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SEI Investments Company  (NASDAQ:SEIC)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you very much for standing by, and welcome to the SEI Third Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given to you at that time. (Operator Instructions) Also, as a reminder, today's conference is being recorded.

I would now like to turn the conference over to your Chairman and CEO, Al West. Please go ahead.

Alfred West -- Chairman and Chief Executive Officer

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

I'll start by recapping the third quarter 2018. I'll then 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 Companywide statistics. As usual, we will field questions at the end of each report.

So let me start with the third quarter 2018. Third quarter earnings increased by 26% from a year ago. Diluted earnings per share for the third quarter of $0.80 represents a 27% increase from the $0.63 reported for the third quarter of 2017. We also reported a 6% increase in revenue from third quarter 2017 to third quarter 2018.

Also, during the third quarter of 2018, our non-cash asset balances under management increased by $3.6 billion. At the same time, LSV assets under management increased by $2.9 billion during the third quarter. These increases in assets under management were due to market appreciation. In addition, during the third quarter of 2018, we repurchased approximately 1.7 million shares of SEI stock at an average price of $61.55 per share. That translates to over $102 million of stock repurchases during the quarter.

Finally, in the third quarter as part of the investments we make to create growth, we capitalized approximately $8.8 million of the SWP development and amortized approximately $11.4 million of previously capitalized SWP and IMS development.

Third quarter 2018 sales events, net of client losses, totaled approximately $27.9 million and are expected to generate net annualized recurring revenues of approximately $22.5 million. Our sales results reflect the fact that activity is very high and our pipelines are large. Still, we are experiencing that larger sales events are particularly complex and take longer to close. Each of our units will speak to their specific sales results.

Now, this concludes my formal remarks. So I'll turn it over to Dennis to give you an update on LSV and the investment in our new business segment. I'll then turn it over to the other business segment heads. Dennis?

Dennis McGonigle -- Chief Financial Officer

Thanks, Al. Good afternoon, everyone. I'll cover the third quarter results for the investments in new business segment and discuss the results of LSV Asset Management. During the third quarter of 2018, the investments in new business segment continued its focus on our digital advice offering and on the ultra-high-net-worth investor segment through our private wealth management group. During the quarter, the investments in new business segment incurred a loss of $2.8 million, which compared to a loss of $3.3 million during the third quarter of 2017. This improvement reflects the growth of our private wealth management business.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the third quarter. LSV contributed $41.7 million in income to SEI during the third quarter, this compares to a contribution of $39.3 million in income during the third quarter of 2017. Assets grew approximately $2.9 billion for the quarter. LSV experienced net positive cash flow during the quarter of approximately $300 million. Revenue was approximately $133.9 million, of which less than 1% was performance fee-related.

During the quarter, our effective tax rate was 18.6%.

I'll now take any questions.

Questions and Answers:

Operator

Okay. Thank you. (Operator Instructions) And we do have a question from the line of Chris Shutler. Please go ahead.

Christopher Shutler -- William Blair -- Analyst

Hey, Dennis. How are you?

Dennis McGonigle -- Chief Financial Officer

Great, Chris. How about yourself?

Christopher Shutler -- William Blair -- Analyst

Good. So a couple of questions, one was just on the tax rate. Just what we should expect from here?

Dennis McGonigle -- Chief Financial Officer

I think we're probably back -- tax rate closer to what we where at second quarter.

Christopher Shutler -- William Blair -- Analyst

Okay, got it. And then the corporate overhead expense, it was down a little quarter-over-quarter. I think it's usually up sequentially in Q3. So what happened in Q3 there and how should we look at that line going forward?

Dennis McGonigle -- Chief Financial Officer

We had a small -- or a benefit from the applied for a tax credit from the State of Pennsylvania, the (inaudible) taxes of (inaudible) expenses because of our investment in our data center operations that we've -- that came through in the third quarter. So that helped a little bit, but I would say that kind of across the Company, we had a concerted effort on expenses during the third quarter.

Christopher Shutler -- William Blair -- Analyst

Okay. So going forward it's probably not going to tick back up to the Q2 level somewhere in between?

Dennis McGonigle -- Chief Financial Officer

That's probably a good range.

Christopher Shutler -- William Blair -- Analyst

Okay. Thank you.

Dennis McGonigle -- Chief Financial Officer

Yeah.

Operator

We do have a question from the line of Robert Lee with KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great. Thank you, and good afternoon, Dennis.

Dennis McGonigle -- Chief Financial Officer

Hey, Rob.

Robert Lee -- KBW -- Analyst

Hey. Just a quick question on LSV. I was curious if -- I mean, is it possible to get any color on, do they have one or two specific maybe strategies that are kind of bucking the broader industry trend and seeing generating their flows. Just trying to get a sense of kind of drilling down a little bit on what may be driving this?

Dennis McGonigle -- Chief Financial Officer

Yeah. I mean, most of their -- I'd say, more smaller cap, mid-cap regional products are closed to new money. So their flows are still going into the more, I'd say, their bread and butter foundational products. Now, the good news for them is their distribution activities, their asset flows are also coming globally. So they're not just from US clients or coming from other geographies in the US products. So it's still their bread and butter stuff is helping them.

Robert Lee -- KBW -- Analyst

Great. Thank you very much.

Dennis McGonigle -- Chief Financial Officer

You're welcome.

Operator

(Operator Instructions) Thank you. And we'll go back to the line of Chris Shutler with William Blair. Please go ahead.

Christopher Shutler -- William Blair -- Analyst

Hey, Dennis, sorry to ask another one here. But on LSV, could you give us any update on their performance in the third quarter, or I guess, so far in October, we don't have great visibility into that picks up like through June 30? And I know they had some challenges earlier this year, great long-term performance, but just want to get an update.

Dennis McGonigle -- Chief Financial Officer

Yeah. I mean, their -- again, on their more traditional strategies, their performance is OK. Value has been a tough segment of the market, as you probably aware. And that's continue to play out during the third quarter. Maybe the market cycle are kind of getting into now that will change a little bit. Some of their other strategies, their performance is actually pretty good. But you can see it in their performance fees number coming down a little bit. Last year and this year, even first and second -- or second and third quarter is down a little bit. So, yeah, performance is a little bit tougher.

Christopher Shutler -- William Blair -- Analyst

Okay, makes sense. Thank you.

Dennis McGonigle -- Chief Financial Officer

You're welcome.

Operator

I have no further questions. Please continue.

Dennis McGonigle -- Chief Financial Officer

Thank you.

Alfred West -- Chairman and Chief Executive Officer

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

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Great. Thank you, Al. I'll start with the financial update on the third quarter followed by an update on new business activity. Third quarter revenue of $118.5 million was down slightly from the second quarter, primarily due to a decline in mutual fund trading revenue.

For the quarter, operating profit of $2 million was also down from the second quarter due to the lower revenue and fairly higher expenses largely tied to the SEI Wealth Platform.

During the quarter, we signed one new SWP agreement, Cornerstone Advisors. It's a new client to SEI. Year-to-date, we have signed seven new SWP clients. In Q3, we also signed $3.5 million of professional services fees related to SWP clients and prospects.

In UK, we continue to cross-sell and gather solid net cash flow from current SWP clients. Net cash flow for the third quarter from UK SWP clients was $1.4 billion.

Sales activity in the US and UK with current clients and new prospects is strong. As we mentioned, some of the larger decisions are very complex and frankly can be political with inside of larger organizations. For example, at one UK client we are negotiating a new SWP agreement to minister a large book of private client accounts. There's some organizational and strategy change with the client, we would expect to de-convert some assets from SWP, while we begin to convert new books of business to the platform. We expect this to be a net positive growth event for SEI, and this opportunity is still under negotiation.

Regarding TRUST 3000, during the quarter, we recontracted four clients for a total of $3.8 million, included in the recontract numbers is a TRUST 3000 client that gave us a termination notice in Q4 2017 that they have since rescinded, and as they have extended their SEI relationship. Year-to-date, we have recontracted 16 TRUST 3000 clients for $42 million of annualized revenue. There were no TRUST 3000 client losses during the quarter.

Our asset management distribution business experienced approximately $55 million in negative cash flows, mainly from non-US-based distributors. Overall, net sales events for the Private Banking segment were approximately $5 million, of which $1.5 million is recurring annual revenue and $3.5 million is one-time or professional services revenue.

I did want to make a quick correction, Cornerstone Advisors is actually a new client for banking. They were not of TRUST 3000 client, but they are a client of SEI's in the IMS space.

Overall, -- sorry, as an update on client conversions, we converted a UK client to the SEI Wealth Platform during the quarter. This brings the total to 37 clients currently processing on SWP. Our total signed, but not installed backlog for SWP is approximately $29 million in net new recurring revenue. As I mentioned on previous calls, we are tracking a metric to illustrate our continued momentum with SWP. The total annual recurring revenue value of our SWP backlog, this number includes the recontracted value of TRUST 3000 relationship plus the net new recurring revenue is greater than $72 million. And as the average contract term and our backlog is greater than six years, the uninstalled clients represent more than $450 million in contracted revenue to SEI.

We continue to actively work with Wells Fargo on their conversion to SWP but have not yet set a new conversion date. Overall, conversion activity is robust with 40% of the backlog expected to convert by the end of 2019 and the remaining to convert after that time.

In conclusion, we remain focused on the following: capitalizing on our momentum to grow the SWP business; installing the backlog to matriculate the revenue; and improving profitability of the banking segment to return the unit to its historical profit margins.

Any questions, please?

Operator

(Operator Instructions) We'll go to the line of Robert Lee with KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great, thanks. Thanks for taking my questions. Good afternoon, Joe.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Hi, Rob.

Robert Lee -- KBW -- Analyst

Hi. I was just curious, can you update us as we look at the backlog and the clients are signing up for SWP. I mean, I know the original intent of the platform was to make it much more asset-based, obviously, you get that asset growth over time notwithstanding short-term volatility like we have now. But can you may be give us a sense of on these new relationships or even existing ones kind of how the mix is shaking up between the proportionate maybe asset-based and versus maybe account-based or flat fee, just trying to get a sense of how we should think of --?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Yeah. It's still largely asset-based, although the pricing we have of all the pricing over the history of SWP. And in the UK, the mix of clients are generally higher growth -- fairly high growth wealth manager, advisory clients. So we are seeing not only growth from the market appreciation but those businesses are have a tendency have been growing -- many of our clients have been growing organically and through acquisition but also organically and that's certainly helped -- we've seen good revenue growth from that.

In the US, the clients have a slightly different sort of background, some of them have been our TRUST 3000 clients, which again were largely an asset-based solution but we have added more pricing mechanisms around accounts and fees(ph)depending on the nature of the underlying functionality. But still overall, it's still very much an asset-based -- majority of the pricing is asset-based.

Robert Lee -- KBW -- Analyst

Okay. And then maybe just a quick update on the TRUST 3000 that you did resigned. Can you maybe just update us on kind of what type of, if any, kind of pricing concessions you're seeing? And then maybe any sense of -- if we look forward over the coming quarters, is there are a lot of -- are you pretty much through kind of repricing or resigning --?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Yeah. Well, I got a couple of comments. One is, there are some net downs but they're single-digit net downs and in some cases it's been where a bank may not have as many accounts on the platform on TRUST 3000 as they would have had in the past. We've had a pretty solid year on recontracting, and we have most of our important clients are either recontracted or well on their way to recontract. But also we're talking engaging those clients with their eventual move to SWP. So we typically have a pretty long-term strategic conversation with them, some will choose to recontract for two to three-or-so more years on TRUST, but in all those conversations we're talking about the eventual move to SWP.

Robert Lee -- KBW -- Analyst

Great. Thank you for taking my questions.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Thanks.

Operator

And next we'll go to the line of Chris Donat with Sandler O'Neill. Please go ahead.

Christopher Donat -- Sandler O'Neill -- Analyst

Great. Thanks for taking my question, Joe. Wanted to ask one question about something you've been disclosing in the press releases when you announce SWP wins, which is the number of clients and implementation and it's been sort of around the eight, nine number. Does that represent something of your maximum implementation number, or is that really a function of things not just number of clients but really accounts or assets or something else?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

That's not our -- that's not a maximum for us. We think we can handle considerably more than that. That's more of a reflection we have -- not selling this thing fast enough. But we could certainly have more than eight or nine clients in the backlog.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay. And then just on the $3.5 million of professional services sign this quarter, is that something we should expect in the next couple of quarters, is it flows in?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Yeah. Some of that is already flowed in, so -- I mean, in some cases that's usually, it's -- it matriculates more quickly. And so, some of that is tied to the conversions that we're doing and some of that is tied to projects that are more in we call the discovery or the sales phase. But yes, we recognize that revenue generally fairly quickly.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay. But to confirm, some is in the sales phase or the discover?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

That's correct.

Christopher Donat -- Sandler O'Neill -- Analyst

Got it. Okay. Thanks, Joe.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Thanks.

Operator

And then we'll go to Chris Shutler with William Blair. Please go ahead.

Christopher Shutler -- William Blair -- Analyst

Hey, Joe.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Hi, good afternoon, Chris.

Christopher Shutler -- William Blair -- Analyst

So, I just wanted to dig into the couple of examples that you gave. So the UK client, just if you could reiterate what you said there, maybe talk about that a little bit more? And then, I think you said that one client that originally gave a termination notice in last year is now on-board. So just what kind of changed there?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

So I'll take that one first. So the client that was the long-term TRUST 3000 client, it was smaller, more of a community bank-type client. They were acquired by another bank that was on another system. The plan was to move off of TRUST onto the competitive system that the acquirer had after reconsideration and moving toward conversion. They came back to us and said, that they did not want to move onto the other system, and they wanted to recontract on TRUST 3000 for a couple of years, and they wanted to consider SWP for the larger merged entity. So that's I think is what we've seen. I think we've talked about in some other calls where there have been firms that has been interested in some of our competitive systems, whether it'd be for price or maybe for convenience, in this case, with the merger and ultimately come back to us. So we are happy about that, and we like to see more of that with some of the losses we've experienced over really last -- well, most of that -- these losses happened last year in 2017 or sooner than that.

And then in the UK, I just wanted to sort of give an example that we're having good conversations with large firms, both prospects and clients. We have a situation with the clients there, and we believe that we have an opportunity to grow our business there. But the mix of the underlying accounts might change. So, because of some changes with inside of that firm and the strategy inside of that firm. So, I think the point there I wanted to make is that, these are complex and -- but we are working with these large firms to identify what's our best opportunity and where SWP fits and making some good progress there, but in the meantime, they may change around the mix of underlying accounts.

Christopher Shutler -- William Blair -- Analyst

Okay. And then I think also, Joe, you mentioned the -- that the main reason for the decline in revenue quarter-over-quarter was mutual fund trading revenue. Can you just give us a little bit more detail (multiple speakers)?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Yeah. We have an outsourced service where we execute mutual fund trades for our clients, and we are paid usually basis points to do that as an administration fee. And we're finding that some clients are no longer participating. But we're still doing the trading, but the fees are coming down, or they're deciding not to take administration fees from the funds essentially. So, I think that's sort of an industry pattern. It's still a big business for us, and we still have significant revenue associated with that. But some of those volumes have declined, either the clients are trading less in funds, or they might be going directly to the funds and not participating in the service anymore.

Christopher Shutler -- William Blair -- Analyst

Is it just 12b-1?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Yeah. It's 12b-1s, or others administration fees that they would share with us or give to us for the services that we provide.

Christopher Shutler -- William Blair -- Analyst

Okay. Thank you.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

And some banks are just deciding not to invest in funds with those kinds of shareholder servicing fees.

Christopher Shutler -- William Blair -- Analyst

Okay. Thanks, Joe.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Thanks.

Operator

Thank you. And next we'll go to the line of Glenn Greene with Oppenheimer. Please go ahead.

Glenn Greene -- Oppenheimer -- Analyst

Thanks. Hey, good afternoon, Joe.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Hi, Glenn. Just a couple sort of just data points. Where are you in terms of how many TRUST 3000 clients you have left? And as you're recontracting them, you mentioned a few recontracting this quarter. What's the average duration of these recontracts?

I think the average duration is about three years or so, three or four years, and there's still a lot to recontract. So there's, obviously, some of the very large ones and there are still a decent number of -- we had about 90 or so clients and we still have a decent amount of those too. I'm sorry, not to recontract, but to move to SWP.

Glenn Greene -- Oppenheimer -- Analyst

So, what I'm trying to get is that, are you anywhere close to or where do you get to a tipping point where you get more aggressive with the existing TRUST 3000 or you sort of disincent them to stay on TRUST 3000, if you know what I mean? Or incent them to move to SWP?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Yeah. I think we're getting close to that. So the platform has very robust functionality for US TRUST types of -- US-based TRUST departments. So we have strong functionality there. And we have more maturity of the platform. So I think in almost every case where the recontract, we lead with the move to SWP and sometimes that depends on what else the client is trying to accomplish from a technology standpoint outside of our area. But we are, I'd say, increasingly more aggressive about that.

Glenn Greene -- Oppenheimer -- Analyst

Okay. And then just a final question, I don't know how you want to answer this, but given the Wells Fargo conversion delay, you obviously, or presumably have a hole(ph)on your sort of conversion backlog. What are you doing to sort of address that if I'm correct in that thesis?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Well, we are still working and we're still getting paid by Wells Fargo to implement the conversion. The conversion is taking longer than we would have expected. So there are still significant amount of people working on that and we're getting -- like I said, we're getting paid for that. And in the meantime, we're trying to sell the -- fill the rest of the pipeline. And so, there are, like I've said eight or nine accounts. One of those accounts is Wells. But the goal is to getting to sell more to utilize the resources that we have. But people are not sitting around waiting for work, some of these conversions are more complex than some of the original conversion. So, we're working to get those done as fast as possible.

For example, we announced, I believe in the first quarter, a UK client for the platform and we converted them fairly quickly in the third quarter. So, part of this is also trying to get things, use the resource and experience we have to get things converted more quickly.

Glenn Greene -- Oppenheimer -- Analyst

Okay. Thanks, Joe.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

And matriculates the revenue more fast -- more faster.

Glenn Greene -- Oppenheimer -- Analyst

Faster. Okay. Thanks.

Operator

Thank you. And our next question comes from the line of Robert Lee with KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great. Thanks, and thanks for taking the follow-up. Joe, I guess, I had a question on really the asset management programs, I know couple of years ago that was pretty quickly growing kind of segment within the private -- within your overall segment and notwithstanding some outflows, modest outflows this quarter. Can you maybe update us on kind of what's going on with that part of the business, I mean (multiple speakers) down?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

As we've talked before, it's about a 30% of our business. And we are -- we have some really solid distributors that have been good this year. The business is a little bit more non-US than US, and we have strong teams now on the ground in the US and Canada, and in the UK. We have a good solid pipeline there. We're looking for big deals that will drive assets. We've signed some deals this year. But it does take -- usually take a little bit of time for those assets to matriculate. So we signed sort of a deal with at the headquarters level, and then we've got to go in and train and get the sales force there promoting the solution. So, I'd say, the pipeline is solid. We've got some deals signed that we would expect funding to start to flow in, and then we would calculate those as events as the assets actually matriculate onto our -- into our funds.

Robert Lee -- KBW -- Analyst

And then maybe just one more follow-up, if I could, just -- this is -- I mean, this goes back to, I guess, I'll call it decommissioning TRUST 3000 to an earlier question. I mean, assuming at some point when you're going to have to announce that you're not going to support and pass a certain date and then assuming not -- unfortunately, not everyone is going to go to SWP. So, how much lead time do you think you'll need to give clients when you kind of make that decision, is it three years, two years, how do you kind of think of that and weight that in the (multiple speakers)?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

I mean, we're -- it's not like a some big event. I mean, we're talking to all of our clients about the eventual take down of TRUST 3000. They are all aware of what our plans are and certain clients would need more time than others based on the complexity of their business. I think we've said on multiple calls, though, the firms that are interested to have a strategy -- a growth strategy are very interested in potentially moving to SWP. There are some smaller clients or older clients that TRUST and the services that we've provided had been sort of are now more of an accommodation to their client base as they've evolved their strategy over the years. So some of those clients we suspect might leave. We might want them to leave. But those are generally smaller ones that wouldn't take long-term time to convert.

But we are just having these conversations with every client, understanding their situation and ultimately understanding, talking about the benefits to move to SWP and we expect the most will be move -- most will want them.

Robert Lee -- KBW -- Analyst

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Thomas McCrohan with Mizuho. Please go ahead.

Thomas McCrohan -- Mizuho Securities -- Analyst

Hey, Joe. On the mutual fund trading revenue, can you quantify the impact this quarter? And what kind of margins are getting on that business? It's sounds like they are the low margin business. So I just want to confirm.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Yeah. It is a lower margin business and we were probably down about 15%.

Thomas McCrohan -- Mizuho Securities -- Analyst

Okay. And then, any thoughts on the trajectory of margins from here?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Well, obviously, we'd like to see sequentially better margins every quarter but a quarter is a period of time and different things happened in the quarter. But again, we're working hard to convert this backlog and to sell more and continue to build out the backlog and the margins will improve as we get this backlog converted.

Thomas McCrohan -- Mizuho Securities -- Analyst

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Patrick O'Shaughnessy with Raymond James. Please go ahead.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Hi, Patrick.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Hey, Joe. So we're about a year into the Regions Bank install. Any key takeaways that you would say that you've learned over that year and maybe anything that surprised you, or it's been different than what you had expected?

Joseph Ujobai -- Executive Vice President and Head of Private Banking

So, it's been a year, you're right. We've just sort of been talking about the year. So the year -- not celebration, but the year anniversary. I think that -- we think that some of them buys the platform from front-to-bank. From front-to-back is going to get the greatest benefit and value out of their relationship with SEI. We were able to provide a really solid solution there on the private client side. They are one of our -- well, they are our largest institutional trust user. So we had to build out some more services for them on the institutional trust side, and that includes some of -- some calculations and reporting and those kinds of things.

I think we are very proud of our progress in the first year. They are a referenceable client. In fact, we just had a prospect and a very important prospects on the ground in Birmingham a week or so ago. And so, we're excited about how they're using the platform. We're excited about the progress we've made. We're excited about how they've moved -- how they've evolved their business. And they are a referenceable, and should be a help to us as we grow the business.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Great. Thank you.

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Okay.

Operator

(Operator Instructions) And there are no further questions in queue. Please continue.

Alfred West -- Chairman and Chief Executive Officer

Thank you, Joe. Our next segment is Investment Advisors, Wayne Withrow will cover this segment. Wayne?

Wayne Withrow -- Head of SEI Advisor Network

Thanks, Al. In the third quarter of 2018, we continue to grow our revenues and profits, while simultaneously making big strides in our migration to the SEI Wealth Platform.

Third quarter revenues totaled almost $103 million. These revenues were $8 million better than the third quarter of last year. This increase was driven by market appreciation and positive net cash flow, offset in part by previously announced fee reductions in some of our investment products.

Expenses were up in the third quarter versus last year. The year-over-year increase was due to increased direct costs and personnel expense tied to our growth. As compared to the second quarter, expenses were relatively flat. The Q3 versus Q2 comparison benefited from there being some one-time expense items in the second quarter that did not repeat in the third quarter.

Our profits grew $12.6 million from last year's third quarter and our margins improved 1.6%.

Assets under management was $67.1 billion at September 30, an increase of $1.8 billion from June 30. The increase was driven by both market appreciation and positive net cash flow.

During the third quarter, our net cash flow was $324 million.

During the quarter, we recruited 81 new advisors. Our pipeline of new advisors remains active.

With respect to the SEI Wealth Platform, we continue to work on the migration of our advisors. At the end of September, we migrated over 100,000 accounts and over $12 billion in assets. We now have 47,000 accounts and $4.7 billion in assets remaining on TRUST 3000, and continue on target to migrate these remaining asset on March 31 of next year. While the completion of the migration is targeted for March 31, we will continue throughout 2019 to help our advisors benefit from the new features on the platform, especially its straight-through processing capabilities.

In summary, the third quarter reflected our continued financial growth and solid progress in our migration to the SEI Wealth Platform. These items give us confidence in the long-term opportunity in front of us.

I now welcome any questions you have.

Operator

(Operator Instructions) And our first question comes from the line of Chris Donat with Sandler O'Neill. Please go ahead.

Christopher Donat -- Sandler O'Neill -- Analyst

Hey, Wayne.

Wayne Withrow -- Head of SEI Advisor Network

How are you doing?

Christopher Donat -- Sandler O'Neill -- Analyst

Good. So, one thing that surprised me a little bit this quarter as we saw your fee rate -- as we calculate it, tick up to 62 basis points from 61 in second quarter, and that's not something we see in a lot of places these days. So, just wondering, is there something in your mix shift or as you migrate clients to SWP that causes little higher fee or something else going on. Just happy to see it and wanted to make sure I understand why it's going on?

Wayne Withrow -- Head of SEI Advisor Network

Yeah. I can't tell you, I have a really good explanation. We're getting some -- we're getting -- we're trying to get them little platform fees, it's just a lot of little things. I can't tell you there's one factor driving it.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay. But no changes in your fees on the positive side, but more small things?

Wayne Withrow -- Head of SEI Advisor Network

No. No, I wish it was.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay. That helps. Thanks.

Operator

Thank you. And our next question comes from the line of Robert Lee with KBW.

Robert Lee -- KBW -- Analyst

Hey, good afternoon, Wayne. How are you?

Wayne Withrow -- Head of SEI Advisor Network

Good, Rob.

Robert Lee -- KBW -- Analyst

Just a -- first question is really just kind of on the -- maybe investor behavior environment. I mean, usually when you start get into these kinds of environments, you start to see the risk off trade, so to speak, advisors, clients kind of try to take down their risk levels. You starting to see some of that or you kind of expecting as we kind of look ahead a little bit to start to see some of that kind of filter through and if this kind of -- this environment kind of stays in place for a little longer?

Wayne Withrow -- Head of SEI Advisor Network

I don't know if we're seeing a lot of risk off. I mean, I think if you look year-over-year, I think, our liquidity balances or higher percentage of our overall asset balances and I think there is a small migration to that, as you recall, risk off status. But I don't -- and I think this is just a little -- maybe a little more apathy out there now because people don't know what direction to go. But I haven't seen a major change yet.

Robert Lee -- KBW -- Analyst

Okay. And without maybe reading too much into any one quarter's flows. But it does -- last quarter, this quarter, you have seen some slowdown in inflows and kind of number the advisors, while still obviously growing, maybe little slower pace than it's been in a while. Is there anything maybe around that related to just client preferences or just one of those quarters was slow and just seen if there's anything we should be thinking about kind of trend-wise?

Wayne Withrow -- Head of SEI Advisor Network

Yeah. I guess, what I would say is that, I think at the end of March and at the end of September, we had the two biggest migrations to date. And when I look at the field force and service folks(ph), we are focused on getting these clients migrated and it is a little bit of extraction.

Robert Lee -- KBW -- Analyst

Great. Thank you.

Operator

Thank you. And our next question comes from the line of Chris Shutler with William Blair. Please go ahead. Chris, your line is open.

Christopher Shutler -- William Blair -- Analyst

Hey, Wayne.

Wayne Withrow -- Head of SEI Advisor Network

Hey, Chris.

Christopher Shutler -- William Blair -- Analyst

Hey. My questions are already answered. Thanks.

Operator

Thank you. And currently, there are no further questions in queue.

Alfred West -- Chairman and Chief Executive Officer

Thank you, Wayne. Our next segment is Institutional Investors segment. Paul Klauder will report on this segment. Paul?

Paul Klauder -- Executive Vice President, Head of Institutional Group

Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the third quarter of 2018. Third quarter revenues of $83.5 million increased 4% compared to the third quarter of 2017. Third quarter operating profits of $43 million increased 6% compared to the third quarter of 2017. Both revenues and operating profits for the quarter were positively impacted by market appreciation, positive net client fundings and changes in asset class diversification by our client base.

Quarter end asset balances of $92 billion reflect a $1.2 billion decrease compared to the third quarter of 2017. This decrease was driven by lower low fee liquidity balances, net client losses were offset by positive market appreciation.

Net funding for the quarter were a positive $450 million. The unfunded new client backlog at quarter end was $450 million.

New client signings for the quarter were $1 billion. This was primarily new clients in US endowments, foundations, US hospitals and UK fiduciary management. Client events(ph)in revenue terms were strong due to the consumption of higher earning asset classes. Our sales pipeline is solid and growing and we continue to be aggressive in our pursuits of new business. We continue to believe that volatility in the financial markets would be a tailwind for new business, as it would be a catalyst for investors to evaluate their current investment program.

Thank you very much. And I'm happy to entertain any questions you may have.

Operator

(Operator Instructions) And currently, there are no questions in queue. Please continue.

Alfred West -- Chairman and Chief Executive Officer

Thank you, Paul. And our final segment today is Investment Managers. I'm going to turn it over to Steve Meyer to discuss this segment. Steve?

Stephen Meyer -- Executive Vice President, Head of Investment Manager Services

Thanks, Al. Good afternoon, everyone. For the third quarter of 2018, revenues for this segment totaled $101.3 million, which was $10.3 million, or 11.3% higher as compared to our revenue in the third quarter of 2017. This year-over-year revenue increase was due to net new client fundings and market appreciation. Our quarterly profit for this segment of $36 million was $4.8 million, or 15.4% higher as compared to the third quarter of 2017.

Third-party asset balances at the end of the third quarter of 2018 were $552.4 billion, approximately $29.7 billion, or 5.7% higher as compared to the asset balances at the end of the second quarter of 2018. This increase in assets was primarily due to net new client fundings of $22.7 billion and market appreciation of $7 billion.

And turning to market activity, during the third quarter of 2018, we have our strongest sales quarter this year with net new business events totaling $15 million in recurring revenues, as well as recontracts of $8.5 million from recurring revenues. Most importantly, these sales were diversed and spanned our entire business and included both new-name business and increased wallet share with current clients. These events included expansion of our business with several large enterprise clients, the win of a traditional manager and the servicing of the mutual fund family, which was won in a competitive process, and the win of a large new family office servicing mandate.

From a market standpoint, we continue to see the dynamics of the industry changing. From the demands of investors, the fee compression in the industry, the new evolving needs of investment managers globally all create some level of disruption. We feel strongly that this disruption presents an opportunity for continued growth for us. Strategically, we continue to feel well positioned.

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

Operator

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

Robert Lee -- KBW -- Analyst

Hey, good afternoon, Steve.

Stephen Meyer -- Executive Vice President, Head of Investment Manager Services

Good afternoon, Rob.

Robert Lee -- KBW -- Analyst

I'm just curious, I mean, while in the past and there was a -- there have been -- there has been the M&A and transactions in the industry. You generally view that as an opportunity to get some new clients. And State Street, obviously, just did a larger acquisition, I guess, of Charles River and then I know -- I mean, does that create any kind of potential disruption that you could benefit from or is it too early to tell, I mean, how do you think of that?

Stephen Meyer -- Executive Vice President, Head of Investment Manager Services

Well, I think that specific transaction and there was another purchase of a front office system, I think it's too early to say. But what I'd say, any type of M&A activity, especially regards to, does it change the focus of the acquirer present some disruption in the market? And that, obviously, present some opportunity for us.

Robert Lee -- KBW -- Analyst

Okay. And since I have to ask my typical question every quarter, can you maybe just update us on kind of your backlog and how you think of that funding over the coming year or so?

Stephen Meyer -- Executive Vice President, Head of Investment Manager Services

Sure. So, our backlog going into the quarter was $44.7 million. Our backlog coming out was $44.9 million. What we should take from that is, if we sold $15 million, at the end of the day we matriculated in around $15 million. So we had decent fundings this quarter from the backlog. When I look at the backlog, it's very diverse from our alternative business traditional, and I might have a slight edge more in the alternative side and I believe the majority of that will fund over the next 12 months to 14 months.

Robert Lee -- KBW -- Analyst

Great. Thank you.

Stephen Meyer -- Executive Vice President, Head of Investment Manager Services

Sure.

Operator

Thank you. And our next question comes from the line of Josh Schwartz with CJE Investment. Please go ahead.

Josh Schwartz -- CJE Investments -- Analyst

Hi. I'm looking at the sort of more rapid growth of this segment and I'm just wondering, is this a market share win for the Company or is the industry growing quicker?

Stephen Meyer -- Executive Vice President, Head of Investment Manager Services

Well, I think the industry is growing, Josh. But certainly, I think we are winning a good bit of the market right now. And we've been doing that for a decent period of time. But the industry is expanding and our new manager starting, even though they are shrinking in some segments. But I think clearly from our standpoint, we're moving more upstream, we've started to do that two years or so ago and we continue to do that.

Josh Schwartz -- CJE Investments -- Analyst

Okay. And whatever the fee basis point looking like in this segment, is there compression or is it stabilizing?

Stephen Meyer -- Executive Vice President, Head of Investment Manager Services

Well, I think there is pressure from -- if you look at the pressures, which I mentioned in my right up -- there is pressure at the manager level in their products and that's certainly works the way down to their partners, including the area of we service. I think, though, we products those on having not a commoditized offering but the premium offering and I think we've been able to battle FTE compression with increased service and kind of a premium service level. But it is something out there, there will be continued pressure. Again, I view it a little bit as a tailwind for us because I think the more pressure on the managers in this segment, the investment managers is requiring them to relook at their business models and looking how they've scaled their internal business and operations and that presents an opportunity for them to outsource more.

Josh Schwartz -- CJE Investments -- Analyst

Okay, great. Thank you.

Paul Klauder -- Executive Vice President, Head of Institutional Group

Sure.

Operator

And there are no further questions in queue. Please continue.

Alfred West -- Chairman and Chief Executive Officer

Thank you, Steve. And now like to turn it over to Kathy Heilig to give you a few Companywide statistics. Kathy?

Kathy Heilig -- Chief Accounting Officer and Controller

Thanks, Al. Good afternoon, everyone. I had some additional corporate information about this quarter. Third quarter 2018 cash flow from operations was $155 million, or $0.96 per share. Bringing year-to-date cash flow from operations to $417.9 million, or $2.58 per share. Our third quarter free cash flow was $137.3 million and year-to-date cash -- free cash flow was $362.9 million.

The capital expenditures for the third quarter excluding capitalized software were $9 million and that did include about $3 million of facility expansion. Year-to-date capital expenditures, again, excluding capitalized software were $21.7 million, was about $5 million of facility expansion cost in there. We project the capital expenditures for the fourth quarter, including capitalized software to be $15 million, but -- and about $10 million of that does relate to the facility.

As we noted in the earnings release, the tax rate was 18.6%, that's due to a combination of the tax act and tax benefit option exercises and our effective tax rate could fluctuate as a result.

We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks and that the financial information presented in our release and on this call is unaudited. Our forward-looking statements include our expectations as to revenue that we believe will be generated by sales events that occurred during the quarter, the timing and scope of client implementations, and our ability to capitalize on our strategy.

Those -- and also market conditions that will create opportunities for us to grow our business. Although we believe the assumptions upon which we base our forward-looking statements are reasonable, they could be inaccurate. Some of the risks and important factors that could cause actual results to differ from those described in our forward-looking statements can be found in the Risk Factors section of our Annual Report Form 10-K for the year ended December 31, 2017, which we filed with the Securities and Exchange Commission.

And now, please feel free to ask any further questions.

Operator

(Operator Instructions) And there are no questions in queue. Please continue.

Alfred West -- Chairman and Chief Executive Officer

Thank you, Kathy. So, ladies and gentlemen, I am encouraged by the direction our businesses are taking and the progress we are making. While we face short-term headwinds, we believe that the investments we are making will help us identify a benefit from all the changes taking place in our industry.

Have a good day, and thank you for attending our call.

Operator

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you very much for your participation. You may now disconnect.

Duration: 51 minutes

Call participants:

Alfred West -- Chairman and Chief Executive Officer

Dennis McGonigle -- Chief Financial Officer

Christopher Shutler -- William Blair -- Analyst

Robert Lee -- KBW -- Analyst

Joseph Ujobai -- Executive Vice President and Head of Private Banking

Christopher Donat -- Sandler O'Neill -- Analyst

Glenn Greene -- Oppenheimer -- Analyst

Thomas McCrohan -- Mizuho Securities -- Analyst

Patrick O'Shaughnessy -- Raymond James -- Analyst

Wayne Withrow -- Head of SEI Advisor Network

Paul Klauder -- Executive Vice President, Head of Institutional Group

Stephen Meyer -- Executive Vice President, Head of Investment Manager Services

Josh Schwartz -- CJE Investments -- Analyst

Kathy Heilig -- Chief Accounting Officer and Controller

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