SEI Investments Company (SEIC) CEO Discusses Q2 2013 Results - Earnings Call Transcript

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SEI Investments Company (NASDAQ:SEIC)

Q2 2013 Earnings Call

July 18, 2013 2:00 pm ET

Executives

Alfred P. West - Chairman and Chief Executive Officer

Dennis J. McGonigle - Chief Financial Officer and Executive Vice President

Joseph Paul Ujobai - Executive Vice President

Wayne Montgomery Withrow - Executive Vice President

Edward Doyle Loughlin - Executive Vice President and Director

Stephen G. Meyer - Executive Vice President

Kathy C. Heilig - Chief Accounting Officer and Controller

Analysts

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Alec Mcaree

Sam Hoffman - BlueCrest Capital Management Limited

Sam Hoffman

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Peter Seuss

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the SEI Second Quarter 2013 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Al West, Chairman and CEO. Please go ahead, sir.

Alfred P. West

Thank you, and good afternoon, everybody, and welcome. All of our segment leaders are on the call, as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's controller.

I'm going to start by recapping the second quarter 2013, and then I'll turn it over to Dennis to cover LSV and the Investment in New Business segment.

After that, each of the business segment leaders will comment on the results of their segments.

Then, finally, Kathy Heilig, will provide you with some important company-wide statistics. And as usual, we'll field questions at the end of each report. So let me start with the second quarter 2013.

Second quarter earnings increased by 68% from a year ago. Diluted earnings per share for the second quarter of $0.47 represents a 68% increase from the $0.28 reported for the second quarter of 2012.

Our earnings during the second quarter were positively impacted by the cash settlement payment related to a SIV security. And now due to this payment, we booked a gain of approximately $0.16 per share. We also reported a 14% increase in revenue from second quarter 2012 to second quarter 2013.

In addition, during the second quarter 2013, SEI's assets under management decreased by $1.5 billion due to a market depreciation. And LSV's assets under management grew by just under $0.5 billion during the quarter.

Finally, during the first quarter 2013, we repurchased 1.7 million shares of SEI stock in an average price of just over $29 per share. That translates to $50.5 million of stock repurchases during the quarter.

Now turning to sales. Our net new sale -- recurring revenue sales remain strong. We generated $21.7 million of net new sales events, of which $19.8 million will be recurring revenues. Each of the segment heads will address their sales activity.

Now, as you know, we are continuing our investments in SWP and its operational infrastructure. During the second quarter, we capitalized approximately $16.1 million of the SEI Wealth Platform development and amortized approximately $8.4 million of previously capitalized development.

Now Dennis will explain the higher-than-normal numbers. Our development agenda for SWP is to further automate our operations and deliver U.S. and U.K. functionality important to the larger advisors and banks in the U.S. and U.K. markets.

Now turning to our business segments. In the Banking segment, we have shifted our focus to selling and converting larger banks in both the U.K. and U.S. other than a very few a number of smaller banks, which we are using to execute a step-in strategy to the U.S. banking market.

Now, thus far, we are very encouraged with the progression in our sales agendas and the revenue opportunities they represent, although limiting the number of targets to large banks has made our events choppy. The lack of sales events this past quarter is caused by that, and we feel that is -- that will possibly be the same next quarter.

The investments we are making continue to challenge banking profitability. We will improve the profit outlook as we sign and install the larger prospects we are selling to. They are who we have built the system for, and we know we are on the way to building a very large profitable -- growing profitable business. We wish we could have done it earlier, but the task is large.

Now to ensure the profitability follows the revenues from large banks, we are closely managing the cost of acquiring and absorbing new business, building excellence and scale in our operations, and keeping pace with the challenges of a rapidly changing U.K. and U.S. regulatory environment. Fortunately, we have a portfolio of businesses, and 3 business units are growing their profits nicely.

In the Advisor segment, we have made solid progress in improving our asset gathering, as well as in preparing for the roll-out of the SWP to the U.S. market. Now both are important to accelerate our growth in this -- in profits of this business.

In the Institutional segment, the market adoption of our differentiated solutions is reflected in our strong sales and profits globally.

Finally, our Investment Management Services segment had a strong start to the year, while managing the good problem of having a lot of new business to absorb. And behind all of this, I am encouraged by the feedback I receive from clients and prospects across our company's target markets. For instance, just recently, I hosted a dinner with the early adopter clients to the advisory unit and the feedback was particularly positive. Plus, our sales activities and events in all units confirm the positive feelings in our client bases.

So in conclusion, we believe our investments in infrastructure and new service offerings, coupled with our financial strength, positions us well for the long-term growth.

Now this concludes my remarks. So I will now ask Dennis to give you an update on LSV and the Investment in New Business segment. After that, I'll turn it over to the other business segments. Dennis?

Dennis J. McGonigle

Thanks, Al. Good afternoon, everyone. I will cover the second quarter results for the investments in New Business segment, discuss the results of LSV active management, and address a couple of corporate items.

During the second quarter 2013, the Investments in New Business segment continued its focus on the ultra-high-net-worth investor, the integration of our capabilities acquired in the NorthStar acquisition and the further development of new web-based investment services and the use of mobile technologies.

During the quarter, the Investments in New Business segment incurred a loss of just under $2.9 million, which compares to a $2.7 million loss during the second quarter of 2012. There has been no material change in this segment, and we expect losses in the segment to continue in this range during the remainder of 2013.

Regarding LSV, our earnings from LSV represent our approximately 39.3% ownership interest during the second quarter. LSV contributed approximately $27.8 million in income to SEI during the quarter. This compares to $22.7 million for the second quarter of 2012.

Asset balances grew by approximately $450 million during the quarter, due to increased market valuation. Cash flows were slightly positive.

Revenues for LSV for the quarter were $83.7 million. In addition to the business update, I wanted to review a couple of events. During the quarter, as Al mentioned, we entered into a settlement agreement with respect to litigation caption, Abu Dabhi commercial bank et al versus Morgan Stanley and Company Incorporated et al, related to the purchase of Cheyne Finance LLC, a structured investment vehicle security. As part of the settlement agreement, we received a cash payment of $43.4 million. This is reflected in our earnings for the second quarter under the caption, Other Income and equates to just under $0.16 per share.

As a result of this event, coupled with the gain recognized on the sale of SEI Asset Korea, we have had to accelerate the recognition of stock-based compensation expense related to our equity option program. As I'm sure you're aware, the equity option is granted as part of our compensation program vest on the attainment of certain earnings per share target, net of equity compensation expense. The impact of these 2 positive events on earnings will cause us, we believe, to reach the vesting targets on certain grants at least one year earlier than previously estimated and in 1 grant's case, 2 years earlier.

This incremental expense will be recognized over the final 3 quarters of this year, starting in the second quarter. The incremental amount recognized in the second quarter, when compared to first quarter 2013, was approximately $5.3 million, or just over $0.02 per share. This was spread over the business segments, with private banks incurring $1.6 million in incremental expense and the 3 other segments each incurring approximately $1 million. The remainder impacted G&A.

This incremental expense of approximately $16 million in 2013 will result in a reduction of a similar amount in future years, primarily 2014. The net of these 2 events is between $0.13 and $0.14 a share.

Also during the quarter, we capitalized $16.1 million of SWP expenses, as Al mentioned. $8.8 million of this amount was related to a licensing fee option we exercised to pay a one-time buyout fee for a piece of software embedded in SWP, rather than incur a perpetual recurring charge for use of this software. This will not add incremental expense, but rather, as we add more accounts to the SEI Wealth Platform, will provide better cost leverage. Essentially, what we did here is replace a variable cost component with a fixed cost component.

The remainder of the capitalized amount, $7.3 million, is what I would term normal SWP product development. I will now take any questions you have.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from the line of Chris Donat with Sandler O'Neill.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Just one clarification on the comments about the early vesting of the stock-based comp. So you're saying that 2014 is effectively pulled forward to '13? I guess I imagine that there would still be levels of stock-based comp, but -- or elevated levels, but that's not the case. It's really is a pull forward of things that were expected to happen a year or 2 out?

Dennis J. McGonigle

Yes, because the way the expense works, Chris, just as -- maybe quickly, is you calculate what the value of those options are that were granted, and then you amortize that cost in over the vesting period. So if you think it's going to take 3 years of vest, you amortize over 3 years or 4 years or -- and what we're doing is accelerating the amortization by a year. So on those grants, so what we're doing is pulling the expense forward a year. So next year, you would see a lot less -- a much lower level of equity compensation expense as a result.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then I would guess then we'll assume some sort of normalization in 2015?

Dennis J. McGonigle

Yes. So, I mean, although -- even there's 1 tranche of options that we pulled forward 2 years. So we'll get some benefit in '15 as well to this. It's really just a timing event.

Operator

The next question is from the line of Robert Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Real quickly, just now that you've had the Korea sale. You've got this kind of big chunk of cash from the settlement. I know you had talked about maybe re-funnel -- putting some of the proceeds from the Korea sale into maybe some buybacks. So should we be thinking that maybe this puts a little bit more momentum behind buybacks over the near-term, as you put it to work? Or at least for some period of time this -- that would be the main attention for the incremental cash?

Alfred P. West

Yes, I mean, as the Board here has talked about that certainly, primary use of capital besides investment of the businesses would be stock buyback. And I think also, during the quarter of reference, you saw an increase in the cash dividend as well. Fairly healthy increase. So during the quarter, kind of a combination of those 2 things. But going forward, I'd say it would be similar.

Operator

Our next question is from the line of Jeff Hopson with Stifel, Nicolaus.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Dennis, so the accelerated amortization, I had lower numbers. I'm just wondering if that's -- so I had like $3.1 million versus $5.3 million. Was I using post-tax versus the $5.3 million? And then, in terms of the SWP amortization, I didn't hear that completely. Was there an additional expense this quarter that was recognized? And if so, is that ongoing, I guess?

Dennis J. McGonigle

Okay, sure. On the first question, Jeff. On the first question about the option, I think you took our guidance coming out of first quarter accurately, which was 3 point -- which was a $3.1 million, I think. But as we got work through this quarter and we realize there was a -- this is all, if you go to our proxy statements and in the MD&A section of our K, you'll see this information. There is one tranche of options that would vest if we hit this adjusted EPS number of $1.60. During the second quarter, we felt our assumptions now are that we're probably going to hit that this year. So that brought forward the cost associated with that particular tranche as well, which is really 2 years of expense on that one tranche. So that's how we went from the $3.1 million up to the $5 million, a little over $5 million incremental. So your numbers were right. We just added to it as the quarter worked through. On the second point, there wasn't any incremental expense associated with what we did on the capitalized asset with SWP. Essentially, one of the software licensing agreements we have for a software package we use on the platform was -- the way that was priced to us was per account. So for each new account we put on the platform, we had to pay an incremental charge for use of that software. So it had a variable cost structure to it. In that licensing agreement, we had the option to buy that contract out with a one-time payment, and then wind up with a perpetual license kind of at that one-time cost. There was a deadline on when we could exercise that option, which happened to be June 30. And our analysis, as we look forward and we look at the -- certainly our expected growth of accounts and business on the platform, it just made sense to exercise that buyout. And then have -- we will have now as a fixed cost, if you will, that $8.8 million will amortize with the useful life of the platform, eventually go away as the platform is fully amortized, versus a variable cost. But incrementally, there's no incremental cost and terms of run rate because the 2 were essentially equivalent. That amortization cost over the remaining 9 years versus the account charge was just about equal at this point.

Operator

Our next question comes from the line of Alec McAree with Highbridge Capital.

Alec Mcaree

Guys, before we get into all the different segment, I really want to talk with you guys about the expense controls because it's been now several quarters, and each quarter we're hearing about how expenses are higher than you guys would like. And even -- I understand the comp cost and the pull forward, but even when we x that out, you're still not showing the incremental margins that you historically have and definitely inferior to what some of your peers are showing, who are in that asset management processing businesses. So, I mean, maybe, Al, you could comment about specifically and what you do -- what you're intending to do with these expense controls because it has been an issue now for a few years, actually. And we understand the investment in SWP. But it seems like we -- we're just not getting there on the expenses because revenue is starting to grow. And I'm just curious when we should anticipate seeing the leverage that we have historically seen from you guys.

Alfred P. West

Well, I think that 2 places where expenses are higher than we would like is, one, is do we continue to make investments in these things do cost a decent amount. And we're spending a lot of money on the front end, which is very, very popular, I guess. And it's something that when we started, there weren't any -- no such things as front ends. And it's just been a very -- there just seems to be more and more that we develop. But we've got a good handle on that. Our development process is showing real improvement in productivity. And so we're not very worried about that. It's just something we've got to do and it's a one-time as we do it to get ready for these larger banks and larger advisors. And so we're accomplishing an awful lot there. Now the other area is in operations, and that's really the cost of operating. And we had some issues in the U.K. because of us not understanding the cost of custody over there versus the U.S. And we made a couple other judgments there that we -- is not terribly damaging to us. But as we put in -- we put on more and more new business that is not of that ilk, then we can also adjust those fees at recontracting. Now -- and right now, our operations are still manual and we are delivering a lot of new technology to that to make that much more scalable than it is. So I think that's really the story. The final -- the scale on our production, which is the technology, is extremely high. And so we know, as we add more and more clients, those will have a lot of scale there. And so we're after operational scale, and it's going to take some more technology to give us that. And the other thing is, I guess, the U.K. doesn't have some of the automations that we have here that the -- industry itself. And so it has taken us more -- it's a little more tougher to build that technology in that particular industry. But we made a lot of progress there, too.

Alec Mcaree

So how should we think about, Al, then in terms of kind of incremental margin? Is it that you need to have one of these large deals filing/signed in the U.S. and the SWP or do we need 3 or 4 of them? How should we think about that? And then, also, on the U.K., these costs, are we on the other side of it now? Are we -- have we taken the brunt of that cost and now that you should -- as you do some -- as you said, either add new business or resignings, we should see the incremental margin from here?

Alfred P. West

Yes. From here, we still do have these investments in technology that will -- but again, these are onetime. Those don't bother us as much as the others. And the others, we will definitely see scalability from here as we had these larger accounts.

Alec Mcaree

And do you still feel like when we go back and look historically, obviously, you guys had very significant incremental margins when you had product rollouts. And obviously, SWP has been a longer product rollout than previous ones, lot -- some of it macro, some of it just the scale of what you're doing? Do you still feel that you can have the type of incremental growth in margins that you've shown historically when you've been successful with new product rollouts?

Alfred P. West

Yes, I do believe that SWP will have a higher margin than Trust 3000 eventually. And because SWP has a lot more scale in the production area, and if we can get in the operations area, it will be particularly heavy revenues that come in.

Operator

Our next question is from the line of Sam Hoffman with BlueCrest Capital Management.

Sam Hoffman - BlueCrest Capital Management Limited

Just had a couple of clarifications on LSV. Dennis, did you disclose the revenue from LSV in the quarter?

Dennis J. McGonigle

Yes. It was $83.7 million.

Sam Hoffman

Okay. Can you explain why the earnings from LSV were about flat in the quarter, when the markets -- when the average assets were up about 5%? It seems like there was a big step up in earnings from LSV between the fourth quarter of '12 and the first quarter of '13, but then they remain flat. So was the first quarter particularly high in terms of fee rate or margin? Or was the second quarter more normal or particularly low?

Dennis J. McGonigle

The second quarter, in terms of their business, they didn't see a 5% appreciation in total assets. But, as I mentioned, their assets are about $450 million, but also in Q2 -- but also in the quarter for expenses, they had one -- kind of a onetime expense event in their business during the quarter. They retooled their portfolio management technology platform. And I think there was a -- in terms of the onetime component of that expense, that hit them in the second quarter, about $1.2 million of incremental expense. That won't happen in the third quarter, obviously. So that had a little bit of an impact on our -- since we're roughly 40% of earnings, that would affect us to a tune of about 40% of that number. So that's one other element they had on. Their fee -- average fee levels are pretty stable.

Sam Hoffman

Okay. And then the other question was your ownership in LSV was down by about 50 basis points in the quarter. And it seems like it -- in the second quarter of last year, your ownership also went down slightly. So can you remind us why that is and kind of what happens when your ownership slips down, like do you actually get cash in exchange for that?

Dennis J. McGonigle

No, that relates to years back. The partnership made a decision to set up a equity distribution plan to provide partnership distribution or equity interest in the firm as a part of the compensation package to key employees as they shine. We contributed about 3% of our ownership interest to that equity plan. And over the years, our gradual distribution is out of that plan. They generally occur on April 1 at least the past few years, they've occurred on April 1. So really with that half a percentage point drop in our ownership interest reflects is, our share of this year's equity distribution out of that equity distribution plan.

Sam Hoffman - BlueCrest Capital Management Limited

Okay. So would you expect that to be a recurring event every year that you would -- your ownership would decline maybe 0.5% or 1%?

Dennis J. McGonigle

I wouldn't say that I would -- it's that straight line. Technically, the total contribution of that plan was about 5%. So once that's fully distributed, there won't be anything else to distribute, unless the partnership kind of regroups and agrees to set up a new distribution plan. So it's -- so technically, the answer is no. Practically speaking, that's just something that the partnership would work out over the next couple of years, I guess.

Operator

[Operator Instructions] And our next question is from the line of Tom McCrohan with Janney Montgomery Scott.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

The $43 million gain from the SIV-related litigation, is that cash that's reflected in the balance sheet cash?

Dennis J. McGonigle

Yes.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Okay, great. And just one question on the expenses. Is there any way, Dennis, to kind of frame out, for those incremental SWP-related items such as what Al had talked about, with kind of the front end stuff. Is there a way to kind of frame out maybe for everybody, like how much higher the expenses were this quarter related to SWP development maybe than you otherwise thought that was kind of flowing through the P&L to kind of help people kind of normalize. Because some of that stuff in the front end sounds like it's stepping up and then it's going to kind of taper off a little bit. I'm just trying to understand what the run rate is.

Dennis J. McGonigle

Yes, I think Al's comments were more longer-term than just kind of quarter-to-quarter. Because quarter-to-quarter, really, if you back out the $5 million of option expense overall, company-wide, expenses are relatively flat quarter-to-quarter. But I think Al's comments were more longer-term. That's why, as part of the progression of expenses on the wealth platform, it's really been over time, and Tom, frankly, I'm not prepared to kind of break that down. I don't have that in front of me. So...

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Yes. Again, I don't -- but I guess, what I just want in general, Dennis, is the trajectory of SWP expenses that are flowing to the P&L, are they still upward -- are they still going up or plateaued, going down? Just directionally, I think people were just trying to get a sense of where we're at in that spend cycle.

Dennis J. McGonigle

Yes, the development cycle, as we've talked in past, were kind of in this -- pushes here for U.S. to get to the U.S. market. That will start. We have our goals Wayne has talked about early next year. Joe has begun to roll out to U.S. banks and he'll talk about that in his comments. And he has what they call a step-in strategy that development is kind of married up to in that whole curve over the next 12 months or so. And then it's just a matter of what, in my view at least, and my peers certainly can chime in, is that as we get to market with kind of the core set of the services we need to be in market and to sell new business and deliver for new business, then we can put more discipline around the actual spend level that we kind of -- that we would like to spend. It's that you heard me use this analogy, I'm sure. We don't have 4 wheels on the car yet. Once we get all 4 wheels on the car and get the car on the road, then we can say, okay, how much do we want to spend and put more discipline around that. And I'm actually getting some head nods as I say this, so I think I'm getting agreement that people share the same view. And that's what I think comp spending will start to move in a more downward trend, unless, of course, we had some next great idea.

Operator

I'm showing no further questions at this time. Please continue.

Alfred P. West

Thanks, Dennis. I'm going to turn it over to Joe Ujobai now to discuss our Private Banking segment. Joe?

Joseph Paul Ujobai

Thanks, Al. In the Private Banking business, we are making good progress in both the continued build-out and sales activity of the SEI Wealth Platform. Despite our progress, we are challenged by the financial impact of our new offering.

As I mentioned at the recent investor conference, profit improvement is slower than any of us would like. Progress, I believe, will be made as we grow our revenue and scale operational and technology delivery by selling and converting larger banks.

As an update on financials, revenue of $95 million declined 4% or $3.6 million from the first quarter and improved 8% or $7 million from the year-ago quarter. Revenue was impacted by $3 million in lower investment processing onetime revenues versus quarter 1 and a $700,000 in lower brokerage transaction revenue.

Private Banking profits were negative $2.6 million compared to positive $2.4 million in Q1 and $3.4 million in Q2 2002 -- 2012. Profit was impacted by the lower revenue and costs associated with the continued development and rollout of the SEI Wealth Platform. This includes some of the items Al mentioned, continued development and operational infrastructure, as well as a fully staffed sales force here in the U.S. and the U.K. And we are building increasingly towards scale to look for larger clients. And also, profit was impacted by the costs associated with accelerating -- accelerated vesting of stock options mentioned by Dennis. For the quarter, the sale of SEI Asset Korea had a $2.9 million negative revenue impact and a $400,000 negative profit impact.

Turning to new business. We've shifted our sales strategy in both the U.K. and the U.S. back towards larger prospects. These targets have longer sales cycles but would likely implement the SEI Wealth Platform across multiple business segments. As Al mentioned, this focus in sales pushes out contract signings and will make quarter-to-quarter sales activity inconsistent or choppy, both now and in the coming quarters.

That said, I'm encouraged by our sales progress with current large prospects, as well as bringing new firms into the sales process. We've invested in a robust sales team and a supporting marketing programs to build a big business.

Gross sales events for the quarter were $5.6 million, $4.2 million of which is recurring. Net sales events were $2.7 million, of which $1.2 million is recurring. Net sales events were impacted by a few lost clients and asset management direct costs.

In the U.S., during the quarter, we signed one additional SEI Wealth Platform client, and we converted our second bank, Pinnacle Trust, as part of our U.S. step-in strategy. We now have 7 signed and 2 converted clients in the U.S. During the quarter, we had normal re-contracting activity. Approximately 80% of our Trust 3000 book is committed through 2015.

In the U.K., we had a good quarter converting the backlog, growing assets under administration, scaling the infrastructure and progressing the large prospect opportunities. We had over $600 million in net cash flow from current clients. Worldwide, the platform assets under administration at the end of the second quarter were up about $1 billion to approximately $24 billion. We had 28 signed contracts and 20 clients are now live. We also have about 160,000 end-client accounts.

Worldwide, we have a backlog of approximately $6 million in recurring revenue that should install within the next 12 months. An additional contributor to our business is asset management. Quarter-ending assets were up $500 million to almost $12.9 billion.

In conclusion, 2013 is a year of solution build-out, sales execution in the U.S. and continued momentum in the U K. Although our financials remain challenging, I'm encouraged by our progress, as we build towards a large and profitable business. Are there any questions?

Operator

[Operator Instructions] I have a follow-up question from the line of Robert Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Just first question is, I guess, I'm just kind of curious when you guys talk about going after like large institutions. Is there any way of kind of -- I mean, well, how do you define that? I mean, do you look at that and say it's just number of trust accounts? Is it kind of -- do you think of it in terms of -- what are the metrics that you use? And then I'm just kind of curious what those are. And then, secondly, follow-up to that. I understand that sales could be very lumpy with this and your -- that -- and your focus is on larger banks. But is it your expectation that you could -- that it's reasonable or you can sign 1 or 2 of these by the end of the year and then we kind of assume it's a 6- to 18-month conversion once signed? Is that kind of a reasonable framework?

Joseph Paul Ujobai

Okay. So let me take your first question. How do you define large? So we'd look at a number of things. So historically, we've been very focused on trust accounts. So we look at size, the number of trust accounts. That's a good indicator. Trust accounting is sort of -- or trust was the way that most U.S. banks delivered wealth management. But that's evolved over time. So a big book of trust is good. But in some cases, trust books aren't growing so much. So we talked a lot about the platform being a single infrastructure. So then we -- I then try to identify what are the other areas of wealth management withinside of the bank that we could utilize the SEI Wealth Platform as an infrastructure solution. So we can go beyond, say, the bank trust departments and look at maybe the advisers that they have either built or acquired over recent years and potentially, other areas of wealth management where they may have brought in clients now to digital or Internet-based channels. So we've done an assessment, not only on our clients, but also on large prospects, of how big really is the book of wealth management. It might be located across a variety of segments withinside the bank. But we try to size that. And we size that by assets under management, and we also size it by a number of accounts. And that would obviously imply sort of average accounts size under management. And so we're looking at firms that have somewhere north of $5 billion to $10 billion of assets under management. A lot of our first clients in the U.K. were closer to the $1 billion mark. We're focused on firms of $5 billion to $10 billion, and clearly, firms with more than that in assets under management as really a way to qualify what's a large account. Also, they probably should look for other things, firms that are looking for -- some firms such as regional banks are largely focused on -- are still largely focused on expense reduction. Some of the larger national or global banks had gotten past sort of the focus on expense reduction. Although, certainly important to them, are now focused on how would you grow your business and start to gain market share. So the -- sort of the selling challenge is a little -- or the selling opportunity is a little different across different segments or different types of firms. But as I said, we've invested in and built out a pretty decent sales force, both here in the U.S. and the U.K., and are spending a lot of time really doing a deep dive into prospects to identify big solid ones and firms that have an impetus to make a change. As far as the timing, I think your second question was largely around timing. Timing is really difficult to predict. I can tell you that withinside the pipeline that we described at the investor conference, just -- what seems like a few short weeks ago, we are making progress with some of the larger firms inside of there. Purchasing inside of banks has evolved pretty dramatically over the years. So what's a relatively new activity for us is we've spent, obviously, a lot of time doing discovery upfront, trying to determine how we would show the clients or the firms how the SEI Wealth Platform would help them. And we sell to business leaders, then there's usually an effort of purchasing departments withinside of banks to actually negotiate the contracts and renegotiate the pricing of things. So it's really hard to predict timing. But back to some of Al's comments, we are increasingly encouraged by the interest in the market, the interest of larger firms, as they've come out sort of a tough period of time, given the crisis. So the activity is certainly picking up. The fact that legacy systems aren't getting any easier for banks to use are helpful. The fact that we do have 160,000 clients up and running, the fact that we have largely built a lot of the back end and are focusing now more on some of this added value front end. So what's the experience of the advisor? So timing's difficult, but we are making progress. And I suspect -- or I firmly expect we're going to have a big and very profitable business here. But I don't want to mislead you to say that something will sign in a period of time that's, in some ways, unpredictable. But we will have signings, I just can't tell you how quickly those are going to happen.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

And I guess, it's fair to say, given that these would be larger, more complex, that -- and knowing every transaction is different, but that a typical implementation, even in the historic business, could be anywhere from 6 months to 18 months or so. So they're kind of reasonable. There's no reason to expect that it would convert sooner than that once the deal is announced.

Joseph Paul Ujobai

Yes, so one of the other differences is really -- is less of a big bang conversion. So again, in our Trust 3000 -- our trust business, we identify a book of trust accounts that were usually within one segment within the bank. And we will build out a plan to convert all of those trust accounts at once, which would usually set out -- would replace a stack of technology and operations. As we're talking to these banks about a single infrastructure across multiple segments, I think the conversion will look a little differently and we'll see sort of staged conversions with books of business, where we would bring on trust toward the discretionary book first, in some cases, and then add other books like the advisory books or business that they generate other ways. So I think conversions, as we're looking and talking to banks about conversions, is morally -- particularly with these large firms, it's more of a step-in conversion. And again, I think -- so that would take you from 6 to 12 months for the first conversion, over 2 to 3 years to get the entire book of business. These are, obviously, larger books of business than just trust in some cases. So I see conversion. And as we win some of these, we'll probably tell you more about how conversion works. But it would probably go from a year to -- for these bigger banks to 3-plus years depending on how many systems we're taking down and which segments we're going to be supporting.

Operator

Our next question is from the line of Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

A few questions. And the first one, maybe you could talk a little bit about the lost clients. What was the reasoning kind of what happened there?

Joseph Paul Ujobai

The lost clients were 2 small clients. So we talked about a bigger client last quarter. And they're just typical reasons. We do always lose a few clients over the course of the year. Sometimes people, they consolidate this on some of their book of business inside the -- with some of the book of business. So these weren't any -- nothing unusual to some sort of normal course of a few small firms making some decisions about alternatives. Nothing to really worry about.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. And then just to clarify. I might have missed it. But the net sales figure that you gave, I think, was what, $2.7 million?

Joseph Paul Ujobai

Yes, that's correct.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay. Did you give an update on pipeline sizes in the U.S. and U.K.? And if you didn't, could you?

Joseph Paul Ujobai

No, I didn't. The pipeline looks pretty similar to what we talked about in the investor conference. About $50 million in the U.K. and about $100 million in the U.S. We haven't -- obviously, we haven't closed anything big to change that but nor have we lost anything big in the process. The characteristics are we're making progress on some of the key prospects. So they will fall out of the pipeline at some point. And our expectations are they'd fall into the failed event category given the progress -- the good progress that we're making.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

And then the one new client signing in the quarter, was that a client that's previously been unannounced or is that a new one you're announcing today?

Joseph Paul Ujobai

It's -- we haven't announced it yet, but it's part of the step-in strategy, and it's a large trust book of business -- or it's a small trust book of business. But behind that, there's a large wealth management book of business at that firm. So they've committed to moving the trust book. And -- but behind that, there's a substantial opportunity. And that's why we thought it felt -- it fit into this step-in strategy and we'll announce that some time, probably in the third quarter when we coordinate with the client.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

And then just a final one. Did you give, if you did, I missed it, the SWP AUM in the quarter?

Joseph Paul Ujobai

Yes, the AUM was up about $1 billion, and that's part cash flow and park it -- so a little bit up on -- and we did a client conversion in the U.S. But then a little bit down because of market depreciation and currency, so for a total of about $24 billion.

Operator

Our next question is a follow-up from the line of Jeff Hopson of Stifel, Nicolaus.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Joe, the client cash flows, you told us, but I didn't get that. Could you give me that? And then, in terms -- on the expenses, it seems like you're differentiating, obviously, between sales infrastructure build-out, I guess, service infrastructure and then additional technology investments for enhancement and/or building scale. So in terms of the latter technology, what kind of -- any kind of timing that you can see for that basically being done leveling out, I guess?

Joseph Paul Ujobai

So...

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Over the next 12 months or so, how do you see that playing out?

Joseph Paul Ujobai

Okay. So, I'll answer your first question. So net cash flow onto the new platform was $600 million. Again, that -- and that's after redemptions, and that's flows, redemptions and then market depreciation and any currency issues because a lot of these -- most of these clients are in the U.K. We're up about $1 billion with net cash flow of about $600 million. When it comes to investing, Al mentioned a couple of things. So one, is we've invested in building out a sales force, both here in the U.S. and the U.K., as well as the marketing surrounding that. You may be seeing some online marketing that we've been doing because, as we want to go well beyond trust departments and banks, we want to make sure that people that didn't know us very well because they maybe weren't in trust will start to recognize the SEI name and the value of what we've built, and we've launched some marketing around that and you'll start to see that. You're probably may already seeing that when you log on the Internet. And we'll do some more of that, really trying to create a lot more presence in the market here in the U.S. outside of trust departments. So sales expense will go up because I think we'll be selling events and we'll be writing commission checks, which I think we all want to do. From a development standpoint, as Al mentioned, we started first, with the back office. We're more focused now as that has wrapping up on the front office, meaning creating a better experience for the advisors, creating an improved experience for end investors. That wasn't as important when we first started to build that. That is a very strong driver now in decisions at our prospects. And the great news is that we can deliver to the prospects in fully integrated solution. And the other good news is they're also helping us as we build that out, identify what would make an advisor or a relationship manager a lot more efficient. And that will go on for some time now. We just really started that investment in the last year or so -- last couple of years. But I think it is just bigger and there's more to do there than we -- than there was when we first started to build this thing. When we talk about scale, we really look at it in 2 things. One is technology scale. So if we have 160,000 accounts, though we expect to have millions of accounts on the system over time. We believe, from a technology scale standpoint, we're in pretty good shape. So we'll have to buy more technology, and unfortunately, a lot more operating system software as we add more and more accounts. So we feel like that's pretty scalable, and we have tested and have forecasted what that would be. And those numbers are looking to us like pretty comprehensive and pretty encouraging numbers. The hard part, and I've said this for the last several quarters, is understanding operation scale. And that is that, when we first built the platform, we felt this more on functionality than we did on scale. We're now beginning to focus a lot on scale as these big clients are coming our direction, at least from a prospect standpoint. So trying not to have to hire a lot of people as we bring on lots of more accounts. That isn't quite as easy to predict as, say, the technology scale is. So we're -- our goal is to automate as much as we possibly can to create greater scale around operations. But that's been a fair amount of where we've been spending money in the past several quarters. So we're looking at those things closely. We -- I'd say 2, 3 years ago, we've sort of looked at all of that in sort of a big lump. Now we're looking at it in much more finer chunks and understanding and setting targets for ourselves. But we do see additional expenses as we grow this or we create this infrastructure to take on fairly substantial scale.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then one more, I'm sorry, real quick. The revenue, the booked, I guess, but not converted is, I think, $6 million in revenue. Is that over the next 12 months or...

Joseph Paul Ujobai

Yes, I mean, that's expected to come in over the next 12 months. So it'll drip in over the next 4 quarters.

Operator

Next question is a follow-up from the line of Tom McCrohan with Janney Montgomery Scott.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Last quarter, I think you mentioned there was like a de-conversion that was going to be a headwind in Q3. Just want to understand the net effect relative to the pipeline assets that are coming onstream.

Joseph Paul Ujobai

Yes, we mentioned that we had a U.S. client who sold the book of their business, as well as are converting their assets to an in-house system that already exists. That'll start to hit us in the third quarter. And that was about a $4 million client -- about $4 million, $5 million client.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Annual revenue, right?

Joseph Paul Ujobai

Annual client, yes, annual client.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Got it. Okay, great. And the $3 million in your prepared remarks, talked about kind of aggregate revenue for the quarter and why it was down sequentially. You talked about $3 million lower onetime revenue. Was that like this implementation fees? Can you give some clarification on that?

Joseph Paul Ujobai

Yes, it's some implementation fees, but it's largely custom work we do for Trust 3000 clients. So I would suspect over time, as clients begin to consider the SEI Wealth Platform, the custom activity on Trust 3000 will start to go down. Well, it is going down. And -- but those clients haven't yet committed to a plan yet on the SEI Wealth Platform. So there's a bit of a gap here. But I would expect over time that onetime would come back up as clients commit to the new solution.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Great. And my last question, on the new client that had a small trust business and a bigger, I guess, wealth management business. Were they an existing Trust 3000 client?

Joseph Paul Ujobai

That was a new name for us.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Completely new?

Joseph Paul Ujobai

Yes, completely new, yes.

Operator

Our next question is from the line of Eric Bertrand with Surveyor Capital.

Peter Seuss

It's Peter Seuss, actually. Just wanted to follow up on, I think, Rob's question on timing. I think it was Al that said at the Investor Day that just the decision period is kind of 6 to 10 months away for a lot of the large banks and so that was 2 months ago. So that would mean 4 to 8 months now. Has anything changed in terms of that time frame?

Joseph Paul Ujobai

I can tell you, we're active -- we're very active with some really great prospects and -- but these are large organizations that require a lot of sign-offs. And so I feel like we're making progress. But to talk in terms of a month or 2 here or there, it's really impossible for me to predict that. We're working as hard as we can to get these deals moved along and ultimately signed. But it's really very difficult to predict that. Maybe 3 or 4 years from now, when we've signed a bunch of these, I can be a little more exact. But we are making progress and I think we feel encouraged by the progress that we are making.

Peter Seuss

Do these things -- do these decisions tend to be kind of year-end type decisions? Or are they made at any point during the year?

Joseph Paul Ujobai

They're made at any point during the year, although certainly, firms or banks are budgeting for 2014 and that's more about things like onetime and custom types of costs. But the third quarter, some historically was slow in the last couple of years. It actually hasn't been bad because sometimes maybe second quarter decisions get -- so it's not really that seasonal. But people, there is a psychological. They're trying to get things done by the end of the year and I think that on both sides. So -- but I don't think that's a big driver. And again, what's a bigger driver is this is the new, exciting solution and we're getting a lot of interest. And it's going well beyond sort of our historical opportunity set. So it's probably more complex decisions, but bigger opportunities for us.

Peter Seuss

And sorry, just one last quick follow-up. When you talked about a 3-year implementation period, can you just give us, and I know it varies by client, but just kind of a general base case for a large client? If you were to announce a win at the end of this year, how would that revenue phase in over the course of those 3 years?

Joseph Paul Ujobai

So with large clients, there are typically some sort of upfront cost associated with conversion, could be cost associated with custom development, cost associated with interfaces. So you'd start to see onetime kick in relatively soon from signing. And then, again, depending on the size of the book of business, depending on the other activities that may be going on at the bank. The bank may be converting other systems, so they put off converting the wealth management system. So it's really hard to predict. But it's probably no sooner than 12 months. But like I said, we've been trying to, going forward, given these are big opportunities, really break them up in logical conversions. And again, I think as we have some experience with these larger firms, we'll share with you some of that progress and we'll know how to better answer that question a few years from now, when we've done this a couple of times.

Operator

Next question is a follow-up from the line of Robert Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Actually, 2 quick questions. First, and I apologize because I think I may have missed it, but the -- there's the one client that, starting the third quarter, will be coming off the shelf. And that's a, I'm sorry, a $4 million annualized revenue client, is that correct?

Joseph Paul Ujobai

Between $4 million and $5 million, yes.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. Just want to make sure I had that right. And the second thing is, going back on the expense side, I mean, kind of looking out, I mean, understanding that you've been investing, particularly in the front end on getting the U.S. up and running, is there a kind of a certain amount of, I don't know, I'll call it temporary spend that you're going through that you kind of feel like when you get to the end of this year, that will be done and there'll be actually some expenses that once kind of the front end's built out, obviously, you'll have a higher ongoing cost. But there's maybe some kind of whether it's consultant costs or what have you that will kind of fall away. If -- as -- assuming revenue continues to grow from here, you'll actually see kind of expenses kind of flatline for a while because you're kind of -- you're getting rid of some incremental costs that you're incurring.

Joseph Paul Ujobai

Yes, I mean, I can't predict that's going to happen at the end of this year. But if you, again, you look at sort of the sequence, we built a very robust back office, then we started focusing on a front office. And now we're also beginning to focus on how to scale everything that we've built. So that will go on. Not easy to predict. It's going to -- it's not going to end at the end of this year. But yes, of course, and then any spending beyond that would be either driven by, we think, we can take out cost by making more money in development on the platform and make the platform more efficient. Well, we have revenue tied to additional functionality. So yes, but we still have a lot of core stuff to do, whether it be back again largely done front or focusing on and then scale really going from 160,000 accounts to millions of accounts. So yes, it will flatline and then maybe go down or be much more what we would call discretionary.

Operator

Our next question is a follow-up from the line of Sam Hoffman with BlueCrest Capital Management.

Sam Hoffman

I just have a follow-up on the expenses relative to the revenues for the larger clients. When you -- you said you immediately take in onetime revenues when you sign a larger client. So are those revenues associated with an expense, which is being made concurrently, and therefore, there's limited margin on that expense so that your very high incremental margins only come kind of 12 months out? Or are the upfront conversion onetime revenues sort of funding costs that you've already spent this year?

Joseph Paul Ujobai

Yes, it's largely associated with specific expense with, like I said, either the conversion of the data, the build-out of specific interfaces or the build-out of specific functionalities that the client might request. So I think, time of [ph] trust, we had a fairly decent margin on onetime. But the real margin comes in the recurring revenue.

Operator

And I'm showing no further questions at this time.

Joseph Paul Ujobai

Well, thanks. I didn't expect to get any question since you asked Al and Dennis a few of the ones you normally ask me. But now I'm going to pass it back to Al.

Alfred P. West

Thanks, Jim. Our next segment is Investment Advisors, and Wayne Withrow will cover this segment.

Wayne Montgomery Withrow

Thanks, Al. During the second quarter, we continued the cash flow momentum we established last year and had another solid quarter of new advisor recruiting. Assets under management were $36.6 billion at June 30, a 15.3% improvement from a year ago. During the quarter, we had $929 million of positive net cash flow, bringing our net cash flow for the year up to $1.9 billion and surpassing our total net cash flow from last year.

Revenues for the quarter were $59.3 million. This compares to $49.4 million for the second quarter of last year. Expenses increased during the quarter, primarily due to the increase in option expense Dennis mentioned and an increase in direct cost tied to our revenue increase. Despite these expense increases, our margins still improved to 44.5%, which is a 180 basis point improvement from the first quarter of this year and a 330 basis point improvement from the second quarter of last year.

On the new business front, we signed 169 new advisors during the quarter. This represents a high watermark for us, and our pipeline of new advisors remains very strong. Moving onto the status of the wealth platform. We continue to work with our early adopters to solicit valuable feedback, which we can incorporate into the platform. An early example of this feedback is our new advisor desktop. The first version of this desktop went into production at the end of the quarter and had been very well-received. Our more general release to the platform to our client base remains on track for early next year.

In summary, net cash flow and new advisor recruiting were very positive for the quarter. Momentum remains strong and the wealth platform release is on the horizon. I will now entertain any questions you have.

Operator

We have a question from the line of Robert Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

2 quick questions. First, and I apologize, I think I missed -- was the net cash flow for the quarter about $400 million?

Wayne Montgomery Withrow

$929 million.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

I was way off. Okay, great. And secondly, I just -- it looks like, at least kind of the fee realization rate kind of popped up in the quarter, and I don't know if that's just -- was it mix or are you starting to see whether there's some kind of onetime or other kind of non-asset-based revenues flowing through, which I assume, as you roll out SWP over time, the mix will change some, that's part of the intention, I guess, to try to generate other revenues besides just kind of the asset management fees. But was there anything in the quarter that may have influenced it?

Wayne Montgomery Withrow

There's really nothing in the quarter that's unusual, Bob. I think that it's simply a reflection of the scale you see in this business. And if you look historically, as we've been growing recently, you'll see that, that realization rate has been creeping up.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And no reason to expect that the pop in the margin to almost 45% shouldn't be sustainable?

Wayne Montgomery Withrow

No reason.

Operator

Our next question is from the line of Jeff Hopson with Stifel, Nicolaus.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Wayne, the strong flows just slightly less than last quarter. Obviously, there was a fair amount of redemption activity in fixed income. So one, did you see the same type of thing? And then, two, I guess the thought here is that even if you saw that, you retained it either in cash or that money moving into other areas. Can you comment on that? Do you have anything new in July that you're seeing relative to the Q2?

Wayne Montgomery Withrow

I'm sorry, Jeff, I didn't quite hear your comment on redemptions?

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Yes, obviously, in the industry, in terms of mutual funds and such, we saw accelerated redemptions, particularly in fixed income. So to the extent you saw any of that, given that cash flows remained strong, that you would have retained or seen that those any redemptions going to other products and/or cash, but generally staying on the SEI platform.

Wayne Montgomery Withrow

Yes. I mean, we have not seen -- in our book of business, we have not seen a major move to cash. And our disbursement rate still is very strong for what we historically recognize. So we have not experienced -- that industry trend has not trickled through to our business.

Operator

And I'm showing no further questions at this time.

Alfred P. West

Okay. Thank you, Wayne. And our next segment is the Institutional Investor Segment. And I'm going to turn it over to Ed Loughlin to discuss the segment. Ed?

Edward Doyle Loughlin

Thanks, Al. Good afternoon, everyone. I'm going to start with the financials for the quarter and then discuss sales activity. Revenues of $62 million for the second quarter increased 14% compared to the year-ago period. New client funding and market appreciation during the period contributed to these increases. Quarterly profits of $31 million increased 13% compared to the second quarter of 2012. Margins were 48% for the period. Increased stock option expense, direct sub advisor costs associated with new U.K. sales and additional investment and client-facing personnel, caused expenses to grow faster than revenue during the period.

Ending asset balances approaching $65 billion on June 30 declined 3%, due to negative capital market experience for the quarter. SEI's typical pension client portfolio is globally diversified with large allocations to fixed income. While SEI client portfolio has performed better than the market, a typical U.S. and Canadian pension portfolio realized a negative 2% portfolio return for the quarter, with a U.K. pension portfolio returning a negative 4.5% for the quarter.

Net new client assets funded during the quarter were $834 million. And the backlog of committed, but unfunded assets at quarter end was $800 million. New client sales closed during the quarter were $1.9 billion and total $4.2 billion year-to-date through June. New clients were well-diversified by market segment and also by geography. We're especially pleased with the acceptance of our discretionary management solution by U.K. institutional investors.

SEI has a long track record serving clients as a discretionary fiduciary manager, and we have consistently enhanced our solution to support increasing client needs. We're well-positioned to differentiate our offering from increased competition. We enjoy a strong pipeline and remain optimistic about the growth opportunities for this segment. Thank you very much. And I'm happy to entertain any questions you may have.

Operator

[Operator Instructions] A question from the line of Chris Donat with Sandler O'Neill.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Hey, Ed. Ed, actually, you're really the person I wanted to talk to the most today.

Edward Doyle Loughlin

Okay. Well, come on.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Got it. So I appreciate the commentary about the U.S. and Canadian pensions typically being down 2% and U.K. down 4.5%. I guess what I'm looking at and I'm trying to get my arms around is, can you give a sort of a ballpark throughout the mix of AUM that you have, the fixed income versus equities? And then also maybe throw out something about are there main currencies we should be watching for sensitivities to their moves?

Edward Doyle Loughlin

Sure. Our asset mix has changed over time because of the fact that we're doing a lot of liability matching for these pension plans. So that pretty much prompts them to be probably about 45%, I guess, I would say, on average, in fixed income. A lot of that you should recognize is also in long duration. So if you were to look at the U.K. gilts, I mean, they were down like negative 10%. The U.S. long bond was down negative 6%. And I think that the Canadian long-term bonds were down like 2.25%. So -- but in addition to that, we are pretty well-diversified. So most of, if not all of these clients, typically have U.S. high yield, which was down. They have emerging market debt, that was down. And outside the 45% they have real return assets, and that was also unfortunately kind of negative. You flip to the equity side and there, I mean it was really kind of a choppy market. The U.S. large cap was up, let's say, a little bit over 2%. Small-cap was up a little, kind of close to 5%. But outside of that, kind of the developed MSI was down 3%. Emerging market equity, which we've been a long-time investor in for our clients, was down 7%. So it was a challenging capital markets environment.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then just mix of assets. Let's say, U.S., Canada, U.K. or even just the U.S., non-U.S., can you give us some kind of ballpark number there?

Edward Doyle Loughlin

Yes, the bulk of our assets are in the U.S. It'd be the U.S., U.K., Canada would be kind of how you would kind of proportion them.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. And safe to say the more than 50 % is U.S.?

Edward Doyle Loughlin

Yes.

Operator

Your next question is from the line of Robert Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

I got 2 questions for you. First one is, you haven't seen it manifest itself in kind of the fee rate. But I mean, you have talked about kind of the pipeline, the potential client, some of the actual clients kind of being larger than historic, and there's also somewhat of a trend within the fiduciary space towards unbundling, which could lead to some fee compression. I mean, is that reasonable to expect or are you starting to see that some of the newer clients or relationships you're bringing on, or even the older ones that are growing, that we'll start to see a little bit of either break points or fee compression going forward? Or is that just being offset by mix or maybe there's a higher content of alternatives and stuff, so that's kind of offsetting what otherwise would be some fee compression?

Edward Doyle Loughlin

Sure. There's, as you point out, there's a variety of things that are kind of going on. I would say to you that there's still a pretty large kind of core market that, to a large degree, they're not really looking for a separate advisory fee from the manufacturing or the money manager's fee. So those fees pretty much have come down over the last 15 years. But I think what we have seen is the asset mix has changed. So there's more money that is going into some higher fee alternative investments in that particular space. When you get to the larger clients that are really looking for the advisory fee, I think that, to a large degree, the fee that we're going to realize with some of these larger clients for at least the transactions that we've seen, it's kind of where it was in a bundled type of world. But I think as the market becomes more competitive, and that's the -- the focus is only on the single advisory fee, it's going to be pretty heavily negotiated. That advisory fee can increase depending upon the role we play and the services we provide around the alternative space. So I think we have to really kind of see how this plays out because we're kind of early in the game of the separate advisory fee.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then the last question, aside from the million of equity increased expense there, you talked about some other things that may have flowed through. Or should we think of those as kind of just being the new run rate or maybe that kind of one-and-done and maybe get a little bit of margin lift, even if kind of the flattish revenues over the near term?

Edward Doyle Loughlin

Well, I guess insofar as the other big cost was this direct cost. As you may recall, the way that we account for non-U.S. assets, we book that gross, okay? And then we have to show an expense item for the cost of the money management. So we're seeing our assets grow outside of the U.S., which is good news, kind of significantly. So we have to pay the manager cost there. So that was $1.8 million. It's just a piece of number.

Operator

And I'm showing no further questions at this time.

Alfred P. West

Thanks, Ed. Our final segment today is investment managers. So I'm going to turn it over to Steve Meyer to discuss this segment. Steve?

Stephen G. Meyer

Thanks, Al. Good afternoon, everyone. For the second quarter of 2013, revenues for the segment totaled $55.5 million, which was $8.7 million or 18.7% higher than our revenue for the second quarter of last year. This increase in revenue was primarily due to an increase in our asset balances, along with new client fundings. Our quarterly profit for the segment of $18.9 million was approximately $2.4 million, or 14.5% higher than the second quarter of 2012.

This increase in profit was largely due to the increase in our revenue for the quarter, offset by an increase in our investment and ongoing operational expenses, as well as the increase in stock option expense. As mentioned previously, our expenses are trending a little higher, as we continue to invest in our solutions and build out our infrastructure ahead of new business.

Third-party asset balances at the end of the second quarter 2013 were $289.8 billion, approximately $14.2 billion or 5.1% higher as compared to our asset balances at the end of the first quarter 2013. The increase in assets was primarily due to net positive cash flows of $6.5 billion, enhanced by market appreciation of $7.6 billion.

And turning to market activity. During the second quarter of 2013, we had a strong sales quarter. Net new business sales events totaled $10.3 million in annualized revenue during the quarter. These sales were well-diversified among all of our solutions. And encouragingly, approximately 60% came from existing clients. We continue to see steady market activity and opportunity for growth, and we feel well-positioned to execute on this opportunity.

That concludes my prepared remarks. And I'll now turn it over for any questions you may have.

Operator

Your first question is from the line of Jeff Hopson from Stifel, Nicolaus.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

If you can give us an update, so the 6.5 of new -- or of existing cash flow, so was that -- do you mean a business -- old signings that had converted or client cash flow to your clients?

Stephen G. Meyer

It will really comprises both. But the majority of this quarter was from fundings of existing backlog and previous sales, funding some new business.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

From -- okay. And then last quarter, you had mentioned a fairly large, I think, around $12 million, that was in -- moved to short-term. What's kind of the status of that?

Stephen G. Meyer

So I think you're referring to -- we did have a short-term product that's actually in our global group that it's really a funding vehicle. That is still there. It actually took on some more assets, more cash this quarter. But it's kind of in a wait-and-see mode to -- for it to create funding to happen at some point either later this year or next year.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Okay. But is there any risk of it leaving SEI, I guess, and going elsewhere instead of going from a shorter term product to some longer term product?

Stephen G. Meyer

Yes, there is. But what I would say to you is, the revenue associated with that is minimal and would have no impact on us whatsoever. The hope is that the funding would go into a product that we would then service. But that is not clear or guaranteed yet.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Got it, okay. And would you say, despite the strong new -- it sounds like despite what you booked this quarter, that the pipeline that you had talked about at the conference still remains fairly vibrant, I guess.

Stephen G. Meyer

Yes. Pipeline still remains the same. I think I talked about in the U.S. about $130 million pipeline at the Investor Day. I would say that it's probably still in that area, maybe around $128 million, taking off some. But it's actually replenished some, but take off some from what we've funded and global's hanging in right around where it was, around $30 million.

Operator

I'm showing no further questions at this time.

Alfred P. West

Thanks, Steve. And now I'd like to turn it over to Kathy Heilig to give you a few company-wide statistics. So Kathy?

Kathy C. Heilig

Thanks, Al. Good afternoon, everyone. I have some additional corporate information regarding this quarter.

Second quarter 2013 cash flow from operations was $84.3 million or $0.48 per share, and that does reflect receiving the $43.4 million of cash from the SIV settlement. Year-to-date June, cash flow from operations is $123.8 million or $0.70 per share. The second quarter free cash flow is $66.3 million and year-to-date free cash flow, $97.9 million. Capital expenditures, excluding capitalized software, were up $1.8 million. For the year, that's $3.6 million, and we would expect those expenditures, and they exclude capitalized software, to be about 12 million.

In addition to that 12 million, we are going to begin, probably shortly, construction of a new building, and that has an estimated cost of about $11 million. We would expect that to start and be completed by the second quarter of next year.

The tax rate for the quarter was 35.5%. We still expect the annual tax rate to fall between 35% to 36%, although the tax rate always does vary by quarter. Accounts payable balance at June 30 was $1.8 million.

We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risk. And that the financial information presented in our release and on this call is unaudited. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results.

And now please feel free to ask any other further questions that you may have.

Operator

[Operator Instructions] I have a question from the line of Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Dennis, a couple of questions. Kind of at the beginning of the call, when you're talking about the accelerated vesting of the stock options and you kind of suggested hitting your EPS targets, you alluded to comps were sort of getting to $1.60 number for 2013, or at least that's what I heard. And I assume -- a couple of questions related to that. Does that -- that assumes the onetime gains both this quarter and in the first quarter, I assume. And then, it also implies, and I know you don't give guidance, but it implies about $0.72 in the back half of the year, which is a meaningful acceleration from the pace that we're on right now. Or so there are -- are there other onetime gains kind of contemplated on the back half? And am I interpreting this right? Then I got a follow-up.

Dennis J. McGonigle

You're almost right. The -- one thing about our EPS calculation for option vesting that's this part is we add back the expense number related to equity options, to EPS. And that's what triggers the vesting. Otherwise, we'd have a circular problem. So you have to sort through that as well. So it's not a reported EPS. It's EPS adjusted for the cost of or the equity compensation cost.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

I got it. So including -- so it's basically you have to add back that $15 million of stock compensation cost you're talking about accelerated.

Dennis J. McGonigle

Correct. Total for the year, what we expect to be for the year.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

So is it the $15 million accelerated plus some additional or is it that just $15 million you have to add back?

Dennis J. McGonigle

No, no. So it's -- if you take apparently year-to-date, our expense on stock-based compensation is, bear with me, it's about $15 million, $16 million year-to-date. So then -- so we'll have another $30 million or so over the next 2 quarters. And that'll get you -- I'm sorry, not $30 million but another $20 million or so over the next 2 quarters. And then that we back out of EPS.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Okay, I'm with you. And then totally different topic. When I look at the net sales figure, the 21...

Dennis J. McGonigle

It was a good attempt to get us to give guidance, Glenn.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

No, I know you don't give guidance and I don't think you wanted to. So that's why I wanted to clarify that. Because people could have interpreted that one way or another. The other question was the net sales events, the 21.7 for the company. I always struggle with this, but it's pretty clear from -- Joe's business was $2.7 million net and Steve's business was $10.3 million net. So kind of at $13 million. But I always a struggle with Wayne and Ed's business sort of getting to the net sales events in those businesses to reconcile with the total.

Dennis J. McGonigle

Well, I struggle with their businesses also sometimes. But essentially, what we do with Wayne's is the net cash flow he has in his business, multiplied by the earnings rate that we expect off that -- those assets. And then Ed's is basically, that's the net sales events he has times his earnings rate we expect off that business. And Ed mentioned the U.K. and how we have the investment management fees outside of or as an expense in the P&L. So we use the net -- our net revenue take in his business.

Operator

There are no further questions at this time.

Alfred P. West

Okay. Thank you. So ladies and gentlemen, we are concentrating our efforts on maintaining highly-satisfied clients, growing new business events, gaining operational scale and investing in projects that are critical to our future. Now our focus and growth in revenues and profits is unwavering and as our momentum grows, I am very bullish about our intermediate and longer term business opportunities and feel good about what we're accomplishing in the short term. So I'll give you one more chance to ask Ed a question. And then we'll say good afternoon.

Operator

[Operator Instructions]

Alfred P. West

If there's no questions, thank you very much for your attendance and good afternoon.

Operator

Thank you, sir. Ladies and gentlemen, that does conclude the SEI Second Quarter 2013 Earnings Conference Call. Thank you very much for your participation and for using AT&T Executive TeleConference. You may now disconnect.

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