Waddell & Reed Financial, Inc. (WDR) Q3 2018 Earnings Conference Call Transcript

Waddell & Reed, Inc. (WDR)
Q3 2018 Earnings Conference Call
October 30, 2018, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to the Waddell & Reed third quarter 2018 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press * then 1 on your telephone keypad. To withdraw your question, please press * then 2. 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 -- Vice President of Investor Relations 

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 relations section of our website at ir.waddell.com. I would now like to turn the call over to Phil.

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

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. 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 advanced 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 remain sales remain soft. Global trade tensions and the rising interest rate environment prove 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 are International Core Equity and Emerging Markets Equity funds have experienced 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 midcap product line, where performance remains strong on both a 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, 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 was 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 ten funds, which we discussed previously, went into effect on July 31st. The initial feedback has been constructive, leading to a number of potential opportunities across the RIA, DCIO, and unaffiliated broker dealer channels. We will continue to explore opportunities that allow us to breakdown 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 align with our go forward plan to deepen and diversify relationships across all distribution channels. Their collective experience and relationships will most certainly be additive toward those ends.

Finally, over 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 Clouse -- Senior Vice President and Chief Financial Officer

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 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 ten 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 continued 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 and improve 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 or $95 million debt repayment in January. Our balance sheet remains strong and we continue to enjoy ample flexibility to meet our strategic objectives.

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

Shawn Mihal -- President, Waddell & Reed, Inc.

Thank you, Ben and good morning, everyone. Assets under administration ended the quarter at $58 million, 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 section 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 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 from strategic dynamic and tactical investment management that's allowing advisors to spend more time focusing on client relationships.

Our ongoing goal is to offer advisors access to advisory products that allow them to more effectively service every type of client from every accumulators all the way through high net-worth individuals. For that reason, we will continue our expansion 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 and assets in 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. During 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 hours for the trailing 12 months ended September 30, 2018.

Lastly, I'd like to talk about the role of technology and a 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 or advisors used 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 will 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 -- Vice President of Investor Relations 

Operator, we're ready for questions.

Questions and Answers:

Operator

Yes, thank you. We are now ready to begin the question and answer session. To ask a question, you may press * then 1 on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we will pause momentarily to assemble the roster.

The first question comes from Robert Lee with KBW.

Robert Lee -- Keefe, Bruyette & Woods -- Managing Director

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

Benjamin Clouse -- Senior Vice President and Chief Financial Officer

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 fee structuring in the broker dealer field organization. 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. 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 -- Managing Director

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

Shawn Mihal -- President, Waddell & Reed, Inc.

Yeah, good morning, Robert. This is Shawn. We're continuing to expand the product offerings inside the broker-dealer, as I commented. We've added some additional unaffiliated product partners inside of the advisory offerings as we moved through the past quarter but also the past year.

The overall ratio of affiliated funds and non-affiliated funds has remained relatively consistent at 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 forecast as we started this progress into 2017, we're remaining inside those expectations that we've seen from those legacy products that we've had a flow into new products at a net of about $1.5 billion and total overall asset values inside the new program is about $4 billion.

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. We don't expect anything to materially change with 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 -- Managing Director

Great. If I could indulge in one more question, that's obviously a rough start to the quarter for everyone. Could you maybe just update us on what you're seeing or experiencing so far through the first three or four weeks of the quarter? Any additional slowdown investor activities? Any kind of update would be helpful.

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

Yeah, Rob. This is Phil. I'll say a couple of high-level comments and if anyone 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 in our unaffiliated channels is that sales have actually picked up a little bit but redemptions have also stepped up. I think the net flow outlook in the first month is deteriorating from the third quarter run rate.

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 in the year, but they've had some headwinds here given the market volatility and the international markets. It's 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 given the environment we're in. That's how we see it right now.

Robert Lee -- Keefe, Bruyette & Woods -- Managing Director

Thank you. As a reminder, we ask in consideration of the others that you limit yourself to one question and one follow-up. The next question comes from Michael Carrier with Bank of America.

Michael Carrier -- Bank of America Merrill Lynch -- Managing Director

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

Amy Scupham -- President, Ivy Distributors

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 we made at the end of July, we are definitely starting to take interest in regarding some of the headwinds the industry is facing.

As we look over the course of the third quarter across the unaffiliated channel, which would be inclusive of RIA distribution, DCIO distribution, and our broker-dealers in addition to some of our professional buyer groups, insurance and banks, we've definitely seen some additions to approved lists across the professional buyer channel.

In RIA, we've had several reckless 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. Definitely picking up in the broker dealer channel as far as having funds rereviewed that might have been potentially on the chopping block from a rationalization standpoint and had a couple of funds added as distribution partners over the course of a quarter.

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

I might just add that obviously the timing of these things can never be predicted in that. There's no doubt that our long-term success is going to be contingent upon having competitive investment performance, the right product, the right pricing and that kind of stuff. We've really been focused on controlling the things that we can control and as performance improves, we hope and are optimistic for longer-term success.

Michael Carrier -- Bank of America Merrill Lynch -- Managing Director

That's helpful. Maybe just one on the expense side -- I understand the additional $10 million to $20 million operating income and some of the initiatives you have in place to achieve that. How are you guys thinking about the core run rate? Partially, it's driven by seeing the improvement in the performance on some of the technology initiatives, then maybe a more volatile market backdrop. Are there more areas to pull back on some of the variable costs or with the market headwinds? Is that more challenging in the near-term given the different dynamics?

Benjamin Clouse -- Senior Vice President and Chief Financial Officer

I might start. This is Ben. Phil may want to add to this. As I mentioned, we're really focused on 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 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 on that on our next call, but don't anticipate any major changes.

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

I might just add that 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 we're playing the long game and we don't to cut back on things that will improve our positioning for the long-term. We think about support and services for investment management, distribution, and 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 our strategies over the long-term. So, while we'll be mindful of the current environment and be prudent in that regard, we have the financial flexibility to make sure we're building and laying the groundwork for our longer-term success.

Michael Carrier -- Bank of America Merrill Lynch -- Managing Director

Okay. Thanks a lot.

Operator

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

Craig Siegenthaler -- Credit Suisse -- Managing Director

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

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

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

Shawn Mihal -- President, Waddell & Reed, Inc.

Sure. Hi, Craig. Good morning. Certainly, we've done a lot over the course of the last few years with respect through the Project E initiatives, which led to a major technology overhaul and 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 ten years with clearing through purging. 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, in an overall architecture standpoint, we've been able offer a variety of different open architecture solutions with respect to the purging platform, which we further expanded to our classic channel last year with the launch of a couple of advisory products that were new products and also opening an existing advisory product to that classic channel.

From that regard, we've had this expansion of moving to a more 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 different 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 improve the technology package that we offer to our advisors.

It is a little bit of a disparate comparison between the self-clearing platform and then the platforms that we use introducing components. There are certain technology limitations that we have with respect to the clearing components of it. We have been enhancing from financial planning technology to business submission technology and we'll look to do further expansions along that as move into 2019. There is a considerable amount of effort being made.

We do know it is a competitive nature out there with respect to recruiting. There are some firms that are putting up some sizable dollar amounts to move your practice to one firm another. So, we are certainly combatting those headwinds as well.

Craig Siegenthaler -- Credit Suisse -- Managing Director

Thanks, Shawn. 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 -- Chief Executive Officer and Chief Investment Officer

Yeah. 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. I think back to the last 18 months to two 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. 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 right fit, both from a product standpoint and what we can really do with it, culturally and that type of thing. So, we have the ability to grow and execute on our own strategies. As I've said in the past, we're a public company and obviously, we have a fiduciary responsibility.

We're kind of focused on what we can control right now. If opportunities present themselves we'll address them as they come to us. There's really not much more I can say in regard to that. It's just 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 -- Managing Director

Thank you, Phil.

Operator

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

Daniel Fannon -- Jefferies -- Managing Director

Thanks. Good morning. Just looking at the advisor headcount and the trends. You highlighted it's within your expectations in terms of what's happening. I'm curious as to when you think you're going to hit at a stable level within the advisor headcount. Is there a target profile in terms of adding new advisors that we should be thinking about?

Shawn Mihal -- President, Waddell & Reed, Inc.

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

We've in the past had this legacy recruiting model which generated a lot of activity of inexperienced advisors but also had substantially equal activity of advisors departing the organization. There was a lot of activity taking place. As we changed our overall direction of where we're heading as a firm and moving to more competitiveness as the broker dealer, we've changed our 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 to length of service to year five. We still have approximately a little over 100 advisors that are still below that 125,000.

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

Daniel Fannon -- Jefferies -- Managing Director

For my follow-up, in terms of the U&D revenues, as we think of the inputs to that outside of AUM that will drive those numbers up or down, I just want to make sure we understand the moving parts outside of aggregate AUM levels that will have an input there.

Benjamin Clouse -- Senior Vice President and Chief Financial Officer

This is Ben, I might start. The U&D levels outside the impact of AUM moves 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. That's probably the only other moving part there period to period aside from asset changes.

Operator

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

Patrick Davitt -- Autonomous Research -- Analyst

Obviously, the market has gotten a bit tough, which you pointed to. I'm curious if you've started to see anecdotal evidence that the fee cuts are helping gross sales for any particular products.

Amy Scupham -- President, Ivy Distributors

Hi, Patrick, this is Amy. Obviously, it's been a short period of time, only a couple months here, but we have certainly seen some anecdotal evidence. We have had a couple of fairly nice-sized wins in midcap growth in the RIA space. Like I said before, in addition to that, what we're seeing is a review by gatekeepers of our firm and some of our strategies as it relates to the fee reductions. Short-term would say it's been a very positive and constructive move.

Patrick Davitt -- Autonomous Research -- Analyst

In that vein, any update and conversations around the Ivy Distribution leadership change and to what extent the outflows you've been talking about are related to that?

Amy Scupham -- President, Ivy Distributors

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

Patrick Davitt -- Autonomous Research -- Analyst

The change in Ivy Distribution leadership earlier in the year. I'm curious if that's led to increased outflows on the institutional side.

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

Yeah, this is Phil. As you know, we had several key departures early in the year. We've been battling these headwinds on the institution side for the last several quarters. We're going to experience some of those after effects of that into the fourth quarter that we touched on. They're related to primarily portfolio manager departures, but also sales leadership certainly doesn't reinforce or help the matter.

Sometimes it's hard to associate exactly why the reasons are, but any effective change in the leadership or portfolio management can have an impact on flows, especially in the institutional channel, where there's more a direct linkage in personnel. Hopefully, the fourth quarter will be the bulk of that and we can move forward.

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, 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.

Operator

The next question comes from Bill Katz with Citigroup.

Bill Katz -- Citigroup -- Analyst

Thanks very much. I just wanted to confirm something -- you mentioned that you're on pace for your cost savings into next year. I think you also mentioned that you identified a bit more savings into the end of the year. So, is that a net number or is there incremental upside. Maybe the broader question is can you level set what that number is for next year, just try to get it, make sure I'm working apples to apples off the UM ratio. Thank you.

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

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

Bill Katz -- Citigroup -- Analyst

Okay. Broader question -- on the retail broker dealer model, could you talk about regrettable attrition or transfer of asset trends that we're seeing between the ins and outs of who you're hiring. Then I think you had mentioned you're exploring more opportunity on the other side of the pricing. Is that on an incremental market share, distribution or product side, or are there more pricing cuts that may follow. It wasn't clear to me based on your commentary. I apologize for that one.

Shawn Mihal -- President, Waddell & Reed, Inc.

This is Shawn. I can take the first part of that question which had to deal with the broker dealer headcount and some of the attrition numbers. We are watching very carefully. We've reported in the past few questions what those productivity numbers were for advisors that had departed the organization. It did uptick a little bit bringing the 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. 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.

We did see that uptick from last quarter with regard to some increases in the production that was lost with three large groups departing the organization. We're continuing to focus on that and focusing recruiting efforts with respect to higher-performing advisors as we move to 2019.

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

Bill, this is Phil. I'm not sure I understood your question. With respect to pricing, we obviously introduced these pricing adjustments in about 10 funds effectively July 31st but we indicated we would periodically review pricing across all the strategies and make adjustments as we see necessary to maintain competitiveness, but nothing to report at this moment.

Operator

The next question comes from Kenneth Lee with RBC Capital markets.

Kenneth Lee -- RBC Capital Markets -- Analyst

Just a follow up on the incremental technology spend. I realize it's still early, but any way you can clarify which areas would be impacted and maybe sharpen my understanding and see how does it differ from the previous Project E initiative.

Benjamin Clouse -- Senior Vice President and Chief Financial Officer

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

As I mentioned in my comments, we expect to have some incremental implementation work. I don't know what size or shape that will be yet. Directionally, we expect that to be incurred over the next couple of years. Longer-term, as we move to more modern technology, particular to the broker-dealer, we expect that cost to moderate 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 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. I don't know, Shawn, if you would want to add to that.

Shawn Mihal -- President, Waddell & Reed, Inc.

Obviously, we commented that in the last couple quarters, we've been working on a larger initiative with regard to a business administration program. That work is continuing that we're looking to make some final vendor selections here in the coming months. In that regard, what we're focused on is the integration of data. 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 we connect that business through to custodians.

The underlying efforts we're focused on here is the consolidation of that data to really build through more efficient business processes as well as enhancing the overall technology interface. I look at this as being ongoing efforts and we'll continue to make technology improvements. This is not something we're launching all at once but continuing to advance technology offerings to our advisors.

What Ben commented on is we will be discontinuing some of the legacy platforms we've used in the past as we consolidate those down. The expectation would be while we're putting investments in the technology, we're also finding efficiencies in the way we address some of the legacy applications.

Kenneth Lee -- RBC Capital Markets -- Analyst

Great. Just one more follow-up -- any update on what's in the new product development pipeline? Thank you.

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

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 perhaps higher active share, maybe something on 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 important is potentially new products -- and I'm speaking about organically here, not including anything that we possibly might do through acquisition, but as important as new product development would be making sure we have the right distribution vehicles of our existing products, which are -- I think that's an area that we probably haven't taken advantage of here in the past. I might let Amy mention what she's working on in that respect.

Amy Scupham -- President, Ivy Distributors

Yeah. We're currently working on launching model delivery portfolios that I think will be very, very beneficial especially in our broker dealer channel as it the way clients are consuming long only equity strategies in that channel. In addition to that, we've had a subset of our products available in a collective investment trust in a daily valued vehicle for the qualified market. We've done a review of the trust and we'll be adding certain strategies to that to broaden out the product line available to define contributions and qualified money.

Kenneth Lee -- RBC Capital Markets -- Analyst

Very helpful. Thank you.

Operator

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

Chris Shutler -- William Blair -- Analyst

Good morning. Just one quick one -- you talked about the $10 million to $20 million of cost savings 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 Clouse -- Senior Vice President and Chief Financial Officer

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.

Operator

Okay. Thanks a lot. And this morning's last question will come from Mac Sykes with Gabelli.

Macrae Sykes -- Gabelli & Company -- Analyst

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

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

Hey, Mac, this is Phil. I think we've been pretty active in the market and we outlined a program about a year ago and we've been pretty active. I think obviously, as things move forward, we'll work in conjunction with the board and address this in terms of ongoing allocation of capital and how the share repurchase program looks going forward, but that's something that we'll work in conjunction with board approval on.

I would say that 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 flexibility.

Macrae Sykes -- Gabelli & Company -- Analyst

Thank you.

Operator

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

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

Thank you. I just want to say thanks to everybody for joining us. Appreciate your time and attention and we look forward to catching up to you in a few months. Thank you.

Operator

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

Duration: 52 minutes

Call participants:

Nicole McIntosh-Russell -- Vice President of Investor Relations 

Philip James Sanders -- Chief Executive Officer and Chief Investment Officer

Benjamin Clouse -- Senior Vice President and Chief Financial Officer

Shawn Mihal -- President, Waddell & Reed, Inc.

Amy Scupham -- President, Ivy Distributors

Robert Lee -- Keefe, Bruyette & Woods -- Managing Director

Michael Carrier -- Bank of America Merrill Lynch -- Managing Director

Craig Siegenthaler -- Credit Suisse -- Managing Director

Daniel Fannon -- Jefferies -- Managing Director

Patrick Davitt -- Autonomous Research -- Analyst

Bill Katz -- Citigroup -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Chris Shutler -- William Blair -- Analyst

Macrae Sykes -- Gabelli & Company -- Analyst

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