Q3 2020 Waddell & Reed Financial Inc Earnings Call

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Okay.

Good morning, everyone and welcome to the Waddell <unk> Reed financial third quarter 2020 earnings Conference call.

All participants will be in a listen only mode should you need assistance. Please see no conference specialist.

Our key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

Good question you May Press Star and then one to withdraw your question you May press star in Q.

You also note today's event is being recorded.

At this time I'd like to turn the conference call over to Mike Daly, Vice President of Investor Relations. Sir. Please go ahead.

Thank you.

Half of our management team I would like to welcome you to our quarterly earnings Conference call. Joining me on our call today are Phil Sanders, our CEO, Brent Bloss, our president.

And Klaus our CFO, Dan Hansen, our CIO, Sean Me Hall, President of our wealth management business, what Ellen reading and Amy scrap them president of Ivy distributor zinc.

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 FCC.

We assume no duty to update any forward looking statement.

Curios relevant to 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 supplemental schedules have been posted on the Investor Relations section of our website at IR Dot Waddell Dot com.

I would now like to turn the call over to Phil.

Right. Thanks, Mike Good morning, and thank you for joining us.

As it has throughout 2020 uncertainty surrounding the financial markets during the third quarter.

Given the political landscape in the U.S., the ongoing pandemic, social unrest and economic challenges.

Investors had plenty of reasons to remain cautious.

However, the financial markets seem to be looking beyond short term concerns providing strong returns over the quarter with the S&P 500 index hitting an all time high in early September before pulling back somewhat since then.

Volatility in the markets has been a constant throughout the year driven by concerns about a second wave of COVID-19 infections and ongoing questions about the viability and timing of a vaccine.

As we approach the final days of the U.S. presidential election campaign uncertainty is only rising rig.

Regardless of the election results the eventual resolution of the political leadership questions should provide some clarity as we enter 2021.

The likelihood of a new stimulus package at some point in the next few months also appears to be supporting the markets as we look ahead.

While challenging this environment does provide an opportunity for active investors. Our investment teams continued to execute on proven investment processes that are designed to deliver more consistent results over the long term.

As investors seek advice and long term planning guidance amid the uncertainty our wealth management business and its affiliated advisors continue to focus on delivering disciplined advice and long term personalized financial planning to help clients achieve their financial goals.

Across our enterprise the majority of our employees continue to work remotely they want to publicly acknowledge and thank our teams for the commitment they have demonstrated to our clients affiliated advisors and shareholders throughout this challenging environment.

We see wealth and asset management services as relevant and impactful today as they have ever been and we remain committed to steadily executing on our long term vision and growth strategy.

Next I'd like to highlight some of the progress we made this quarter and several key focus areas.

We continue to evaluate our product lineup and ensure we are competitively priced to succeed in the marketplace.

In September we introduced a series of enhancements the IB invested 529 plan, increasing the number of invest said portfolios, including age based in static options in adding to EPS and three Ivy funds as underlying investments in those options all designed to provide flexibility.

And best meet Investor needs as they say for education.

In addition, effective October onest, we reduced load fees on all class a shares for Ivy equity and Ivy fixed income funds. These.

These reductions which include various breakpoints on all funds at certain purchase levels are further illustration of our desire to maintain competitive pricing across our lineup.

We have made significant investments since 2018 to drive down fees declines to try down piece to clients today, 75% of our AUM is at or better than competitor median fees.

Technology and analytics is also an ongoing focus area, where we made additional investments this quarter appointing Eric Meltzer as our new Chief Technology Officer.

Eric is a member of our executive leadership team and is leading efforts to leverage technology as a strategic asset across the organization overseeing areas, including enterprise technology architecture and infrastructure cyber security application development.

Data integration and service delivery management.

Within our asset management business, we continued to progress on our data strategy with the rollout of an hour I, a target and segmentation tool.

The use of data and analytics continues to be an area of focus for our teams as we constantly strive to be more efficient and coverage of our sales territories.

We continue to support our wealth management and asset management technology platform initiatives with the goal of improving our affiliated advisor and client experiences enhancing sales enablement and improving internal operations.

Specifically within our wealth management business, we are expanding the capabilities of our Waddell one digital platform with the introduction of one path a digital account opening and maintenance tool that will reduce the time required to open an account through a data driven dynamic workflow process.

We will launch a pilot program for one path during the fourth quarter with full implementation by early 2021.

One path simplifies and enhances workflow for affiliated advisors serving.

Serving their clients by accelerating straight through processing, reducing clicks improving E signature capabilities.

And providing transparency for advisors into the status of work in progress.

In our asset manager our institutional distribution model has benefited from new technology that brings a more seamless client experience to further support sales and retention efforts.

In our wealth management business, we appointed industry veteran Cory recruiting to lead our advisor and client experience initiatives.

She will collaborate with key stakeholders across the business to improve advisor and client journeys, while creating new innovative experiences increasing loyalty and driving advocacy.

She is also working to develop and lead strategies in support of best in class client and advisor experience processes and procedures, while acting on opportunities for innovative investment growth and expansion.

Our capacity to make these investments in our products technology and personnel is supported by our strong balance sheet.

Our robust capital base and the high cash flow generation of our business fortified us as COVID-19 impacted the markets and enabled us to continue investing in growth throughout the spring and summer.

This remained a key strength for us this quarter and going forward and going forward positions us well to continue to pursue both organic and inorganic growth opportunities, while supporting meaningful capital returned to shareholders via our dividend and share repurchases.

Lastly, we took additional steps to enhance our culture, including diversity and inclusion initiatives. We have made great strides to ensure we have a true culture of belonging within our organization.

In recognition of some of the steps we have taken this year, what Ellen Reed financial was recently named a finalist for the diversity Champions Award by investment News, we were proud to be recognized along with other firms for our ability to inspire others from diverse backgrounds to joined flourish and bring their authentic selves to work in the financials.

Services industry.

Before I turn it over to Ben I will touch on a few details with within both our asset management and wealth management businesses.

Within our asset management business I'd be investments third quarter net flows improved meaningfully compared to the same quarter of 2019 as both sales and redemptions improved.

Sales continued to be strong in our mid cap suite with both strategies and net positive flow for the quarter.

Our mid cap income opportunity strategy launch to a seed capital six years ago recently achieved a milestone of $1 billion in fund assets. This milestone was the result of a strong investment process and 100, 100% organic growth.

While short term performance has improved we continue to see outflows in our international core equity product.

Overall, our investment and distribution teams are effectively working remotely and distribution has continued to make traction across channels. Since we realigned the structure of our sales teams.

Turning to investment performance.

The quarter was generally positive for the equity markets with many market segments delivering strong year year to date returns as I noted earlier.

Active managers were challenged during the period with the majority of active managers lagging benchmarks although.

Although our distinct investment process kept us competitive.

Broadly our relative performance across the complex held held steady on a one year base basis and improved on longer term metrics, but.

But we continue to see opportunities to improve performance in the future.

As a fundamental active manager and long term investor on behalf of our clients. We believe that acting as an engaged knowledgeable steward is an integral component of our value add to our clients and so we wanted to highlight some of our initiatives in this area.

In the quarter, we shared our views in a comment letter to the department of labor regarding the value of the SG in investment decision, making.

In addition, we support disclosure of material SG matters as an active member of the savvy Investor Advisory group.

As a CDP investor signatory and as a signatory to the Investor Stewardship group.

We believe that the market is increasingly recognizing the important role that specialist fundamental active managers play in driving authentic shareholder engagement and ESG integration and we will continue to invest in these capabilities.

In our wealth management business, we have been pleased to see continued improvement in net a way flows and continued growth in advisory net new assets with positive net advisory flows for the seventh consecutive quarter.

We also have seen strong advisor recruiting risk results this year.

And we think our differentiated service and support model combined with our technology package and full product suite offer value to advisors looking for a differentiated independent business model with meaningful support in the areas that matter to them most.

In summary, we continue to see evidence of progress across the enterprise.

And believe 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.

Ill now turn it over to Ben to go over the financials.

Thank you Phil and good morning, everyone.

We reported net income of 30.5 million or 48 cents per share compared to 24.8 million or 38 cents per share in the prior quarter.

Steady recovery in the markets during the quarter led to an increase in both.

Okay and resulted in total revenues growing by 11.5% compared to the second quarter.

At the same time operating expenses were higher by 13.6 million.

Due to an increase in distribution costs of 14.3 million.

We were pleased to be able to hold controllable expenses.

Below the second quarter levels at 101.4 million benefiting from continued low travel and business meetings expense as well as lower compensation costs from slower hiring than planned.

Investment income was lower by nine points, Simon by $9.7 million compared to the very strong second quarter levels.

Due to lower unrealized investment gains on our corporate and seed investment portfolios net of our hedging strategy.

We continued the momentum from earlier in the year within our wealth management business.

Wealth management anyway ended the quarter at $62.7 billion and increased 6.3% compared to the prior quarter, primarily due to the market rebound.

Net new assets improved compared to the second quarter from stronger net new advisory assets.

As Phil mentioned, we achieved the seventh consecutive quarter of positive net new advisory assets with 6.4% annualized growth at an all time high balance of $29.3 billion in advisory assets at quarter end.

Our recruiting success has also continued with another 11 advisors affiliating during the quarter, bringing our total for 2020 to 32, new advisors with prior from assets in excess of 1.9 billion.

Our transition teams are engaged and working well together with advisors to ensure a seamless transition for advisors and clients.

We did experience some turnover this quarter, which led to the slight decrease in total adviser and associate count. However, our outlook for the fourth quarter remains positive and our recruiting team continue to have productive dialogue with potential recruits.

Furthermore, we continue to attract and retain incredibly high caliber advisors and have seen advisor productivity continued its steady improvement, reaching an all time high of 474000 trailing 12 month revenue per advisor.

Ivy investments ended the quarter at 67.9 billion in Asia.

An increase of 4.5% from the prior quarter, while average of 68 billion was up 10%.

Bill covered the details on flows and I would just add that while we did experience a seasonal decrease in sales this quarter the year over year improvement in net flows and redemption rates are both encouraging.

Turning now to the income statement.

Total revenue increased 11.5% compared to the prior quarter led by the 12.8% increase in you in D. fees, primarily resulting from higher advisory fee revenues and higher Commissionable sales from the low second quarter levels.

Best Management revenues were also higher from the higher asset levels and one additional day compared to the prior quarter.

The management fee rate held fairly consistent with the second quarter as improvements in the overall mix were offset by increased fee waivers on our money market funds.

Operating expenses totaled $230 million and increased $13.6 million compared to the prior quarter.

Distribution costs were higher 14.3 million due to the higher revenues, while controllable costs decreased 700000, primarily due to lower gionee costs as business meetings and travel expenses continued to be minimal.

We did make progress on several key projects as Phil mentioned and I would attribute the lower expense results to broad cost controls coupled with the lingering impacts of the current operating environment on meetings and travel as opposed to step back and growth oriented investments.

I expect fourth quarter controllable costs to be higher in a range of 103 to 105 million due to strategic project activity and the absence of the meeting expense reductions we experienced in Q3.

That said our continued discipline on controllable expenses, particularly with increases in revenue provides operating leverage that enables us to continue to invest in growth.

The effective income tax rate was 24.8% for the quarter and it was a fairly normal quarter from a tax perspective.

Based on current asset levels, and the resulting forecast we expect the tax rate to remain within our prior guided range of 24% to 26% for the fourth quarter.

Finally, cash and investment balances decreased modestly compared to the prior quarter due primarily to the deconsolidation of one of our seeded investments that lowered the balance by $26 million.

We also returned another $56 million of capital to shareholders this quarter through dividends and share repurchases.

2020 year to date, we've returned $162 million to shareholders, while maintaining ample liquidity on the balance sheet to support our growth plan.

Operator, we would now like to open the call for questions.

Ladies and gentlemen at this time, we will begin the question and answer session.

Just to ask a question you May press Star then one raising a touchtone telephone if you are using a speaker phone. We do ask that you. Please pick up your handset before pressing the keys to ensure the best so quality.

So it's all your questions you May press star and two.

And then is this the time, we also ask that you. Please limit yourself to one question and a follow up.

At this time, we will pause momentarily to assemble the roster.

And our first question today comes from Dan Fannon from Jefferies and company. Please go ahead with your question.

Hey, this is actually James Steele filling in for Dan. Thank you for taking our question.

So you touched on it in the prepared remarks that the targeted reductions I'm just curious on the lessons learned here. So far I know you've been using these for a few years and you're trying to strike a balance between increasing the salability the products versus the immediate loss of revenue. So just interested in how you are benchmarking progress and any feedback that you may have heard.

From your distribution teams.

Okay great.

Amy do you want to.

To address that question with respect to fees and our strategy there and how we are seeing that implemented across the product line.

Absolutely hygiene, Jamie Thank you for the question and.

What we've done as we've looked at our overall pricing and product strategy over the last few years certainly take a look at.

The competitiveness of our strategies in multiple formats in fees and pricing is one of them and so as we know we're competing against passive.

And and the pricing.

Dynamic that passive positive and so what we've done is we've really focused on trying to get those strategy that we feel like are well resourced with its strong institutional quality.

Process in performance.

To a space, where we're in that kind of media in range of the below average.

Okay Quint pile in their peer group and so as we measure success you know it is very different depending on the asset class that we're talking about so.

You look at Phil mentioned in his prepared comments, our mid cap suite of products are net positive low mid cap income for a long period of time mid cap growth that means that net positive over the course in the last quarter. When you look at those two categories mid cap growth and mid cap value in the Morningstar.

Mutual fund peer group.

They are in pretty substantial net outflow.

The category, So we view that as being positive from a success metrics, though but we try to do internally look cannot.