being noticed by industry professionals.
Secondly, we also find that they call that has created uncertainty which segments within our industry peers.
We're able to attract advisors that have seen the evolution of our business. The decisions, we've made to stand behind and support our advisors their clients and our communities throughout this difficult period is really differentiated our organization has a great place for Likeminded financial planners to attempt to do to help build their business and service their clients.
From a productivity standpoint, our teams continue to have success extending their business and attracting client relationships.
With that I'll turn it over to Barry.
Right.
Thank you very much Damon and good morning, everyone.
I'll begin my comments on Q3 2020 results on page 22.
Mackenzie is total AUM of 147.3 billion was up 4.5% for the quarter.
Q3, 2020 saw record high investment fund net sales of 946 million with positive contributions from both mutual funds and EPS.
And we've now achieved 16 consecutive quarters of positive retail mutual fund net sales and 18 quarters for retail net sales.
I fully expect this momentum to continue into the future with Mckenzie strong relative investment performance and our top two ranking in the Enbrel Onyx adviser perception studies for both mutual funds and Dts.
And finally, we discussed the acquisition of GLC asset management on our last call and today as James mentioned I will share details of our exciting strategic partnership with northeast Apple of partners, including a 56% economic interest in the company.
Slide 23 highlights Mckenzie is operating results total.
Total mutual fund gross sales of 2.9 billion saw year over year increases from both retail and institutional strong retail investment fund net sales of 840 million rough 491 million relative to Q3 of last year and Mckenzie is total investment fund net sales rate has risen to 2.9%.
Kinsey has 61% of AUM rated four or five stars by Morningstar, which is the highest in over a decade.
The charts on the left side of slide 24 highlights the strength of Mckenzie is gross and net flows for Q3 year to date and the month of October relative to past years.
Last month October was a record breaking month with investment fund net flows of 238 million. The best October results on record for Mckenzie.
And on the right you can see the strong net flows momentum on a trailing 12 month basis.
The latest Enron ex advised perception studies have been published in Mckenzie as results are summarized on slide 25 Mccann.
Mackenzie improved the second in the overall mutual fund perception ranking from third last year, our sales penetration was strong in both the MST in Iraq channels and the overall quality of our sales organization improve to first from second.
And on each side, our overall perception ranked increase the second from fifth last year, which we're very proud of.
While we are encouraged by the success, we have had over the past 16 quarters of positive retail net sales, we're equally encouraged about our future opportunities.
26 highlights five areas of emphasis for future growth, which we believe Mckenzie has strengths to capitalize on.
We have dedicated leadership and teams to execute on each of these themes that most recent developments in Sri alternatives and retirements.
Some of our most successful fund flows are coming from these areas such as Mckenzie Global Environmental equity Fund Mackenzie his retirement monthly income and strategic income offerings and Mckenzie, all China equity fund.
We are in the early days for these emerging opportunities and look forward to discussing them more in the future.
And finally slide 27 provides an overview of the Northleaf capital partners partnership and equity interest we announced on September 17.
For those not familiar with Northleaf. They are an independent midmarket private equity private credit and infrastructure investment firm with global capabilities. This.
This is a strategic transaction provide benefits for Mckenzie aegeans wealth managers, great West life coat Northleaf and ultimately all of our clients. We are very excited about the immediate and long term potential of the transaction and have already started to execute underwriting these initiatives.
Example, Mackenzie we have a dedicated team focused alternative investments, we intend to continue to build out our liquid alternative products suite in the near term and at the same time, we expect to introduce our first private market alternative products, starting with North sea private credit in the coming months.
And I see well commitments in Europe. These private credit strategies have already been made within their high profile High network managed assets solutions.
This offering will complement hygiene longstanding history of operating real estate and mortgage credit products for their clients.
Also as discussed in the press release, our sister company Revpas agreements like go has made commitments to invest in northeast solutions for its balance sheet and will pursue future opportunities to strengthen access to private market solutions across its businesses globally.
We believe that now is the time to democratize private market alternative investment for retail Canadians and see this as one of our key growth catalysts I'll now turn it over to Luke.
Great. Thanks, Greg more to your Buddy.
So while it's been a very busy quarter for us indeed.
So on page 28 up I'll first start by just highlighting a few items number one it's a reminder, disclosure enhancements that James.
James reminded us up earlier and I I would point out there is a reconciliation to the previous disclosures with within our own DNA and we will make it make sure that we're giving you what you need to to reconcile that to to past disclosures. This quarter end to end in coming quarters.
Second I'd highlight we have that as mentioned by James and Barry number of corporate investments announced or closed in the quarter. This include the acquisition of GLC, which was announced and is on track to close at the end of the year and Norfolk, which we announced in September and that includes last week. We also at the close of the sale of personal capital, which brought us a pre tax gain.
37 million on accounting basis, and 44 million on an economic basis and that was included within our Q2 results.
Hi, just a bit of guidance on the acquisitions that have closed or are closing in the coming weeks.
First we will have two months of northeast results in the fourth quarter and we do expect in the first year out with Northleaf will have about EBITDA above 12 million per year.
I'd also highlight with GLC will start to incorporating the incremental earnings from that in Q1, and we will expect to have incremental EBITDA of about $20 million per year in the first year.
On the acquisition that you will see and this will be partially offset from $5 million of lower fees from the silicon obviously, the funds to kind of life.
Lastly, as James mentioned as a result of a number of technology transformation initiatives launched during the quarter as well as the acquisition of GLC and other investment changes, we do have a pre tax restructure amount of around $75 million pretax results.
I'd note the largest part of this amount relates to restructuring and downsizing and transition costs from outsourcing or technology infrastructure and automating processes.
I'd highlight this involves transitioning off of our current platform as well downsizing the environment as James mentioned this provides ongoing cost savings of $20 million per year, while also allowing us to leverage the scale and expertise of leading providers.
The other key elements of the this expense amount.
Relates to restructuring costs associated with the GLC acquisition and the transfer of the quarters group of funds to kind of life as well as other invest management change that Mackenzie.
While the transaction Hasnt closed yet the restructuring cost recorded now as we are actively executing and delivering the plan with our sister company. At this time, we have notified all the all the people who are coming on and and we are we are actually executing on contracts for the fund contracts. So I'd say, it's unusual to record a charge before close but given.
So our sister company and given the the notification weekends all parties that this is the right moment to its recorded.
Moving to page 29, you can see our consolidated assets under management and advisement, we closed the quarter with 196 billion, an increase of 4.3% and average assets were up 7% from Q2, which led to very strong sequential growth in earnings.
I'd also note that you look at the chart on the left you can see the decline in assets at the end of October and I would highlight that this is obviously more than fully recovered so far in November where were sitting and we're at about $200 billion. Today. So it's looking like a very good Q4, so far.
On page 30.
Hi, Harlan the left their consolidated EBIT was 300.4 million in the quarter. This was up 16% from Q2.
As highlighted by James This was our second highest adjusted EPS in the company's history.
Sure you can see in the churn the left the second stack from the top we had our share of associates earnings quite strong once again at $45.7 million and near the same level as Q2.
Bottom on that same chart, you will see operations and support expenses were down from Q2 and in line with Q3 2019.
On the right you can see the operating leverage that this has resulted in in the business. Our net revenue rate was relatively stable at 89 basis points, while our operations and support expenses declined from 41 basis points to 37 basis points.
As a result, our EBIT margin improved nicely from 46 basis points to 52 basis points.
On page 31, you can see our consolidated income statement and I just have two remarks in this slide.
First as indicated earlier at the bottom you can see the growth relative to last quarter and wrote last year second a few comments in the expense line.
First you can see our operations and support expenses were 181.9 million down from Q2 and in line with last year.
In spite of this what we used to call or non commission expenses are a little bit higher than where we guided I'd remind like like last quarter part of this is the growth that we experienced the business relative to where we set our guidance, which has resulted in higher cost like sub advisory fees.
As well as isn't as higher and higher compensation expense per rep for salespeople as Mackenzie had another consecutive quarter of a billion dollars in net sales driven primarily by retail.
We also have had some unexpected costs related expenses as well as some delays in transformation benefits from the initiatives that we brought to light this quarter, but.
For Q4, I'd Guide you that you should expect expenses to be at or very slightly higher than Q3 level.
Full year. What this implies is that will be relatively close to 29 teams level of $1.04 billion and I remind you that's $3 million below our original guidance for the full year of 2019, and we do remain very focused on the on prudent cost management.
We won't be giving definitive guidance between 21 at this time as we're still finalizing our plans, but I would reinforce our guidance that we wouldn't expect operations and support expenses to increase by more than 3% next year year over year and that excludes.
Lastly, GLC coming on which will let will get us incredible expenses.
I will also give guidance on how we expect advisory business development expenses to behave and we would also expect that those expenses not driven by when and sales levels I would not grow between 3%.
Moving to page 32, you can see our fee rates and expense rates for those lines driven by 81 or 80 weight on the right right you wealth I'd remind the advisory fees, which you can see at 105.9 basis points are charged as a percent of assets under advisement and may vary based upon the composition of our clientele.
Selected program fees of 86.2 basis points are charged on assets under management and they don't vary based on who the client is they vary based upon the underlying composition of products and ask losses.
When it takes 33.
This is a slide that you're familiar with and and we did review on October Eightth, when we announced the news closures I just wanted to reinforce as David highlighted I'd use value proposition better gamma better data and better health <unk> important.
Importantly, gamma is the value of working with a financial advisor and we charge advisory fees on assets under advisement to these services as.
As you can see here Gambit, not just 60% decline outcome. It's also 60% of the fees we charge.
I want to use this moment to remind that has a wealth manager we will be emphasizing eight you wait and net client contribution to their accounts, meaning net flows as our key performance indicators as opposed to assets under management and the net sales to our a UN.
I would remind as David highlighted as we build new client relationships assets transferred to our affirming kind and would only be moved to our own solutions, if as and when suitable to our clients. As a result in some periods you will tend to be a lag between net contribution to our a way versus net sales were eight.
Good to page 34, you can see <unk> income statement.
You can see 0.1 other financial planning revenues were up noticeably from Q2. This is due to depressed mortgage income in Q2 as a result of the matrix interest rate changes we had that in early April I guess you through Q3 I'd highlight is a return to normal earnings for the mortgage business.
You can also see that operations and support expenses were up a little bit in Q3. This is as a result of some unanticipated coberly expenses as well as a delay in some of the technology benefits from initiatives that we brought to life and that's meaning we expect to those initiatives be launched earlier than what.
You can also see that this was offset by reduced other business development costs in the quarter, which were down $4 million last quarter.
Page 35, you can see the composition Mckenzie said you Emeka left and you can further see within that chart that Weve further split that third party a whim of 73 point.
73.7 billion into its component pieces to help you understand the change in fee rates overtime as the mix of balls between retail and institutional there.
The net fee rate, you'll see on the rate was 71 basis points during the quarter on third party assets.
I'd just highlight the basis point decline in the period per the change was higher sales Commission expense, which is included in that net revenue item and that really to higher sales levels. I'd also highlight we onboarded a lot of a lot of institutional business late in the in the second quarter and that did that.
That did I would say annualize it quarter to quarter rise during the period as we had a full three months of the of that business in the period.
I turn to page 36 were very pleased to see the significant growth at Mccann. These earnings of 17% from last year and 29% from last quarter as a result of the growth in the business as well as operating leverage.
When you're just to remove the new sub advisory fees from my G that we announced earlier mentioned these results.
This is mckenzie its highest quarter quarterly earnings in over five years.
Just make one comment on the operations and support costs, which are down from last quarter and down from last year and was 69.7 million.
This this could cost result, as a result of the expense management efforts, we announced after first quarter.
I would also note there were some extraordinary severance severance amounts in the prior period.
But we do expect this is the normal run for Mckenzie and and we will give guidance over.
Over time, as we as we evolve our business and builder business.
On page 37, you can see the strategic investments in other segment.
We highlighted in the in the bullet cure and we highlighted on our call on October eight the segment as a fair value of over $2.9 billion at September Thirtyth.
I first call load, the full circle item, which as well as simple as reviewed by James and as we highlight a few weeks ago, well simple did complete a funding round that value in the firm at 1.5 billion post money we've.
We've adjusted the fair value of steak wants simple by $300 million as we're still as results reflect this valuation and we are now carrying both simple and potage at $590 million.
I'd remind that we equity account for our investment in trying to asset management and we do intend to do a deep dive on trying to every two quarters.
I'll remind that our share of their earnings is up from 7.6 million last year to 10.5 million. This year, which is an increase of 36%.
Which is a little bit higher increase than that then that we had year over year last quarter.
The book value you can see is 713 million and I would remind the firm's earnings have risen noticeably since or invest in 2017, and we have no reason to believe that multiples have contracted so we believe the book value is actually a very conservative measure of the fair value of this investment.
I'd also note in the second column from the right, we have $580 million in unallocated capital.
Hundred 93 million was earmarked for the absence of the Northleaf and $145 million is your marks the acquisition the GLC, we've been $242 million of excess capital.
That concludes my my comments I'll turn over question zero.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then too.
We'll pause for a moment as callers join the queue.
Our first question comes from Jeff Kwan of RBC capital markets. Please go ahead.
Hi, good morning.
My question is for James and David just with your new roles are there things that you plan to do differently versus the strategic direction that was already in place.
When you assumed your positions.
Sure I'll start Chaffetz Chaim sent and good morning.
No the short answer is no.
Out my overall message and I believe damons overall message is really one of continuity.
And maintaining momentum.
You know I, followed this company Jeff from a distance for several years I've been very impressed with this company for a long time include.
Including you know in particular their 2017 Investor day.
Where they laid out a this strategy so Dan and I are committed to executing the strategy.
And as I said in my remarks there.
There will be three external markers that we will be quite focused on they're not know, but they're they're worth pointing out we're going to be very focused on net flows.
Sales and disciplined on expenses and that we believe will lead to a a clear path for earnings growth and were committed to achieving that.
Yes, okay. So thanks Vince.
Terms of of AI Jie Wells you know.
Exactly what when James talked about Jeff, Jeff Carney and the leadership team have done a great job in putting together, a winning strategy the right strategy and and setting a course for transformation and we are now in execution mode. We want to build off of the investments that were that were made and we're looking very very clear.
And three verticals share of wallet, new client acquisition and recruitment and Thats where were focused we believe that we are in a position now to to really capitalize on our strategy and all the investments made in the firm and and to drive results.
Okay. Thank you for that and just my other question is on the <unk> side.
Let me look at the gross sales performance. It suggests that you've been able to successfully pivot to target more affluent investors, but the net flows have been.
You know I guess heard due to the higher redemptions thing.
Well, it's been seen prior to that sort of strategic change and I'm just wondering.
If it's due to perhaps higher than what was anticipated redemptions from.
Moving mass market clients to the National Service Center, and just trying to get a sense of when you think the gross redemptions dissipate such that you can consistently generate positive net sales on a monthly basis.
Yeah, and obviously I mean, you you answered part of your own question, there, but just in the tremendous amount of change that we had at the at the organization, but we believe in executing this strategy is going to result in accelerated growth in both anyway and AOL.
There's just there's just a lag as a as you would know and live talked a little bit about that are going up market is is big for us in the sense that a few things happen number one you're bringing on third party assets, you're not bring it on you as you're bringing on anyway, and then recruitment you're bringing on a new way as well so when you buy.
Turning it off the portfolio level. The other your opinion of the book level and as you bring that on and you go up market, you're dealing with less registered assets and more nonregistered assets.
Unregistered assets as we now have approximately implications just can't move money right away, we always want to make sure that we're doing what's in the best interest of the client. That's that's that's what we're focused on.
But so anyway as a leading indicator to to continue it.
We really believe that we have a great suite of wall constructed managed solutions and overtime.
And we'll we'll feed AOL.
And actually as Dave and I'll add to that just step one comment Jeff Jeff on page 19.
You can see the the net the net flows over time and you can see the positive 111 million October and as Dan mentioned, that's that's continuing.
November, but but I would comment when you compare you wait to UN I know to the extent that money leaves our UN and goes to high interest savings accounts for example, or other other solutions within our sweet that's going to affect your ATM number, but not or are you in that number. So we're going to try and give disclosure to understand how product flows are happy.
Within our client relationships on but there is going to be a divergence at times between the net flows being contributed to client accounts, which you can see here on page 19 versus the net sales into our own investment solutions.
Okay perfect. Thank you.
Our next question comes from Gary Ho of day Chardan capital markets. Please go ahead.
Thanks, Linda and good morning, James add maybe want to ask Jeff's question. Another way, maybe just high level, where have you been spending both CV time since joining the firm is the M&A strategic investment is it actually wealth Mckenzie or deep transformation program and you mentioned there is no heart shifts but that any tweaks.
To the strategy that you would make or anything you would like to accelerate.
Yeah, Thanks, Gary and good morning.
So it's been about seven weeks and I would say I have.
Spent those seven weeks frankly listening and learning.
Right across the organization.
Not unlike others are on this call I'm sure. It's it's it's 10 hours a day of teams meetings and I am.
Digesting a business that has been I think well built and that is headed.
In a very clear in right direction.
I do think over time, there will be there will be differences, perhaps an emphasis.
But I very much what I, what I said, you should not expect any kinda hardships kind of left or right here.
This business and I think this quarter is a very good example of it I mean this really was a.
A strong quarter and you know, it's it's worth saying internally as a management team you know it was a strong quarter, but there are still lots of upside piece businesses have not hit their full stride yet.
And yet it was as you know it was a strong quarter for clients. It was a strong quarter for shareholders and I hope what you're seeing is it isn't real evidence of momentum now right across the businesses. So disrupting that would be foolish that so that is not going to happen.
The strategy will be executed it will be executed well and that's.
As I said in my remarks, keep an eye on that flows net sales and expense growth those are markers that we as a team.
Are very focused on and if we if we watch them and manage them well, we will be delivering to you our shareholders earnings growth.
Okay perfect. Thanks, Thanks for that.
Next question, maybe more for Luc just few question on the restructuring charge no theres a piece related to the GLC acquisition that can you clarify if that would change that 20 million EBIT you expect from Chelsea.
What they would contribute and then second you know just overall, how should we expect the related savings related to two that charge and or amount that is reinvested score for other initiatives I assume you know that you baking some of that into your non non commission expense growth and then also you know going through the numbers again, if you can add the one.
For.
<unk> billion under the old disclosure I think you said there is no more than 3% next year no I think well be helpful. That you can get some guidance how would that might look under the new disclosure line items.
Yeah. Thanks for that Great question, So I'll take it in order to have other out so first on the on the charge out large the largest piece of that is technology, but your question was on GLC. So on the GLC. That's that's restructuring costs related to asset to a occurring the team and changes to the team.
<unk> be transferring the clutch group of funds over to over to kind of life and I'd say on on this restructure then it doesnt change our route or guidance of the update of the net revenues coming on to us from the acquisition.
On technology right now the the charge relates to us really.
Leaving and then host platform that we that we share with our sister company and so the theme that the theme you can think of is.
We used to leverage the scale of the power group on technology and that will be moving to leverage the scale of the of the leaders in.
In technology, the googles, the IB EMS and a and many others.
And and so it's really a were quite fortunate in blessed that we've got a business that allows us to really partner with best of breed providers and so thats what the largest piece of this service charges is actually getting off of our current platform and the restructuring downsizing that comes with that with this pivot to outsourcing.
On the expense guidance.
That that 3% constraint, we again as mentioned, we're finalizing our plans over the coming weeks, we will get more definitive guidance.
In our February call, and where we're going to be a being 2021 that 3% constraint.
Whether it's on the previous definition of non commission expenses or whether it's on the new reporting of operations and support costs and the I'll call. It the discretionary elements.
Elements or the the piece of business development cost that that isn't driven directly by 80 women sales. Both of those you should look to to that 3% number as well that we're doing as a ceiling and and obviously sub advisory fees are going up or going to travel with assets and we're always looking to manage them as to the best of our ability and I'd note when we bring get further guide.
And it will be inclusive of the benefits from our transformation program.
Okay, and then the 3% I should think about that including the GLC acquisition, bringing on right.
No well, we were bringing on a bunch of people the the numbers that that I I quote in terms the incremental earnings that's incremental earnings after the expenses there will be brought on so we will be.
Delineating, what what are the incremental expenses from that acquisition when we bring it so that 3% growth number would exclude the incremental expenses coming on with that acquisition and so we tried to give guidance on this is the net earnings that will be contributed from the GLC acquisition and that net pre tax number is about $20 million in year one.
Got it Okay and then just last question if I can put Damon the increase and the energy consulting count that was notable in the quarter. How should we think about this is this how should we think about looking out is there is it going to be a gradual increase and can you elaborate on the quality of consultancy, you're bringing on experienced advisors or people that.
Just kind of new to the industry.
Yeah, I think what you want to do is you want to look at this as this is something that we are clearly focused on and we believe that we're going to continue to grow our ranks by bringing on quality advisors, both knew that Teva natural market and want to be associates for our existing teams and experience advice.
There's so a nice mix of both the experienced advisors more quality, we want those that want to be in a financial planning a culture that is <unk> wealth management, we believe that the growth that we'll see here is is we'll be sustainable we've made a lot of investments into our platform into our tools.
Into our product line and you know there's a lot of advisors out there right now that I'm that realized that that things are changing in the industry and they're getting to know the new Oh Gee wealth management and the story is is compelling we have a very strong pipeline and we look forward to continuing to grow our ranks, but they do so.
At a measured pace that is that making sure that we bring on the REIT advisors.
Okay. That's helpful and that's it for me thank you.
Our next question comes from Tom Mackinnon of BMO capital markets.
Yeah. Thanks morning, just a question whats your with respect to I'd wealth and in terms of the sort of a go up market strategy. How is oh is coal that impacted that or I guess as you try to go more up market. In this environment you need to have or can you do this in a.
How successful it has this been in a working from home environment.
And or does it need to have kind of more face to face in order to sort.
Sort of steel more of these high net worth clients if you will.
It seems to have worked you seem to be able to recruit despite that but are you able to you know recruit new perspectives high net worth clients.
And in trying to go up up market in this current environment or do we need to or do we expect more of an acceleration of that so once we get through cogan.
Yeah, well, it's it's as you would think it's it's a process and when Colgate first hit you know we were all in the adjustment veins everyone on the on this line as well as our our consultants and all of our clients and potential clients, just making sure we're home, making sure everyone safe and that type of environment, it's very tough to to bring on new clients that now that we are.
We're in the post adjustment things of coven, and what that means is for our consulting that work for advisors.
They have the tools.
They have everything that they need to be in Golden Valley digitally.
And then for the Canadian or the average Canadian the average getting the household is digitalize now so the massive what the high network clients are used to doing business at home.
In some way shape or form and talking to their friends talking to their advisors stuck into their their peers.
Through through digital means so now that we are in the post post phase we find it's much easier to conduct business. Obviously, it's a process that you're dealing first with your existing clients and share of wallet.
Because we have you know a lot of a lot of a lot of Canadians diversify their advisors and have more than one adviser. So your first natural market is his share of wallet and then you go to new client acquisition. It does get tougher as you get to new client acquisition, but as I said at the further along we get into this Colgate World.
The easier it is for Canadians to Digest building, a relationship with someone digitally versus face to face.
Yeah. Thanks.
[music].
Our next question comes from Graham riding of TD Securities. Please go ahead.
Hi, good morning.
On that same theme when we think about the 20 million of savings that you're guiding towards from recent transformational initiatives is there anything.
Either baked in there or incremental perhaps as we come through this current period, where you see an opportunity to structurally change your expense base based on.
On how you see the business operating pose cobot more digital matter.
Yes.
I'd say, we've seen part of that right now Graham just in the <unk>. The way we've given this new guidance for that for the full year at 2020, and as David highlighted and as we highlight <unk> protocols. We were so proud of and proud unfortunate and the way we are able to conduct business remotely across the board with her financial.
Monitors with with our employees with the whole team and as a result of a lumpy investments made over the past few years to be able to do things were mode and digital I as we look forward.
We havent made any any calls on things like facilities at this point, we obviously, it's very early independent, but I would say the way that we work and the way that we engage their clients. This is changing and evolving and will embrace every opportunity to do two things effectively but but the one thing that we're going to cure, but the most is the client experience and making sure that we're doing a reef.
And to make sure we're serving clients how we expect to be served and the right way to really grow our business.
Okay are your expenses.
I'm thinking more Oh, I can hear the asset management side, but perhaps overall our expenses lower right now because you're doing well.
Lets entertainment less marketing less conferences things like that is that is that what we're seeing in the numbers at all.
Well, it's interesting we can be in particular had trouble done a little bit obviously that is part of the the $50 million or $30 million that we that we took another expense guidance. This year also what you're seeing in Mckenzie. As result is one of the transformation programs. We brought to life a lot last year, which was our our outsourcing of fund service, it's a JV CVC Mellon.
So as we telegraphed last year that give us you know pure very very sizeable benefits.
And it didnt away that didnt require much restructuring. So we've got you know I'd say.
Characterize mckenzie as current expenses as more or less steady state.
We will obviously be investment growth overtime, but right now there's there's nothing really unusual there and we are very very fortunate to have via the benefits from the from the CBC melanoma sourcing last year.
Understood.
Then just to be clear the 20 million in savings that you're targeting for the recent.
Transformational choice.
Changes is that is that baked into your guidance of expenses groping no more than 3% next year.
It will be grabbing when we come back in February and get more definitive in 22 and when it will also be inclusive of those expenses those those savings okay understood.
David if I can jump to you with one last question just.
Indeed, you know do you track historically.
When you have assets that transition into a new way.
Their new assets or existing assets.
Sort of penetration of that transition back into it do you have.
Is that something you monitor you can speak to at all.
That's something that that we are monitoring monitoring the key here is that it's still early days.
Our ability to focus on bringing on experienced.
There's just started a little over a year ago.
And and you know we were predominately focused on the mass market for a very long time, and really just focusing on selling proprietary product. So this change in strategy means that obviously more brittle we will grow our anyway at accelerated rates and we will drive that.
But it's still early days. So the data is I would say to you is it's not it's not where it needs to be in terms of the length of time that we have it so.
We've always said I can.
That's it for me thank you.
Once again, if you have a question. Please press Star then one on.
Our next question comes from Scott Chen of Canaccord Genuity. Please go ahead.
Hi, good morning.
Just on slide 26, Barry I really appreciate the no the five areas of products and we kind of talked extensively about for them, but Ah I'm just curious about the S.R.A. I saw I.
You know kinda seem at Mckenzie, maybe a bit of a background there and I know you said 1 billion, but is this an opportunity in both the retail and institutional channel right. Now is obviously, a sri isn't isn't pretty big demand right now.
Yeah, Great question and I'm glad you asked that because again, we put in place the other for the all Ccs retirements and in China, as you're well aware of it yes, you're right. We're working hard on this because it is a significant growth opportunity as you pointed out both retail institutional it's been it's been in the us too.
In a world for many years, if not decades or probably in Europe and in some respects the large pension plans in Canada, and we all expected to come to the retail segments, North America, including Canada, and it took a little time to come here now you know, it's here and Oh and by the way of the demand for US right products in the retail second.
It is not necessarily just the millennials and there is a strong demand for millennials, but it's all demographics and Weve survey. This and we monitor every was telling us for a couple of years now so we want to be thoughtful in terms of us trying to launch them at a strike products. We have last couple of years, they're doing very well as we mentioned we're already over $1 billion net.
These are mutual funds active you know strong fees.
The global environment Global Environmental equity Fund for instance, which we as some divide by Green Chip just a terrific.
As try specialist firm based in pronto.
That is now garnering one or $2 million, a day and inflows because eight it promises exceedingly good but also everyone is embracing the fact that not only this is a way for Canadians to a mash up their personal beliefs with or investment dollars. It's also a very strong investment thesis stand alone because this for US is one example of this.
Particular fund invests in global listed companies that are focused on the new energy right when water solar and we all know that with a lot of countries and over the next 30 40 years transitioning off of fossil fuels into these sources of energy that's going to grow very fast. So we're working very hard with us you'll see more launches come come shortly.
In this area, we want to provide advisors and Canadians with choice so that they can again.
I understand we call probably sustainable responsible in fact investing.
As opposed to a socialist off investing a lot of names out there, we're helping the education as well, which we always do so that's the business investor I wish you'll see a lot more from us going forward, probably top five S. Right manager actually in Canada in fact for a well regarded in the space in Canada already because I think it's because we've got strong corporate culture that people realize we're community.
Focusing and very Corporately responsible being part of by geography or power, but we'll also as you know we're signatories of the United Nations Principles response, investing and so we have integrated into all of our asset management Cross our boutiques. Yes, you factor is to make sure that we can comply with that a signal that cigna.
Hi responsibilities. So its really two phases that we're working on I'm glad you asked it you'll hear more from US going forward is a very fast growing area. Oh. This is growing 30, 40% of your not last two three years. This this segment in Canada and more to come. Thank you.
And just a follow up area. Both your assets on that that's all I platform proprietary right now and where it's coming from is it going to be both proprietary and supervisors that.
Thank you it's going to be both now we started out by hiring some advisers. We launched also by the way a a global women's leadership, a mutual fund and each year, we want to hire some advisors from the onset because we thought for a moment, we want to be off and authentic of course, and so we want to ensure we hired the s. rice specialist.
And with the sub advised Mckenzie each company chip. So that's what we did from the onset.
Then of course, you know that we Mackenzie manufacturers for well simple there to Sri each yes that they they launched a few months ago, which is which are which are already up to a half a billion dollars in a roundabout way.
What you'll see from us going forward, though we were never shy about using some advisors that we feel is a good fit for advisors investors needs as to us doing that but you'll see more from us launching Sri products with us Mckenzie manufacturing as we feel good now where we are from U.S.G. integration perspective, we feel good about going out so.
Right and using our and distributing these new products are coming in next 12 to 18 months.
The factory by Us. So therefore, we can capture the full economics.
And just like the industry.
Right right.
Oh, sorry, I just got a good add to it varies pointed obviously those sets of advisors are exclusive to us and Canadian retail.
So I, just just probably I'm using the word proprietary those are exclusive vessel advisors.
Okay. Thank you that's good point.
And just policy James you know coming from the bank culture for and your experience. There. Your your long experience there or what have you found so far coming you know into an independent company and how is your how do you think your bank experienced Ken.
Translated into.
What kind of strategy, you're thinking on Oh with an idea.
Well it's.
I mean, this is an industry that I know well from from from my Bank days Scott and.
Over 29 years at a at Scotiabank I can tell you that the that the wealth management and the asset management businesses were.
We're in some respects my favorite businesses because.
Close to markets, but more importantly, I really love the people.
That are drawn to these businesses so.
You know like clearly bring a body of knowledge as a result of my 29 years in banking that.
Directly connected to a wealth management and asset management.
Okay. One of the one of my early observations is Oh, what I.
What I love about a a G.M. is that it's it's.
It's both got scale.
And is able to be nimble and I think that's actually a really kinda neat intersection.
And I think that's one of the that's going to prove to be one of the strengths of this business, it's a big business to be sure.
But it's not so big that we can't move quickly and so you know I.
Looking forward to working with the management team on that as we respond to.
Macro macro wins that are blowing in this industry, it's going to create opportunities for us and you should expect expect us to be nimble and responsive to them.
[noise], that's that's a great point, thank you for your time.
Our next question is a follow up from Tom Mackinnon of BMO capital. Please go ahead.
Yes, thanks for having the follow up question I just wanted to revisit slide 32 here on AI Jie wealth management key profitability drivers.
And you May have mentioned this but <unk>.
You really just looking at it.
In terms of revenue advisory fees coming down and asset base comp fees going up.
How is that supposed to say essentially change.
Is and how is that I mean, that's not necessarily a great trend that we're seeing right there yeah, and what's going to drive that change in order to or is this just a you know is this just a function of moving a way day you out.
Great Great question, Tom So I'll start with estimate Comping up I'll, just remind when you look at that that increase in the in Q1 over Q4 that if you go back to our disclosures around list a presentation from not from Q1, you will see discussion in there which is a reminder, that we've been we've been over two years since we just can.
Can you just deferred selling commissions, we've been transitioning the comp is the composition of our other compensation.
Our consulting network and so what we've what we've seen and we've got one more year of becoming is we've seen that sales based compensation are reducing and that being offset with increased asset base compensation. So when you look at that that increase from that from Q1 to Q4 that was the step that was offset by a commission rates coming down and all that.
That is it this is disclosed in our supplemental info and so you can think of compensation being being unchanged. It's just the the component pieces that said that changed and we do have that happening once again in 2021 and that it will be more steady state.
On the advisory fees.
What's that what you see here is the competition the clientele changing and so we've we've tried to give guidance to the best that we can how the advisory fees will evolve as we execute our plan and it is going to be determined but basically a function of how successful or unsuccessful, we are in or high net worth strategy them.
Our success, we are you will see this rate come down.
To a greater extent, because we're bringing in high net worth clientele and of course, we've got our age away increasing rapidly in that scenario and our revenue increasing rapidly.
We are less successful in executing our high net worth strategy, you'll see that this line be more stable, but that's the biggest driver about line to it is the composition of our clientele and there is a clear relationship between our net slows and are a way growth and this rate.
What does that mean the advisory fees are essentially just higher as a percentage of they you eight as you move upscale that seems to be a bit contradictory.
Nor do I see it's the opposite so we're seeing the revenues higher as we move upscale because because we've got the client relationship but yeah. The rate goes down they are higher with clients pay lower advisory fees and that and if you look at our past disclosures, you'll see in Q4, 2018, we announced that we actually set a competitive and differentiated pricing.
Across all all the key client segments and we actually have that have got what we believe is very competitive pricing for households, with over a million dollars. So the more successful we are there the rate will come down at a greater level.
Okay. Thanks for that.
Our next question is a follow up from Gary Hell of Danger, then capital markets. Please go ahead.
Perfect. Thanks, just one more question that Barry just on the private all with Northleaf that you're planning at the product that you plan to launch next month can you tell us to how that's structured at any liquidity a redemption limitations kind of what's been the market Intel for a product like that and the retail marketplace.
Yeah. Thank you, yes, so were well we'll be launching again just to lay out a game plan well be launching as I mentioned, probably a private credit fund first off a end of this year it might might might go into January but December or January and then I'm also we're going to launch next a.
Infrastructure fund and other private equity fund both in 2021, so it will be all set by a third or fourth quarter of 2021 or all three.
Midmarket global orientation oriented strategies, and RFP manages there'll be Oems offering memorandum rappers I'm up here from other folks, but Ah so that wouldn't be the vehicle.
And worse, we're working on a we think a pretty unique design.
In partnership with Northleaf to ensure that the we can balance within that construct but in that vehicle.
Both obviously direct access to their direct private falls in those three asset classes individually by fund as well as having the proper liquidity and better because as you know we have a full array now liquid alternatives that matches up those three asset classes.
So that's how it will work in broad strokes, so wouldn't Winnie when we launch it will we love to give everybody I'm a little more background on how that will be balanced between the.
Again, getting taking advantage of the long term illiquid orientation return opportunities at these of these private strategies, but ensuring there is proper liquidity embedded in the a and the vehicle through liquid alts I would like to say also that we you know where our sales team is all educated and ready to go with Northleaf just.
Terrific partnership we're so excited to just called wonderful cultural alignment and but we do know that that what we have done in the past that we there's a certain element of education with advisors that we certainly what will take on the responsibility to ensure that noxious. They understand how these vehicles are constructed to ensure that they have that combination.
Liquid and illiquid.
Investments in the in the fund, but also how the ship how those should be structured and their overall portfolio because again as we know liquidity and it was probably more on the team and Damon sign liquidity can be provided in other parts of your portfolio. So that you know you can focus more on again the garnering the return.
Tasha Love these direct investments from a longer term orientation, but more to come on that you know, we don't want to give away all the secret sauce, yet [laughter], but I'm very excited by the first launch which will be either next month of January. Thank you.
Okay, that's perfect. Thanks Barry.
This concludes the question and answer session I would like to turn the conference back over to Mr. Potter for any closing remarks.
Thank you Barry all and thank you to everyone, who joined us on the call today.
We hope you have a great Friday and as it moves into the weekend and with that I will hand the call.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Uh huh.
Yeah.
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Yeah.
HM.
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No.
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HM.
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Hmm.
HM.