Waddell & Reed Financial (WDR) Q3 2018 Results - Earnings Call Transcript

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About: Waddell & Reed Financial Inc (WDR)
by: SA Transcripts

Waddell & Reed Financial, Inc. (NYSE:WDR) Q3 2018 Earnings Call October 30, 2018 10:00 AM ET

Executives

Nicole McIntosh-Russell - Waddell & Reed Financial, Inc.

Philip James Sanders - Waddell & Reed Financial, Inc.

Benjamin R. Clouse - Waddell & Reed Financial, Inc.

Shawn M. Mihal - Waddell & Reed, Inc.

Amy Scupham - Ivy Distributors, Inc.

Analysts

Robert Lee - Keefe, Bruyette & Woods, Inc.

Michael Carrier - Bank of America Merrill Lynch

Craig Siegenthaler - Credit Suisse Securities (NYSE:USA) LLC

Daniel Thomas Fannon - Jefferies LLC

Patrick Davitt - Autonomous Research US LP

William Katz - Citigroup Global Markets, Inc.

Kenneth S. Lee - RBC Capital Markets LLC

Chris Charles Shutler - William Blair & Co. LLC

Macrae Sykes - Gabelli & Company

Operator

Hello, and welcome to the Waddell & Reed Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

I would now like to turn the conference over to Nicole Russell. Please go ahead, ma'am.

Nicole McIntosh-Russell - Waddell & Reed Financial, Inc.

Thank you. And on behalf of our management team, I would like to welcome you to our quarterly earnings conference call.

Joining me today on our call is Phil Sanders, our CEO; Ben Clouse, our CFO; Brent Bloss, our COO; Shawn Mihal, President of our Retail Broker-Dealer, Waddell & Reed, Inc.; and Amy Scupham, President of Ivy Distributors.

Before we begin, I would like to remind you that some of our comments and responses may include forward-looking statements. While we believe these 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 reference in our public filings with the Securities and Exchange Commission. We assume no duty to update any forward-looking statements.

Materials relevant to today's call, including a copy of the press release and supplemental schedules, have been posted on the Investor Relation section of our website at ir.waddell.com.

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

Philip James Sanders - Waddell & Reed Financial, Inc.

Thank you, Nicole. Good morning, everyone. Today we reported net income of $46 million or $0.58 per share compared to $44 million or $0.55 per share during the prior quarter. This represents an increase in net income of approximately 4% compared to last quarter. Ben will expand on our financial results following my initial remarks.

During the quarter, we continued to make meaningful progress with respect to the strategic initiatives discussed over the past several quarters. Our focus remains on improving overall investment performance, stemming net outflows, implementing operational efficiencies, and evolving the broker-dealer model. As our work continues, our efforts are gaining traction and giving us a clear path forward.

It is important to note that while we continue to work on cost efficiency initiatives, we remain committed to investing in top talent and new technology to position ourselves for future growth. These investments extend across all areas of our company, investment management, distribution and our broker-dealer. Our strong balance sheet and capital return policy continue to afford us a great deal of financial flexibility.

We have seen a sustained improvement in investment performance across much of our product line over the past year, and the most recent quarter was no exception. Similar to last quarter, we saw solid improvement across the one-, three-, and five-year Lipper and Morningstar rankings for the majority of our investment strategies.

This improving performance trend follows on the heels of enhanced resourcing of our investment management organization over the past couple of years, a commitment that spans investment research, portfolio management and risk management. Some headwinds on the flow outlook persist, but we did see sequential outflows decline largely due to fewer redemptions across the institutional and unaffiliated channels.

Within unaffiliated distribution, third quarter sales remained soft. Global trade tensions and the rising interest rate environment proved challenging for a couple of our key products, as investors gravitated toward more defensive strategies such as domestic fixed income at the expense of international products. Two sources of strength earlier in the year, our International Core Equity and Emerging Markets Equity Funds have experienced a more challenging flow trends recently.

These trends could persist in the near term, given recent market volatility and the weakness in international markets. However, we remain confident in their long-term positioning. Conversely, we experienced positive flows for the quarter across our small- and mid-cap product line, where performance remains strong on both the short- and long-term basis.

Net outflows for the channel were $476 million for the reporting period, down from $583 million in Q2. Within our affiliated broker-dealer, flow trends were largely consistent with what we had experienced last quarter. Net outflows for the channel were just under $1.1 billion, representing a slight increase compared to Q2. Shawn will offer additional perspective on this channel in just a few minutes.

Our institutional channel experienced an improvement in net outflows, with net redemptions totaling $452 million in the current quarter versus $1.5 billion in Q2. Last quarter, we mentioned we had received notifications of about $500 million in forthcoming redemption, about half of which occurred during the third quarter and is included in the $452 million. The remainder is expected to occur during the fourth quarter.

In addition, we are aware of an additional $700 million in redemptions expected to occur during the fourth quarter, for a total of approximately $1 billion in the fourth quarter. Reasons for the redemptions vary, including performance, a move to passive, and previously discussed personnel turnover.

We did fund one relatively modest international mandate and continue to see expressions of interest in our small and international strategies, but this channel is likely to remain challenging for the time being. As a reminder, our institutional channel currently comprises a little over 6% of our total company assets under management.

We remain committed to our strategy of diversifying our assets under management and flow profile across the various distribution channels. We are making incremental progress to enhance the positioning of our platform and distribution efforts. We have refined many of our internal structures to ensure each of our distribution channels is properly resourced to support future growth. We are also making strides in terms of modernizing our analytics and data capabilities that will support more targeted sales and marketing efforts.

However, having the right distribution infrastructure and solid investment performance is only part of the equation. We are equally focused on ensuring our products are competitively priced. Fee adjustments on 10 funds which we discussed previously went into effect on July 31. The initial feedback has been constructive, leading to a number of potential opportunities across the RIA, DCIO, and then affiliated broker-dealer channels.

We will continue to explore opportunities that allow us to break down barriers with fee-sensitive advisor channels, seeking competitively-priced products. I would also like to note that we continue to fortify and strengthen our distribution team under the leadership of Amy Scupham. Industry veteran Joe Moran came aboard as Head of Intermediary Distribution during the quarter, joining Grant Cleghorn who was named Head of the Professional Buyers Group in February. Both are now key parts of our distribution leadership team.

The additions of Joe and Grant allow align with our go-forward plan to deepen and diversify our relationships across all distribution channels. Their collective experience and relationships will most certainly be additive toward those ends.

Finally, over the next week, we expect to complete the previously announced merger of six funds as part of our internal product rationalization review.

Let me now turn it over to Ben.

Benjamin R. Clouse - Waddell & Reed Financial, Inc.

Thank you, Phil, and good morning, everyone. As Phil noted, today, we reported third quarter net income of $46 million or $0.58 per share compared to $44 million or $0.55 per share during the prior quarter, which represented an increase of approximately 4% primarily due to lower operating costs and better investment income. Continued reductions in our share count also drove the earnings per share number slightly higher.

Revenues of $295 million remained unchanged sequentially as lower assets under management in the institutional channel and the impact of our fee reductions in 10 mutual funds which became effective on July 31 were offset by higher advisory revenues in the broker-dealer and one extra day during the current quarter. While it's early, the fee reductions have so far been in line with our expectations of an annualized effective fee rate reduction of approximately 2 basis points.

Operating costs declined by $1.4 million sequentially. Distribution costs paid to financial advisors affiliated with our broker-dealer moved in line with distribution revenue, while G&A declined due to lower consulting spend and the continued conversion of some technology contractors to employees, which is a more cost-effective model for us in some areas. We also had lower technology costs as we have begun replacing some older systems and software with more cost-effective solutions. However, this also drove $2.4 million of accelerated depreciation in the quarter.

We continued to invest in areas focused on strategic growth, including adding resources to our investment management team, pricing and product changes to support our distribution efforts, and improving the underlying support structure and systems in our broker-dealer.

At the same time, we continue to make progress toward our $30 million to $40 million cost containment initiatives, as evidenced this quarter in our financial results. Our primary focus is on long-term controllable expenses, which includes compensation, G&A, technology, occupancy and marketing. These totaled $107 million during the quarter and $333 million year-to-date. These numbers included severance costs of approximately $5 million year-to-date that are not part of the long-term run rate.

One opportunity we are thoughtfully addressing is broker-dealer field office lease savings. We are on track for closing a total of 36 offices through year end as we move the broker-dealer toward a sustainable and competitive model, driving an anticipated $3.8 million in cost reductions which will be realized in our 2019 run rate.

We continue to expect to realize pre-tax earnings improvement within our targeted range as we enter 2019. We will also continue to advance our investments in improved technology in 2019, which are expected to have some incremental implementation costs over the next one to two years. Our expectations are that the longer-term technology expense run rate will be moderated by continuing to move from older to newer technology and refining our operating processes.

Looking at the balance sheet, we ended the quarter with cash and investments of $859 million. On a year-to-date basis, we repurchased $88 million of stock and paid $62 million in dividends, while continuing to generate positive cash flow after taking into account our $95 million debt repayment in January. Our balance sheet remains strong and we continue to enjoy ample flexibility and liquidity to meet our strategic objectives.

I will now turn it over to Shawn to provide an update on our broker-dealer progress.

Shawn M. Mihal - Waddell & Reed, Inc.

Thank you, Ben, and good morning, everyone. Assets under administration ended the quarter at $58 billion, up 2% compared to the second quarter and 5% year-over-year. Advisory products, which continue to drive asset growth, are a stable source of recurring revenues, rose to $24 billion.

As we discussed last quarter, one of our key strategic priorities is to expand choices and flexibility within the advisory products we make available to financial advisors. This is an area where we executed well in Q3. Our list of investment product partners was further expanded during the quarter with the introduction of two new fund families and a selection of additional investment choices from an existing unaffiliated fund family.

The addition of funds in the third quarter was in coordination with the ongoing review of all funds by an independent financial consultant. We intend to continue to offer more investment choices through strategic relationships with unaffiliated manufacturers.

We're also anticipating the launch of a new advisory product in early first quarter 2019. This new advisory product will offer multiple investment portfolios consisting of both mutual fund-based portfolios as well as ETF-based portfolios from three separate unaffiliated institutional managers. The product will provide additional options for advisors seeking to outsource asset allocation. We're offering a choice of strategic, dynamic and tactical investment management, thus allowing advisors to spend more time focusing on client relationships.

Our ongoing goal is to offer advisors access to advisory products that allow them more effectively service every type of client from early accumulators all the way through to high-net worth individuals. For that reason, we will continue our expansion of advisory offerings through 2019.

We launched a new advisory product a year-and-a-half ago and have expanded unaffiliated investment offerings in this product over the past year. While we experience transfers in assets from our legacy products, our net outflows from these legacy products to the new advisory product remain in line with our expectations at approximately $1.5 billion since the product launched in May 2017.

Total assets in this new product were at $4 billion at the close of the third quarter. We ended September with 1,074 financial advisors and an additional 351 advisor associates, for a total of 1,425 advisors and associates. In alignment with our strategy, we continue to focus our efforts and resources on the growth of high-performing advisors.

This has led to the discontinuation of our legacy recruiting model, in which we had significant recruiting activity and offsetting turnover on an annual basis. Due to this change in recruiting model, our advisor count is lower, consistent with our expectations. As desired, we've experienced further improvement in average productivity, which stood at $350,000 for the trailing 12 months ended September 30, 2018.

Lastly, I'd like to talk about the role of technology in the broader effort as it plays a vital role in our success, now and in the future. Given the importance of investing in technology, we've made significant progress in our work through the vendor selection process of our business administration program.

This portfolio of projects will establish an integrated data repository designed to support the broker-dealer business by providing efficient connections between the systems our advisors us to support clients, thereby driving a streamlined and simplified experience for both advisors and clients.

During this year, we established a Business Process Design Department hiring three Lean Six Sigma-certified individuals who'll be instrumental in the implementation of new technology and design of related business processes. We have narrowed the list of vendors and we expect to make a final decision by year-end, as we pursue incremental rollouts of new technology offerings through 2019.

Operator, I would now like to open the call to questions.

Nicole McIntosh-Russell - Waddell & Reed Financial, Inc.

Operator, we're ready for questions.

Question-and-Answer Session

Operator

Yes. Thank you. We are now ready to begin the question-and-answer session. And the first question comes from Robert Lee with KBW.

Robert Lee - Keefe, Bruyette & Woods, Inc.

Great. Thanks. Thanks for taking my questions. Maybe just starting out with some of the continued expense initiatives, I think I'm just trying to get a clearer sense of the – I believe it was roughly $20 million to $30 million kind of reduction you kind of expect the run rate in 2019. But how – is that – how much of that is really going to fall all the way through to the bottom line versus you have different initiatives as you talked about in the broker-dealer channel, hiring plans? So, how kind of on a net basis, how should we really be thinking about, one day, we may see fall to the bottom line versus kind of get absorbed in some of the other initiatives?

Benjamin R. Clouse - Waddell & Reed Financial, Inc.

So, Rob, this is Ben. As a level set, we established a goal a couple years ago to drive $30 million to $40 million of enhancement to pre-tax earnings. We achieved about half of that last year, specifically through the pension freeze as well as some restructuring in the broker-dealer field organization.

And then, we had a remaining goal of half of that. So, $10 million to $20 million to realize in 2018, and be poised to recognize in our 2019 run rate. So, we're seeking the remaining $10 million to $20 million this year. We've made significant progress on that. I think in the last call -- I'm not quite ready to provide particular guidance on the line items where you'll find that, although I would just repeat they'll be likely concentrated in our real estate and personnel efforts, as well as some of the technology initiatives that I mentioned.

Robert Lee - Keefe, Bruyette & Woods, Inc.

Okay. And maybe as a follow-up, can you just update us in the retail broker-dealer channel -- I mean, as you introduce new programs, more third-party products, could we just get an update currently or what your own expectations are for kind of the sales mix? What you're seeing that currently is going into proprietary products, whether it's in a fee-based platform or otherwise? And kind of how you think that's going to migrate as you introduce some of these new programs over the coming year?

Shawn M. Mihal - Waddell & Reed, Inc.

Yes. Hi. Good morning, Robert. This is Shawn. And we're continuing to expand out the product offerings inside the broker-dealer, as I commented, and we've added some additional unaffiliated product partners inside the advisory offerings as we moved through the past quarter, but also over the past year.

The overall ratio of affiliated funds to non-affiliated funds has remained relatively consistent and about 75% in affiliated funds. But with the continued expansion of those products, we do expect to see some diminishment of that overall ratio of affiliated funds to unaffiliated funds as the growth continues, as we broaden out the exposure to unaffiliated funds.

Overall, inside of our expectations of what we forecasted as we started this progress into 2017, we're remaining inside those expectations in that we've seen from those legacy products that we've had flow into new products of about a net of $1.5 billion. In total, overall asset values inside the new program is about $4 billion.

So, we're remaining relatively consistent with where we thought we would be with the expansion of advisory programs, which is continuing to be the area where new sales are going. So, we don't expect anything to materially change from what we've experienced over the course of last year, although we will continue to bring additional advisory programs together throughout the balance of 2018, moving into 2019.

Robert Lee - Keefe, Bruyette & Woods, Inc.

Great. And if I could maybe indulge one more question. And thanks for your patience. Obviously, a rough start to the quarter for everyone. Could you maybe just update us on kind of what you're seeing or experiencing kind of so far through the first three odd – three weeks to four weeks of the quarter, kind of any slow, continued or additional slowdown in kind of investor activity? So, any kind of update would be helpful.

Philip James Sanders - Waddell & Reed Financial, Inc.

Yes. Good morning, Rob. This is Phil. Maybe just a couple of high-level comments, and if anybody else wants to expand, they can. I'd say, definitely, it's been a rough start in terms of the month of October, a lot of market volatility obviously. What we've seen kind of in our unaffiliated channels is that sales have actually picked up a little bit, but redemptions have also stepped up.

So, I think the net flow outlook in the first month is deteriorating from the third quarter run rate, and a lot of that is driven by the volatility in the markets. But in particular the international side where, as I mentioned in my opening comments, the international funds that we have were sources of strength for us early in the year, but they've had some headwinds here given the market volatility in the international markets. So, it has definitely been a little bit of a rough start to the quarter. But we'll see how that plays out. Things can change in a heartbeat when given the environment we're in, but that's kind of how we see it right now.

Robert Lee - Keefe, Bruyette & Woods, Inc.

Okay.

Operator

Thank you. And the next question comes from Michael Carrier with Bank of America.

Michael Carrier - Bank of America Merrill Lynch

Thanks, guys. Amy, first one, just given some of the improvement that we're seeing on the performance side, just wanted to get your sense, when you look at the unaffiliated and then the broker-dealer channel, just how that you may be resonating with the sales force, the clients? And if you're seeing a little bit more interest in traction versus maybe like some of the other challenges that the whole industry faces in terms of – you mentioned like the shift to passive and those other headwinds? So, just – how much is the improving performance, maybe like picking up interest?

Amy Scupham - Ivy Distributors, Inc.

Hi, this is Amy. I would say definitely the improving performance helps a lot as we start to clear more screens. When you take that and you combine it with the fee reductions that we made at the end of July, we are definitely starting to see a pickup of interest even regardless of some of the headwinds that the industry is facing.

As we look over the course of the third quarter across the unaffiliated channel, which wouldn't be inclusive of RIA distribution, DCIO distribution and our broker-dealers, in addition to some of our professional buyer groups, so insurance and banks, we've definitely seen some additions to approved lists across the professional buyer channel.

In RIA, we've had several rec list additions in the third quarter which we hope to start seeing fruition from as we move into the fourth quarter and into 2019. As well as in the DCIO space, we've gotten some more platform placement and definitely picking up in the broker-dealer channel as far as having funds re-reviewed that might have been potentially on the chopping block from a rationalization standpoint, and had a couple of funds added at distribution partners over the course of the quarter.

Philip James Sanders - Waddell & Reed Financial, Inc.

I might just add that, obviously the timing of these things can never be predicted and – in that. But I think there's no doubt that our long-term success can be contingent upon having competitive investment performance, the right product, the right pricing and all that kind of stuff. So, we've really been focused on controlling the things that we can control. And as performance improves, we hope that and are optimistic that that will lay the foundation for longer term success.

Michael Carrier - Bank of America Merrill Lynch

Okay. That's helpful. And then maybe just one on the expense side. So once – look, I understand the additional $10 million to $20 million on the operating income and some of the initiatives that you guys have in place to achieve that. I guess, how are you guys thinking about maybe the core run rate? And I guess partially it's driven by seeing the improvement in the performance on some of the technology initiatives, and then maybe a more volatile market backdrop. Are there areas to kind of pull back on some of the variable costs, or with the market headwinds, is that a little bit more challenging just in the near term given the different dynamics?

Benjamin R. Clouse - Waddell & Reed Financial, Inc.

I might start, this is Ben, and Phil may want to add to this. Well as I mentioned, we're really focused on that – those controllable costs, comp, G&A and down the line. I would clarify maybe that the depreciation spike this quarter we don't believe to be part of the run rate, but we're focused on that core and getting to the new reset level for our 2019 run rate.

In regard to longer term, we're going to continue to be strategic about investment, in particular, in the areas we talked about. We're of course early on in our planning stages for 2019, and we'll have a little bit better guidance I think on that on our next call, but don't anticipate any major changes.

Philip James Sanders - Waddell & Reed Financial, Inc.

Yeah.

Michael Carrier - Bank of America Merrill Lynch

Okay.

Philip James Sanders - Waddell & Reed Financial, Inc.

I might just add that while obviously if we experience sustained headwinds in the market, we have the ability to pull back a little bit on expenses and manage through that. I will say, though, that I think we're playing the long game, and we don't want to cut back on things that will improve our positioning over the long term.

So I think when we think about support and services for investment management, distribution, and really things that will form our long-term success, our balance sheet strength and liquidity gives us a lot of flexibility in how we manage through that.

As you know, we adjusted the capital return policy some time ago to help us manage through and execute on our strategies over the long term. So while we'll be obviously mindful of the current environment and be prudent in that regard, we have the financial flexibility to make sure that we're building and laying the groundwork for our longer term success.

Michael Carrier - Bank of America Merrill Lynch

Okay. Thanks a lot.

Operator

Thank you. And the next question comes from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse Securities (USA) LLC

Good morning, Phil.

Philip James Sanders - Waddell & Reed Financial, Inc.

Good morning.

Craig Siegenthaler - Credit Suisse Securities (USA) LLC

So, one of the advisors that announced their departure last week referenced open architecture and technology as two of the drivers for the exit. And then – this was in the press, but I just wanted your perspective on how does your availability of third-party product and also your level of technology compare to some of your larger competitors like an LPL or Ameriprise?

Philip James Sanders - Waddell & Reed Financial, Inc.

I might let Shawn address that now. I'll follow up if there's any additional thoughts I have. Go ahead, Shawn.

Shawn M. Mihal - Waddell & Reed, Inc.

Yeah. Sure. Hi, Craig. Good morning. Yeah, so certainly we've done a lot over the course of the last few years with respect to the Project E initiatives which really led to a major technology overhaul and then also the opening of the architecture which was primarily in our classic channel.

So just for reference purposes, we've always had open brokerage architectures over the past 10 years with clearing through Pershing. So a little bit different than an LPL or Ameriprise that are self-clearing firms, and we're an introducing broker-dealer. So, the technology packages do differ a little bit in that regard.

So from an overall open architecture standpoint, we've been able to offer a variety of different open architecture solutions with respect to the Pershing platform which we further expanded to our classic channel last year with the launch of a couple advisory products that were new products and then also opening an existing advisory product to that classic channel.

So from that regard, we've had this expansion of moving to more of an open architecture. We do see quite a bit of competitiveness in the technology packages which are available from a variety of different firms. We have invested substantially into overhauling our technology, and we're continuing to make further progress. And we hope to report in the future quarters with regard to some of the technology initiatives as we make some of the vendor selections to overall improve the technology package that we offer to our advisors.

But it is a little bit of a disparate comparison between a self-clearing platform and then the platforms that we use through in introducing a component. So there are certain technology limitations that we have with respect to the clearing components of it, but we have been enhancing from financial planning technology to business submission technology. And we'll look to do further expansions along that as we move into 2019.

So there is a considerable amount of effort being made. We do know that it is a competitive nature out there with respect to recruiting, and there are some firms that are putting up some sizable dollar amounts to move your practice to one firm or another, so we are certainly combating those headwinds as well.

Craig Siegenthaler - Credit Suisse Securities (USA) LLC

Thanks, Shawn. And just for my follow up, I have a big picture question for Phil. Phil, when you see these deals out there like Janus Henderson or Invesco-Oppenheimer, the signal to analysts like us in our seat is there's a growing need for scale, especially on the distribution front. Given that you're smaller than these firms, what is your thought on this trend?

Philip James Sanders - Waddell & Reed Financial, Inc.

Yeah, I mean, I think obviously we see what's going on and we're focused on a lot of opportunity ahead of us that we feel like we can control. Think back the last 18 months to 2 years, we've made a lot of progress in establishing the framework for longer term success and addressing a lot of the issues we've been faced with.

So, I think there's a lot of stuff that's in our own control, and that's where we're focused right now. We do see opportunities from time to time, but it has to be the right fit both from a product standpoint and what we can really do with it culturally and that type of things. So we have the ability to grow and execute on our own strategies. And as I said in the past, we're a public company and obviously we have a fiduciary responsibility.

But we're kind of focused on what we can control right now. And if opportunities present themselves, we'll address them as they come to us. And there's really not much more I can say in regard to that. It's just – it's an active environment out there. But in the meantime, we have plenty of things that are in our own control that we can focus on and that's what we're doing on a daily basis.

Craig Siegenthaler - Credit Suisse Securities (USA) LLC

Thank you, Phil.

Operator

Thank you. And the next question comes from Dan Fannon with Jefferies & Company.

Daniel Thomas Fannon - Jefferies LLC

Thanks. Good morning. Just looking at the advisor head count and the trends, you highlighted that this is kind of within your expectations in terms of what's happening. I guess just curious as to when you think you're going to hit a kind of a stable level within the advisor head count and kind of is there a – in terms of a target profile that you're looking for, as you think about adding new advisors that we should be thinking about?

Shawn M. Mihal - Waddell & Reed, Inc.

Yes, hi good morning. It's Shawn again. And yes, it's certainly something that we're continuing to focus on inside the broker-dealer. And we've communicated before with the overall change in recruiting strategy, moving away from inexperienced advisors to more experienced and higher-performing advisors is the direction that we will continue to go.

And we've, in the past, had this legacy recruiting model, which generated a lot of activity with experienced advisors, but also had substantially equal activity of advisors departing the organization. So, there was a lot of activity taking place. But as we changed our overall direction with where we're headed as a firm and moving to more competitiveness around the broker-dealer, we've changed that overall recruiting strategy and upped our minimum production levels.

So, for length of service, five years for advisors, we've upped to $125,000 minimum production. At this point, we have a smaller population that are under those production levels, but they do have time to work their way up as they work through those level – length of service to year five. But we still have just approximately a little over 100 advisors that are still below that $125,000.

So, we do expect to see this continuing leveling off with respect to the overall decline in number of advisors. And also, as we're continuing to make investments back into the broker-dealer, the recruiting initiatives do pick up as we continue to press forward and recruiting experienced high performing advisors that align more to the service model that we've constructed here inside the broker-dealer.

Daniel Thomas Fannon - Jefferies LLC

And for my follow up, just in terms of the U&D revenues, is there – as we think about kind of the inputs to that outside of AUM that will drive those numbers up or down this quarter, there was a sequential increase. Just want to make sure we understand the kind of moving parts outside of just kind of aggregate AUM levels that will have an input there.

Benjamin R. Clouse - Waddell & Reed Financial, Inc.

This is Ben, I might start. The U&D levels outside the impact of AUM moves, I think the last quarter, would be pretty indicative of the run rate. As you probably remember, we've added incrementally to that line item as we've converted our grid to a different level and begun charging advisors for programs and services. So, that's probably the only other really moving part there period to period aside from asset changes.

Daniel Thomas Fannon - Jefferies LLC

Thank you.

Operator

Thank you. And the next question comes from Patrick Davitt with Autonomous Research.

Patrick Davitt - Autonomous Research US LP

Well, hey, good morning, guys. Thank you. Obviously, the market has gotten a bit tough which you pointed to. But I'm curious if you're starting to see any anecdotal evidence that the fee cuts are helping gross sales for any particular products.

Amy Scupham - Ivy Distributors, Inc.

Hi, Patrick. This is Amy. Yes, obviously it's been a short period of time, only a couple of months here, but we have certainly seen some anecdotal evidence. We have had a couple of fairly nice sized wins in mid-cap growth in the RIA space.

And then, like I said before, in addition to that, what we're seeing is a re-review by gatekeepers of our firm and of some of our strategies as it relates to the fee reductions. So, in short term, I would say it's been a very positive and constructive move.

Patrick Davitt - Autonomous Research US LP

And in that vein, any update on conversations around the Ivy distribution leadership change and to what extent the institutional outflows you've been talking about are related to that?

Amy Scupham - Ivy Distributors, Inc.

I'm sorry, Patrick, I'm not sure I understand the question.

Patrick Davitt - Autonomous Research US LP

The change in Ivy distribution leadership earlier in the year. Just curious if that's led to increased outflows on the institutional side?

Philip James Sanders - Waddell & Reed Financial, Inc.

Yes, this is Phil. As you know, we had several key departures early in the year and they were related. So, we've had – we've been battling these headwinds on the institutional side for the last several quarters and we're going to experience some of those aftereffects of that into the fourth quarter that we touched on, and they're related to primarily portfolio manager departures. But also I think sales leadership certainly doesn't reinforce or help the matter.

So, sometimes it's hard to associate exactly why the reasons are, but any effective change in leadership or portfolio management can have an impact on flows, especially in the institutional channel where there is more of a direct linkage with personnel.

Hopefully, the fourth quarter will be the bulk of that and then we can move forward. But as I said earlier, we're focused on controlling what we can control. And as we enter 2019, we're in a pretty good spot in terms of our portfolio management teams, our distribution leadership. As I mentioned, we've – Amy's done a good job of building out that team now. And given the improved performance, we're more optimistic as we enter 2019.

Patrick Davitt - Autonomous Research US LP

Thank you.

Operator

Thank you. And the next question comes from Bill Katz with Citigroup.

William Katz - Citigroup Global Markets, Inc.

Okay. Thanks very much. Just wanted to confirm something. You had mentioned that you're on pace with your cost savings into next year. I think you also mentioned that you've identified a bit more savings into the end of the year. So is that a net number, or is there sort of incremental upside? Or maybe the broader question is, could you sort of level set what that number is for next year? Just trying to get – make sure I'm working on apples-to-apples off the year end rates here (40:12). Thank you.

Benjamin R. Clouse - Waddell & Reed Financial, Inc.

Bill, we continue to expect that to be in the $10 million to $20 million range net impact to pre-tax earnings.

William Katz - Citigroup Global Markets, Inc.

Okay. Broader question, two parts to that, I apologize, but on the retail broker-dealer model, could you talk a little bit about regrettable attrition or maybe transfer of asset trends that you're seeing between the ins and outs of who you're hiring versus those who have been leaving.

And then I think you had mentioned that you're exploring more opportunity on the other side, the pricing. Is that on a sort of incremental market share distribution product side or the more pricing cuts that may follow? It just wasn't – it wasn't clear to me based on your commentary. I apologize for that one.

Shawn M. Mihal - Waddell & Reed, Inc.

So, I can take – this is Shawn, I can take the first part of that question which had to do with the broker-dealer head count and some of the attrition numbers. So, yes, we are watching very carefully and we've reported in the past few quarters what those productivity numbers were for advisors that had departed the organization.

It did uptick a little bit, bringing with a departure of a couple of larger groups during the third quarter. So, we did experience some uptick to bring our average productivity loss of advisors. So, on a rolling 12-month basis, their productivity was $112,000 on average for the advisors that have departed the organization year-to-date.

So, we are continuing to see overall alignment to the departure of advisors that fall into that bucket that we've talked about before, the lower-producing advisors under our minimum productivity levels of $125,000.

But we did see that uptick from the last quarter to this quarter with regard to some increases in the production that was lost with three large groups that had departed the organization. So, we're continuing to focus on that and continuing to work on efforts to retain advisors with the broker-dealer, and focusing recruiting efforts with respect to higher-performing advisors as we move throughout the course of this year and 2019.

Philip James Sanders - Waddell & Reed Financial, Inc.

And Bill, this is Phil. I'm not sure I understood exactly the second part of your question, but if it was with respect to pricing, I think what we have indicated in the past is we obviously just introduced these pricing adjustments in about 10 funds effective July 31, but we indicated that we would continue to periodically review pricing across all of the strategies and make adjustments as we see necessary in order to maintain competitiveness. But nothing to report at this moment.

William Katz - Citigroup Global Markets, Inc.

Okay. Thank you.

Operator

Thank you. And the next question comes from Kenneth Lee with RBC Capital Markets.

Kenneth S. Lee - RBC Capital Markets LLC

Hi. Thanks for taking my question. Just a follow-up on the incremental technology spend. I realize it's still early, but any way you could just clarify which areas would likely be impacted and maybe sharpen my understanding? And maybe see how does it differ from the previous Project E initiative? Thanks.

Benjamin R. Clouse - Waddell & Reed Financial, Inc.

I might start. This is Ben, and Shawn, you can help me out. We're still working toward vendor selection. And I think Shawn has previously indicated that we expect that to occur here in the next couple of months. As we firm that up, we'll certainly have a lot better idea of what our implementation and transition plan will be and some of the costs associated with that.

As I indicated in my comments, we expect to have some incremental implementation work. I don't know exactly what size or shape that will be yet. But directionally, we expect that to be incurred over the next couple of years.

And then, longer term, as we move to more modern technology particular to the broker-dealer, we expect that cost to moderate I think into a range similar to what we have today as we replace some of the dated systems that we are using with some more efficient solutions.

The only other item I would cite is that we're continuing to do some work in regard to data analysis and analytics in the distribution area, although I don't anticipate noteworthy run rate changes in regard to that.

And I don't know, Shawn, if you would want to add to that?

Shawn M. Mihal - Waddell & Reed, Inc.

Yeah, so obviously we commented on the – over the last couple quarters we've been working on a larger initiative with regard to a business administration program. That work is continuing, and which Ben just touched on as well that we're looking to make some final vendor selections here in the coming months.

In that regard, what we're really focused on is the integration of data. So, a number of initiatives took place with respect to Project E to enhancing the way that our advisors transmit business to us and the way that we connect that business through to custodians.

But the underlying efforts that we're really focused on here is the consolidation and aggregation of data and how that data really connects for our advisors and clients to really build through more efficient processes – business processes for our advisors and as well as enhancing the overall technology interface that our advisors would use.

I look at this as being ongoing efforts and that we'll continue to make technology improvements on an incremental basis. So this is not something that we're launching all at once, but instead continuing to enhance the technology offerings that we have to our advisors.

But as we do that, and what Ben commented on, is we will be discontinuing some of the legacy platforms that we've used in the past and those data repositories as we consolidate those down. So the expectation would be is that, while we're putting investments into technology, we're also finding efficiencies in the way that we address some of the legacy applications.

Kenneth S. Lee - RBC Capital Markets LLC

Okay. Great. And just one more follow-up. Any updates on what's in the new product development pipeline? Thank you.

Philip James Sanders - Waddell & Reed Financial, Inc.

Yeah, I think no specific updates. I would just mention that, obviously our balance sheet strength gives us opportunities with respect to using seed capital and exploring new opportunities.

They're likely to be more focused in either maybe perhaps higher active share or concentrated versions of existing products, maybe something in the international side, but likely complementary products that are consistent with a lot of our core competencies and core strategies. But nothing new to report on at this moment in time.

I would say that also equally as important is potentially new products, and I'm speaking about organically here, short of not including anything that we possibly might do through acquisition or something like that. But more importantly than – or as important as new product development would probably be making sure that we have the right proper distribution vehicles of our existing products, which are – and I think that's an area that we probably haven't taken full advantage of in the past. I might let Amy just mention what she's working on in that respect.

Amy Scupham - Ivy Distributors, Inc.

Yeah, so we're currently working on launching a series of model delivery portfolios that I think will be very, very beneficial especially in our broker-dealer channel as it relates to the way that clients are currently consuming long-only equity strategies in that channel.

In addition to that, we've had for a period of four or five years now a subset of our products available in a collective investment trust, which is a daily valued vehicle for the defined contribution for the qualified market. And we've done a review of the trust and we'll be adding certain strategies to that in order to broaden out the product line available to defined contributions and qualified money.

Kenneth S. Lee - RBC Capital Markets LLC

Okay. Very helpful. Thank you.

Operator

Thank you. And the next question comes from Chris Shutler with William Blair.

Chris Charles Shutler - William Blair & Co. LLC

Hey. Good morning. Just one quick one. You talked about the $10 million to $20 million of cost savings that you're planning for 2018 going into 2019. How much of that $10 million to $20 million was in the run rate for Q3?

Benjamin R. Clouse - Waddell & Reed Financial, Inc.

I don't have an exact number for you, Chris, but $5 million or less of that was in the run rate. Most of that will be achieved here in the fourth quarter.

Chris Charles Shutler - William Blair & Co. LLC

Okay. Thanks a lot.

Operator

Thank you. And this morning, the last question will come from Mac Sykes with Gabelli.

Macrae Sykes - Gabelli & Company

Good morning, everyone. Given the nice increase in cash levels year-over-year, should we think or should we expect any change in kind of the level of repurchase activity?

Philip James Sanders - Waddell & Reed Financial, Inc.

Hey, Mac. This is Phil. Look, I think we've been pretty active in the market and we outlined a program about a year ago and we've made some – we've been pretty active I think. Obviously, as things move forward, we'll be working in conjunction with the board and address this in terms of ongoing allocation of capital and whether or not how the share repurchase program looks going forward.

But that's something that will work in conjunction with board approval on. Although I'd say that we also have – the nice thing about our current situation is, with the balance sheet strength and liquidity, the idea of incremental acquisitions or capital spending to really grow our company longer term is not mutually exclusive to being active in the market with respect to repurchasing shares. So, through these challenging times, we're fortunate to have that financial flexibility.

Macrae Sykes - Gabelli & Company

Thank you.

Operator

Thank you. And at this time, I would like to return the conference to Phil Sanders for any closing comments.

Philip James Sanders - Waddell & Reed Financial, Inc.

Okay. Thank you. Just want to say thanks for everybody for joining us and appreciate your time and attention. And we look forward to catching up to you in a few months. All right. Thank you.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.