SEI Investments Company (SEIC) Q4 2018 Earnings Conference Call Transcript

SEIC earnings call for the period ending December 31, 2018.

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SEI Investments Company  (NASDAQ:SEIC)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Fourth Quarter 2018 Earnings Call. At this time, everyone joining by phone is in a listen-only mode. And then, later, we will conduct a question-and-answer-session. Instructions will be given at that time. (Operator Instructions) As a reminder, the conference is being recorded.

I will now turn the conference over to our host, Chairman and CEO, Mr. Al West. Please go ahead, sir.

Alfred West -- Chairman and Chief Executive Officer

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 fourth quarter and full year 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 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 reports.

So, let me start with the fourth quarter and full year 2018. Fourth quarter earnings decreased by 5% from a year ago. Diluted earnings per share for the fourth quarter of $0.73 represents a 3% decrease from the $0.75 reported for the fourth quarter of 2017.

For the year 2019 (sic-2018), our earnings increased by 25% over 2017 earnings. Diluted earnings per share for the full year are $3.14 is a 26% increase over the $2.49 reported in 2017. We also reported a 1% decrease in revenue from the fourth quarter 2017 to fourth quarter 2018 and a 6% increase for the full year. Also, during the fourth quarter of 2018, our non-cash asset balances under management decreased by $30.5 billion.

SEI's assets grew -- excuse me, fell by $17.3 billion and LSV's assets decreased by $13.2 billion. For the year, assets under management decreased by $29.1 billion.

In addition, during the fourth quarter of 2018, we've repurchased approximately 2.3 million shares of SEI stock at an average price of $49.56 per share. That translates to over $115 million of stock repurchases during the quarter. For the entire year, we've repurchased approximately 6.7 million shares at an average price of $60.02 and share representing just over $404 million of repurchases. Between our stock buybacks and cash dividends during 2018, we've returned approximately $502 million in capital to shareholders.

During the fourth quarter, we capitalized approximately $10.9 million of the SEI Wealth Platform development and amortized approximately $11.5 million of previously capitalized development.

Fourth quarter 2017 sales events, net of client losses, approximately totaled $10.7 million and are expected to generate net annualized recurring revenues of approximately $3.7 million.

For the full year 2018, sales events, net of client losses, totaled approximately $82 million and are expected to generate net annualized recurring revenues of approximately $57 million.

The bottom line is that, 2018 was a good year but ended on a negative note due to extreme volatility in the fourth quarter. These highly volatile markets are continuing through January, also affecting us as we entered 2019 is the loss business we know about and have communicated to you, yet these clients are still operating on our systems. Our reaction to all the volatility is to maintain our strategic course. We have headwinds of fee compression to deal with as well as the decline in US corporate defined benefit plans.

On the other side of the coin, there are tailwinds we need to take advantage of, namely the intensification of financial regulations worldwide plus the growth of the family offices and the widespread need of financial institutions to replace legacy systems. As we entered 2019, we are emphasizing long-term growth. At the same time, we are doing what we can to manage expenses and profits, while executing our strategy. We believe that the reorganization we announced in November would help us achieve our long-term goals.

The new organization we discussed also recognizes that the needs of manufacturers and distributors are converging, particularly in the large end of both markets. We have a number of case studies of a single organization using 3 to 6 of our platforms, necessitating a high level of collaboration to properly serve the client. That is why we have put IMS and banking together.

While the road ahead in 2019 is challenging, it's also full of new opportunities. We believe we will be better suited to capture the new opportunities with our new strategies and organization.

Now this concludes my remark. So I'm now ask Dennis to give you an update on LSV and the investment in new business segment. I'll then turn it over to the other business segments. Dennis?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

Thanks, Al. Good afternoon, everyone. I'll cover the fourth quarter and full year results for the investments in new business segment and discuss the results of LSV Asset Management.

During the fourth quarter 2018, the investments in new business segment continued its focus principally 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 $3.2 million, which compared to a loss of $3.8 million during the fourth quarter of 2017.

For the full year, the investments in new business segment incurred a loss of $12.4 million compared to a loss for 2017 of $13.8 million. This improvement reflects the growth of our private wealth management business, offset by other areas of investment.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the fourth quarter. LSV contributed $36.4 million of income to SEI during the fourth quarter. This compares to a contribution of $43.3 million of income during the fourth quarter of 2017.

For the full year of 2018, LSV contributed $159.8 million in income compared to $152.6 million in 2017. As Al mentioned, the assets during the quarter fell approximately $13.2 billion at LSV. LSV experienced net positive cash flow during the quarter of approximately $360 million, which was offset by market declines. Revenue at LSV was approximately $119.5 million and performance fees were minimal.

For the company, our effective tax rate for the quarter was 19.2%. A couple of items of note for the company, during the quarter, we recorded severance expense of approximately $2.4 million. This is primarily reflected in corporate overhead. We also had a true-up of incentive compensation expense of approximately $2.8 million, primarily reflected in the Investment manager segment results.

With that, I will now take any questions.

Questions and Answers:

Operator

(Operator Instructions) And we have a question from the line of Chris Shutler with William Blair. Please go ahead.

Chris Shutler -- William Blair & Company -- Analyst

Hey, Dennis, Good afternoon.

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

Hi, Chris.

Chris Shutler -- William Blair & Company -- Analyst

So on the corporate expense, it jumped a little bit quarter-over-quarter, it sounds like some of that was severance, was that $2.8 million in there also? Or was there anything else call out?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

Yes, the $2.8 million was in there also.

Chris Shutler -- William Blair & Company -- Analyst

And the $2.8 million...

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

There were two major kind of, I'd say, more one-time-ish.

Chris Shutler -- William Blair & Company -- Analyst

Okay. And could you state again Dennis what that $2.8 million was?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

That was for true-up on incentive compensation payments, (multiple speakers) in the investor management services segment, given our strong performance this year.

Chris Shutler -- William Blair & Company -- Analyst

Okay. The severance, is that related to any one individual or is that a number of people was that target related to?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

Our employees, they left us during the course of the quarter.

Chris Shutler -- William Blair & Company -- Analyst

Okay. And then tax rate from here, how should we think about tax rate in 2019?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

Well, the good news is, we're still operating under the 21% corporate tax rate. So that's a good starting point. I'd say we're going to be in that range, 21% range. Certainly, the -- we still have the option, accounting benefit that could go one way or the other this year, that is one activity. So I'd say we're definitely 21%, if not a little bit higher.

Chris Shutler -- William Blair & Company -- Analyst

Okay. Thank you.

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

(Operator Instructions) We have no one queuing up at this time, so please continue.

Alfred West -- Chairman and Chief Executive Officer

Thank you, Dennis. We're now going to change things up a bit based on the new organization. I'm going to turn it over to Steve Meyer to discuss both private banking and IMS segments. Steve?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Thank you, Al. Before I begin, just to outline my approach, I will first review the private banking segment's Q4, then take questions on that. If there is questions, I will discuss investment managers Q4 and take questions on IMS.

So, for private banking. For the fourth quarter of 2018, revenue of $121.4 million was up slightly from the third quarter of 2018, primarily due to an increase in transaction-based revenues. Fourth quarter revenue as compared to a year ago was down $5.6 million, mainly driven by transaction-based revenues and a decline in our asset management revenue.

For the fourth quarter 2018, operating profit of $6.9 million increase from the third quarter due to increased transactional revenue and decreased expenses.

For the year, our profit grew by $6 million, mainly driven by our asset management and SWP relationships.

And turning the sales activity, for the quarter, we closed $7.2 million in gross processing recurring sales events and $3.7 million in one-time events. Q4 was a decent new business quarter. As we mentioned on our third quarter call, we are working with one of our larger UK clients to add larger book of global private accounts.

During this process, we expect part of the turn book to deconvert half of our platform in the near term. Although the timing of the deconversion is ambiguous, we have enough certainty that will occur where we believe it is appropriate to net the expected impact against our Q4 of that. If successful, we expect the potential new business from this existing client will be a significant growth opportunity for us.

During the fourth quarter, we signed two new SWP agreements, one existing TRUST 3000 client, security and trust company, and the other a new client to SEI. Also during the fourth quarter, in the UK, we extended our relationship with Fusion Wealth until 2025. Given their strategic affiliation with Schroders and Lloyds Banking Group, we expect this to be a meaningful business opportunity for SEI.

Regarding TRUST 3000, during the quarter, we've recontracted two clients for a total of $10.2 million. For 2018, we have recontracted 18 TRUST 3000 clients for $51.9 million of annualized revenue. Our asset management distribution business experienced approximately $283 million in negative cash flows in the quarter. During the quarter, our AMB(ph)business signed several new deals, including Enaviya(ph), a large French wealth management firm that will use SEI's goal-based solutions as their exclusive approach to goals based investing; and BMO Financial Group, who will offer SEI strategic portfolios to their high net worth clients in Asia.

As an update on the Wealth Platform backlog, we converted the US client to the SEI Wealth Platform during the quarter. This brings the total to 38 clients currently processing on SWP. Our total signed, but not installed backlog for SWP is approximately $35.2 million in net new recurring revenue.

Also to update on Wells Fargo, all of our conversion activity continues and we are working closely with Wells in this project. While we await to finalize implementation schedule from Wells, all milestones and deliverables continue to be met. We are hopeful to know more by the end of the first quarter.

And turning to 2019, our focus is on growth. Our sales pipeline is strong and we will focus on closing new business and generating new opportunities with our current solutions and by expanding our opportunities by leveraging additional platforms and solutions available of SEI. Unfortunately, while doing so, we have to navigate some of the headwinds of the current market as well as the revenue losses from previously announced client deconversions. A significant one, the department of the Interior federal contract we announced in Q4 2017 is expected now to move off at the end of this quarter. These events will put downward pressure on both revenue and profit growth in the short term. We will manage through these headwinds as we continue to sell new business, implement clients, grow the business and we will manage expenses diligently while we focused on positioning the segment for sustainable and accelerating profitability.

While new to leading this business segment, recognizing the short-term challenges to profitability, I'm optimistic about our long-term growth opportunity available to our markets and platforms. We continue to build our pipeline and work on increasing sales and implementing new business.

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

Operator

(Operator Instructions) We'll go to Chris Donat with Sandler O'Neill. Please go ahead.

Chris Donat -- Sandler O'Neill -- Analyst

Good afternoon. Steve. Thanks for taking my question.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Sure.

Chris Donat -- Sandler O'Neill -- Analyst

With the department of Interior contract, so another revenues go away, are there any expenses associated with that, that we would expect to also shrink or any restructuring cost that we should be thinking about in future quarters?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Well, what I'd say is, it was one of our more profitable pieces of the business. And while there are some expenses that we will reallocate within the unit, any take down expense won't be really matched with the release of the revenue, so I wouldn't expect to see kind of a match up on that side and I think we're going to use some of that expense, although we're managing it diligently, to also kind of support new business coming on.

Chris Donat -- Sandler O'Neill -- Analyst

Okay. All right. And then with Wells Fargo just in terms of what we can expect in terms of news flow, you said expect more clarity by the end of the quarter, is that something we should expect to hear about on our first quarter earnings call or would you expect to put out press release, I'm just trying to.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

I would suggest you'd probably not hear until the first quarter earnings call.

Chris Donat -- Sandler O'Neill -- Analyst

Got it. Okay. Thank you.

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

And we have a question from Chris Shutler with William Blair. Please go ahead.

Chris Shutler -- William Blair & Company -- Analyst

Hey, Steve.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Hey, Chris.

Chris Shutler -- William Blair & Company -- Analyst

So the quarter-over-quarter step up in revenue in the business, obviously there was a negative market impact. Can you just break it down for us a little bit, like how much of a step-up was there quarter-over-quarter and professional services or one-time type of revenue? And then how much of a step-up was there in transactional revenue?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Well, the -- so the step-up in revenue, that was about $2.9 million Q3 over Q4, and the majority of that I believe within our transactional revenue. It was both split between brokerage and our mutual fund servicing fees, which were actually down last quarter, they are actually up this quarter. We did have one-time revenue booked in Q4 of that $4.9 million.

Chris Shutler -- William Blair & Company -- Analyst

And that $4.9 million, how does that compare to prior quarters?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Well, it's kind of -- I don't think there's going to -- a kind of standard flow, it's up or down depending on the exact signings we've had, but I think it's somewhat a little consistent what we've seen in previous quarters.

Chris Shutler -- William Blair & Company -- Analyst

Okay. And then just to reiterate, could you go through your comments real quickly on the sales again? You said $7.4 million (sic-$7.2 million) of gross and half of that was one-time? Please reiterate that again.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Yes. So it was $7.2 million in gross and $3.7 million in one-time events sold in the quarter. And of that $3.7 million, about $1.8 million of it has been recognized in the Q4.

Chris Shutler -- William Blair & Company -- Analyst

Okay, got it. Thank you,

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Sure.

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

We have a question from Robert Lee with KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great. Thanks. Good afternoon, Steve.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Good afternoon, Rob. How you're doing?

Robert Lee -- KBW -- Analyst

Good. Thanks. Just kind of curious, if we go back and look over time to drive a one-time fees you guys may have earned over the past couple of years related to potential implementation of SWP, is it -- just trying to get a sense of when someone hires you and paying you some upfront fee, kind of exploring the platform, do you have enough of a tracker, say, it's 100% conversion to a full client once they give us a fee or it's 75% or 50% and if we think of those kind of potential clients paid you this fees over time, are there still potential customers out there who pay you this fees and made the commitment yet to full platform, so you haven't seen them flow through net new business?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

Hey, look Robert, this is Dennis. I'll help Steve, I reckon he is really new to the segment. And I think we've only had one instance where we had a client pay us significant or any implementation fees frankly, they did wind up signing a contract over the past. So it's probably five years ago. So every client is paying us has converted to a contract except one.

Robert Lee -- KBW -- Analyst

Okay. And are there still maybe some out there that has paid you the fee and you expect they are going to sign up, but they just haven't kind of gotten there yet, so there is kind of a little bit of a... (multiple speakers)

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

I think, everybody is paying us a fee for implementation has signed a contract.

Robert Lee -- KBW -- Analyst

Okay. Great. That was it. Thank you.

Operator

And we have a question from Glenn Greene with Oppenheimer. Please go ahead.

Glenn Greene -- Oppenheimer -- Analyst

Thanks. Good afternoon, Steve.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Hi, Glenn. How are you?

Glenn Greene -- Oppenheimer -- Analyst

Good. So I mean, I guess, this is a big picture question, we're sort of now running private banking along with investment managers and I just wanted to get a sense, how you sort of view of the pipeline and what you think you can do or what could be changed to sort of move some of these deals in the pipeline over the goal line and really get the sales figure moving?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Well, Glenn, all eyes are on me in the room now. So listen, it's two months in, so it's probably a little early for any broad strategic discussion. But what I'd say to you is, I do -- my assessment is, we have a lot of opportunity and we have a strong pipeline, both here in the US and the UK. And I think there is a lot of people who have worked very hard and are moving these deals along. Not to use the same phrase you heard, but the process is a long one. I do think there is opportunity for us to look and leverage and this is one of the reasons we did the rework. Other platforms and solutions we have across SEI, that might help us expand the offering we have for this client base as well as maybe have some other shorter-term sales agendas, while we're working on longer term platform agendas. But, with that, I think I'm walking into an opportunity where we have a great people that work really hard, have a very strong pipeline and I think it's just a matter of moving them through the pipeline at this point.

Glenn Greene -- Oppenheimer -- Analyst

Is there anything more specifically tactically that you're thinking about, whether it's pricing or maybe going more modular in terms of the product or maybe something in terms of distribution and with sales side that you're rethinking?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

What I'd say, Glenn, I'll add more color for you as we go along, but right now I think it's safe to say that my number one focus is on growth and growth of the top line and bottom line. And I'm considering everything and looking at everything we do from pricing to how we package, sell the pipe -- platform to our other platforms and solutions on how we can speed up the growth across this division.

Glenn Greene -- Oppenheimer -- Analyst

Okay. Thanks. Good luck.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Thank you.

Operator

(Operator Instructions) We'll go to Sam Hoffman with Lincoln Square. Please go ahead.

Sam Hoffman -- Lincoln Square -- Analyst

Thanks for taking my call. Steve, can you give a bit more color on what you're working on, just a follow-up on the previous question, in terms of developing products to cross-sell the investment managers platform to the private banking clients? And then specifically do you have needs within your budget? Currently you're at the run rate of $114 million to $115 million of expense per quarter, is that going to be enough to kind of accomplish what you're looking to achieve over the next year or two?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Okay. Great. Thanks. So two questions. One, what we're looking at as far as maybe leveraging some of the solutions, primarily in IMS, but maybe just not limited to IMS. When we first made this announcement, we used the example of our client we recently signed Cornerstone, which is a large REA, which is actually using three of the platforms we have. If you want a little more granularity to banking, many of the large banks we deal with are also manufacturers. So many of the solutions and platforms we've built, we are either already have them as a client, such as Wells Fargo, who is a client of IMS as well as banking or we have the opportunity to look at and support their manufacturing businesses. So that's really kind of the main focus I have initially on looking at how we can expand that.

As far as the budget, what I would say is, as we go into this year, we certainly have to manage the budget and I'm going to be managing expenses. So, I feel the expenses we have are more than enough for us to accomplish what we have to do and we'll be looking to actually manage them pretty tightly.

Sam Hoffman -- Lincoln Square -- Analyst

Okay. So you're going to be saving money on merging some of the organizations and that will offset any expenses that you need to make to develop products for growth?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

I'm not sure I exactly classified that way, but what I would say is, I think we're spending a decent amount and I'm confident with the amount we're spending on development and implementing clients. I think there's ways we might be able to do things, maybe a little bit more efficient that can resolve us in saving some money.

Sam Hoffman -- Lincoln Square -- Analyst

Terrific. Thank you.

Operator

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

Chris Shutler -- William Blair & Company -- Analyst

Thanks for taking the follow-ups. Can we just get net cash flow number on the UK for us to VP(ph)?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Net cash flow in UK, yes, I know the total net we are negative, I don't know about the UK on the handy, Chris.

Chris Shutler -- William Blair & Company -- Analyst

Okay. I can follow-up on that.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

We'll try to get that through the end of the call and I'll come back to you.

Chris Shutler -- William Blair & Company -- Analyst

Okay, thanks. And then, any update, Steve, on just the outlook for, I know you didn't have any TRUST 3000 attrition in the quarter, how do you feel about the next handful of quarters?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

I feel good. We've had a pretty good year of recontracting, more importantly I think if you look at our average concessions, we had zero percent concessions in recontracting fees with clients we did in Q4 and just shy of 2% on average for the year 2018. So we're active and we're engaged with them and, obviously, our main goal is to convert them to SWP or for the ones that are not ready to recontract them in advance of moving to SWP, but I feel pretty confident we're on it. We obviously have some clients that will certainly look in the market and it will be a competitive conversation, but that's the nature of the business.

Chris Shutler -- William Blair & Company -- Analyst

All right. Thank you.

Operator

And we have no additional questions. So, please continue.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Sure. And just a follow-up there, Chris. The flows in the UK where $440,000, positive.

So, with that, turning to investment managers. For the fourth quarter of 2018, revenues for this segment totaled $102.4 million, which was $8.1 million or 8.5% higher as compared to our revenue in the fourth quarter of 2017. This year-over-year revenue increase was due primarily to net new client fundings and existing client expansion. For the full year of 2018, our revenue was $398.1 million, which was $48.6 million or 13.9% higher than the full year of 2017.

Our quarterly profit for this segment of $34.6 million was $1.1 million or 3.2% higher as compared to the fourth quarter of 2017. Our full year profit for this segment of $138.4 million was approximately $15.4 million or 12.6% higher than the annual profit of 2017.

Third-party asset balances at the end of the fourth quarter of 2018 were $552.3 billion, essentially flat as compared to the asset balances at the end of the third quarter of 2018. Although the assets were flat quarter-over-quarter, we did have an increase in assets due to net new client fundings of $19.4 billion net against market depreciation of $19.5 billion.

And turning to market activity, during the fourth quarter of 2018, we had a very strong sales quarter with net new business events totaling $12.9 million in recurring revenues as well as recontracts of $13.9 million in recurring revenues. Most importantly, these sales are diverse and spanned to our entire business, included both new named business and expansion of existing wallet share with current clients.

These events include the following highlights: A $17 billion alternative manager designed to outsource for the first time along with two new start-up alternative managers; continued growth of new business wins and cross-sells within the private equity market segment; multiple new family office wins and an expanding solution footprint at several existing clients; advance in our traditional market units across all product lines, including two middle officers mandates, multiple collective trust and an expansion of solutions with several clients.

Our total net business sales events for 2018 were just over $50 million, which was a record and our largest sales year-to-date and approximately $10 million higher than our total events in 2017. We feel this continues to validate the market acceptance and strength of our strategy and solutions.

As we entered 2019, our focus will be on, one, continued execution of our sales and growth opportunities; two, continued expansion of our platform and to the front office, supporting our clients and investors; three, continued expansion of our emerging solutions and platforms, including data and analytics and global and regulatory compliance; four, leveraging our platforms and solutions to support growth opportunities in other market segments. We will continue to invest in our platforms and key solutions to support our growth momentum, while also managing overall expenses diligently. We are focused on driving scale and efficiency as we grow. Our pipeline remains strong and I'm optimistic of the continuing growth opportunities.

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

Operator

Thank you. (Operator Instructions) We'll go to Robert Lee with KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great. Thanks again, Steve. Could you just -- I mean to start, maybe just repeat the new -- the net new business in the quarter that you mentioned, I think I kind of missed some of it?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Sure. Net new business in the quarter was $12.9 million in recurring revenues. The recontracts of existing clients was $13.9 million.

Robert Lee -- KBW -- Analyst

Okay, great. And then, can you maybe talk a little bit about kind of the competitive environment? I mean, some of the -- and clearly you're not in the custody business, thank God, but some of the large custody banks have talked about the pricing -- pushback they're getting from lot of their clients as their clients clearly struggle on the revenue front. Can you maybe talk about what you're seeing there? Kind of, how you are reacting to it? And I mean clearly it's not keeping you from generating new sales, but just kind of recontracting, but maybe just give us a sense on how you're positioning yourself in that kind of environment?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Yeah. Well, I mean, it's certainly out there and there is -- this is a competitive market. There's a lot of other competitors out there. We typically don't compete on price, that's not to say that we don't have financial prospects that come to us and when you get into a competitive bid. We are typically not the low prices -- low cost provider, we're usually not the highest, but we do -- we buy our premium and I think that justify with the platform and solutions we built.

Quite frankly, with the fee compression that's coming from the managers now working its way down to their partners, including us. I still view that as an opportunity, because these requiring managers, and I said this before, to rethink their business model as they have to rescale and relook at their business. There is other areas of their business, whether either their middle office, their front office, their support groups around their trading, their support groups around the middle office that they now have to look at a different way of doing versus doing inside their firm and I think it provides plenty of opportunity for us to add more solutions and to add to our platform and to expand our wallet share with the client. So to me, I view it as a silver lining and that adds opportunity for us.

Robert Lee -- KBW -- Analyst

Great. Thank you.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Sure.

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

(Operator Instructions) We'll go back to Chris Shutler with William Blair. Please go ahead.

Chris Shutler -- William Blair & Company -- Analyst

Hi, Steve. Can we just get the backlog numbers and then the timeline?

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Sure. Backlog is about $43.4 million, right now, and I'd say expect that to fund within the next 12 -- the majority of it, 12 to 14 months.

Chris Shutler -- William Blair & Company -- Analyst

All right. Thanks.

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Sure.

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

(Operator Instructions) We have no one queuing up. So, please continue.

Alfred West -- Chairman and Chief Executive Officer

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

Wayne Withrow -- Executive Vice President, Independent Advisor Solutions by SEI

Thanks, Al. 2018 was really a tale of two cities with the advisor segment achieving good growth during the year until the market turned down in the fourth quarter. However, despite the challenges of the fourth quarter, we still achieved record revenues and profits for the year. More importantly, we are closing in on completion of our migration to the SEI Wealth Platform.

Fourth quarter revenues totaled over $97 million. These revenues were down only slightly from our revenues in the fourth quarter of last year. The impact of positive net cash flow was more than offset by negative capital markets. Expenses were down in the fourth quarter versus last year's fourth quarter. As compared to third quarter, expenses were up only slightly as increases in some expense categories were offset by declines in variable sales compensation.

Our profits were flat compared to last year's fourth quarter, but were down $5 million in the third quarter, primarily due to capital market declines.

Assets under management were $61.3 billion at December 31st, a decrease of $3 billion from December 31, 2017. The decrease was driven by negative capital markets, only partially offset by net positive cash flow. While the net cash flow was positive for the year, we did experience $650 million in net negative cash flow in the fourth quarter as market volatility impacted investor behavior. We also saw the shift from riskier assets to cash during the quarter.

During the quarter, we recruited 87 new advisors, bringing our total for the year to 417. Our pipeline of new advisors remains active.

For 2019, we will concentrate on three main areas. First, we are focused on completion of the rollout of the SEI Wealth Platform. In 2018, we converted 3,500 firms and over $27 billion in assets. We now have over 90% of our AUM migrated onto the platform and should have all of our clients in the platform by the end of the first quarter.

Second, as we complete the technical migration, we will be focusing more on having advisors adopt all of the functionality of the SEI Wealth Platform, allowing them to capitalize on its capabilities and strengthening our relationship with them.

Third, we will reexamine our go-to-market strategy, as we shift the focus of our sales force away from migration and back to pure growth.

In summary, 2018 was negatively influenced by the market volatility of the fourth quarter, but on a positive note we continue solid progress in our migration to the SEI Wealth Platform. We look forward to completion of our migration and remain confident in the long-term opportunity in front of us.

I welcome any questions you may have.

Operator

(Operator Instructions) We'll go to Chris Donat with Sandler O'Neill. Please go ahead.

Chris Donat -- Sandler O'Neill -- Analyst

Hey, good afternoon, Wayne. Thanks for taking my question.

Wayne Withrow -- Executive Vice President, Independent Advisor Solutions by SEI

Yes, Chris.

Chris Donat -- Sandler O'Neill -- Analyst

Was just wondering with the -- you talked about the movement from risky assets to cash and it does look like as we calculate your fee rate that it ticked down a basis point or so. Just wondering if you expect any implications for first quarter 2019 about -- and investors having more cash or have you seen the cash kind of revert back into the market as conditions have improved in January?

Wayne Withrow -- Executive Vice President, Independent Advisor Solutions by SEI

I think basically the more volatility move people out of the riskier asset classes, let's say most investors still have that hangover from the fourth quarter and it's probably a little bit early to predict what will happen. But -- and while I can't say it's the first quarter or second quarter or whatever, I would say that the good news is, the balances in the liquidity will eventually return, hopefully, to higher fee asset class.

Chris Donat -- Sandler O'Neill -- Analyst

Okay. But we might see a little -- I'm putting words in your mouth, I recognize, but you might a little pressure on fees in coming quarters, if you do have people sitting in cash for a while?

Wayne Withrow -- Executive Vice President, Independent Advisor Solutions by SEI

I guess, it's kind of hard to say really. It depends upon what the mix is.

Chris Donat -- Sandler O'Neill -- Analyst

Okay. Just want to make sure I understand the dynamic there. Thanks.

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

We have a question from Robert Lee with KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great, thanks. Good afternoon, Wayne.

Wayne Withrow -- Executive Vice President, Independent Advisor Solutions by SEI

Hi, Rob.

Robert Lee -- KBW -- Analyst

Hi. Just with getting close to the point where everyone will be on SWP, I guess two questions in this. First, are there any kind of decommissioning, savings or something that you kind of realized from being completely off kind of the legacy platform in your channel that you no longer have to bear? And I guess to the extent -- and you kind of suggested they are going to kind of shift back toward kind of a growth putting, but maybe it's early days, but given the increased functionality of the platform and therefore increased sources of revenue, I mean -- have you -- any sense early days that you're starting to see, at least some advisors start to use the functionality and starting to see some uptake of, kind of, ancillary fees from the platform?

Wayne Withrow -- Executive Vice President, Independent Advisor Solutions by SEI

Yes, Rob. Really two questions. I think as we shift to the platform, as we lose some of the migration expense associated with the platform, I think we will save in that area. But how we choose to redeploy that whether we try to reinvest asset growth or not is the decision we continually make. In terms of cross-selling other asset classes to them. I think as we shifted the sales force away from, what I would call, basically handholding and helping the clients through the migration process, they could focus more on going out and gaining better growth in SEI assets and non-SEI assets.

Robert Lee -- KBW -- Analyst

Okay. Great. Thank you.

Operator

(Operator Instructions) We have no additional questions. So, please continue.

Alfred West -- Chairman and Chief Executive Officer

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

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

Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the fourth quarter of 2018, as well as the entire year. Fourth quarter 2018 revenues of $81 million are 7% lower than the fourth quarter 2017 revenues. This was due to lower capital markets and the inclusion of a one-time performance related fee of $3.4 million in 2017. Market appreciation and net client fundings positively impacted revenue on a year-over-year basis.

Full year revenues of $333 million increased 3% compared to 2017.

Operating profits for the fourth quarter 2018 were $40 million, 7% lower than the fourth quarter of 2017 due to the previously mentioned items offset slightly by lower operating expenses. 2018 full year profits were $169.8 million and increased 6% compared to 2017. Net client fundings, higher capital markets and lower operating expenses contributed to this increase. Operating margins for the full year of 2018 were 51%.

Net asset events for the quarter were negative $950 million. Gross sales were $1.05 billion, our client losses totaled $2 billion. New clients were across multiple markets, including US endowments and foundations, UK Fiduciary Management and US hospitals.

Total new client signings for 2018 was $3.6 billion, that represents $11.9 million of revenue. The client loss number for the quarter was driven by US corporate relationship that got merged into a larger organization, continued corporate DB curtailments and investors that decided to offer a complete passive management implementation. The unfunded client backlog at year end was $750 million.

Quarter-end asset balances of $84.4 billion, reflect a $10.1 billion decrease versus the fourth quarter of 2017. This was primarily due to fourth quarter's negative capital market performance. Our focus in 2019 will be to continue to diversify new business growth out of the US defined benefit market and into endowments and foundations, healthcare, non-US DB Fiduciary Management, government and unions, defined contribution, and entering new global markets. We continue to believe that market volatility will be a positive catalyst for institutional investors to reconsider about the management process.

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

Operator

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

Robert Lee -- KBW -- Analyst

Good afternoon.

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

Hi, Robert.

Robert Lee -- KBW -- Analyst

Hey. How you're doing? Just kind of curious, I mean given some of the net new business challenges certainly, just recently, the -- I mean, how do you kind of think about maintaining the existing kind of profitability in the segment? And then there are some (inaudible) obviously ensures fee pressure on top of that. The segment has been pretty steady around 50%, give or take, quarter-to-quarter for a while now, is there anything you kind of see in terms of other new investment you have to make in distribution or infrastructure coupled with kind of shifting fees that -- things -- makes you think that's not sustainable or should be sustainable, how should we view that going forward?

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

Well, we think we've made all the investments in infrastructure and distribution, whether that's in the US or our EMEA and Asia business, so we think we're good there. Your point is dead-on and the fact that what might roll off might be a little bit more profitable than what rolls on in. But we saw that phenomenon actually switch a little bit this year because of the fact that we did really well in foundations and endowments. Those assets are growing. People are donating to foundations and endowments and their consumption rate of alternative investments is much higher than defined benefit plans and we have a much higher yield on alternative investments than we do on public markets.

So while I can't sit here and say this business will always be a 51% profit margin business, I think we're going to see some downward pressure just on some reality is and we saw split down to 49.4% in the fourth quarter. I am confident that's it's high 40% profit margin business and, again, we'll make the right investments and if we have to go a little bit below that to get into accretive markets, we will make those decisions, so we can strategically position the business.

Robert Lee -- KBW -- Analyst

Great. Thank you.

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

Thank you.

Operator

(Operator Instructions) And we have no questions. So, please continue.

Alfred West -- Chairman and Chief Executive Officer

Thank you, Paul. I'd like to now have Kathy Heilig to give you a few companywide statistics. Kathy?

Kathy Heilig -- Chief Accounting Officer and Controller

Thanks, Al. Good afternoon, everyone. I have some additional corporate information regarding this quarter. Our fourth quarter 2018 cash flow from operations was $170.5 million or $1.07 per share, bringing year-to-date cash flow from operations to $588.4 million or $3.65 per share. Fourth quarter free cash flow was $152.2 million, bringing year-to-date free cash flow to $485.1 million.

In the fourth quarter, we had capital expenditures, excluding capitalized software, of $7.4 million, that did include $4.9 million for facility expansion. Our year-to-date capital expenditures, excluding capitalized software, were $29.1 million, which included $9.8 million for facility. In 2019, we expect capital expenditures to be approximately 55 million, which would include about $33 million related to our facility expansion.

We already mentioned that the tax rate was 19.2% for the quarter and the annual tax rate was 17.6%.

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 financial information presented in our release and on this call is unaudited. In some cases, you can identify forward-looking information statements by terminologies such as may, will, expect, believe, continue or appear. 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 the conversion events, our ability to capitalize on new business opportunities and the timing of these events, our strategies for the execution of our business in existing markets and the degree to which market condition create opportunities for us. Those market conditions that will create opportunities for us to grow our business, the strength of our pipeline and our ability to execute on and the success of the 2019 strategic objectives articulated on this call.

You should not place undue reliance on our forward-looking statements as they are based on current beliefs and expectations of our management and subject to significant risks and uncertainties many of which are beyond our control or subject to change. Although we believe these functions 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 our Risk Factors section of our Annual Report on Form 10-K for the year ending December 31, 2017, that was filed with the Securities and Exchange Commission.

Now, please feel free to ask any other questions that you may have.

Operator

Thank you. We have a question from the line of Sam Hoffman with Lincoln Square. Please go ahead.

Sam Hoffman -- Lincoln Square -- Analyst

My question is whether your objectives for the expense budget growth rates for 2019 given the revenue growth is probably going to be challenging this year and whether the main areas that you feel you need to invest in terms of expense and other areas where you're going to be focused on cost control?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

Hi, Sam. This is Dennis. Probably if you're listening to prior call, you know we're not all that real happy about predicting the future from an expense standpoint. I would just say that factor which Steve talked about, particularly in his segments and we are looking at '19 as a really tight year to manage expenses. I'll use Steve's word diligently. So that's what you can expect and I think you saw kind of third to fourth and you thing that those two unusual items were pretty -- it's kind of an indication of how we're going about that and the tightness of which we're managing expenses to the areas that we're going to continue to invest and certainly are to meet the commitments we've made to our clients and to fulfill what we believe are the opportunities in the market strategically. So technology expenditures will continue. It looks running the -- these organizations will work closely with the business units to make sure there's clear priorities and we're only spending on things that are absolute priorities. They are going to help us in the future around that and so managing everything else around the company (technical difficulty)

Sam Hoffman -- Lincoln Square -- Analyst

Terrific. Thanks, again, for taking my question.

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

You're welcome.

Operator

We'll go next to Chris Donat with Sandler O'Neill. Please go ahead.

Chris Donat -- Sandler O'Neill -- Analyst

Yeah. I'm going to just twist the prior question a little bit. I saw in the press release that you're guiding to stock-based comp of $22.6 million. I guess on that line specifically, are there really any puts and takes that -- or what are the factors that would cause that stock-based comps to be higher or lower meaningfully in '19?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

As you know, our -- divesting of our options is driven by us hitting certain pre-tax earnings targets, particularly the options that were granted the past two years and prior to that it's an after-tax earnings target. So how we amortize the cost and associate with those options is based on our estimates of when we think we'll hit those targets. So, the only real variable that would change those -- that expensing is a change in that timing expectations.

Chris Donat -- Sandler O'Neill -- Analyst

Okay.

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

We had that -- we had that occur was last year, if you remember fourth quarter, we had a little bit of that through third, fourth quarter in '18, but that's our only real variable relative to options.

Chris Donat -- Sandler O'Neill -- Analyst

Okay. And then just thinking about compensation more broadly, it's still a case that if you had large contract wins often you'll see sales people get -- you'd accrue some compensation for things like that, trying to think what swing factors you might see in compensation?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

The only change there though, Chris, remember from last year, the new accounting rule that went into place in terms of some of that -- most of that getting deferred.

Chris Donat -- Sandler O'Neill -- Analyst

All right. Okay.

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

And expensed in over the life of the contract or the life of the relationship, even crazier to that and estimated life, so you would -- you wouldn't see as much of that like you would have in, let's say, 2016 or 2017.

Chris Donat -- Sandler O'Neill -- Analyst

Okay. All right. Thanks, Dennis.

Operator

And a question from the line of Chris Shutler with William Blair. Please go ahead.

Chris Shutler -- William Blair & Company -- Analyst

Hi. Thanks for taking my follow-up. Let's say, the $3.7 million recurring revenue from sales events that occurred in the quarter, can you break that down by segment. I think you said $3.5 million in private banks, $12.9 million in IMS, what were advisors and institutional?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

There were negative, because their cash flows were negative.

Chris Shutler -- William Blair & Company -- Analyst

Yes, the first two numbers were correct, right?

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

Banking was essentially flat in terms of net recurring, because a lot of those -- the fact that we -- I'd say -- being a little conservative by including in our net number that one client it's in transition, we have upside opportunity, but in the meantime they're going to -- there's a good chance they are going to transition business away from us. And then the other two advisor and institutional, there were negative cash flow. So the total numbers really kind of make it simple, IMS less kind of the advisor and institutional cash flow number with banking was relatively flat.

Chris Shutler -- William Blair & Company -- Analyst

Okay. Got it. Thank you.

Operator

(Operator Instructions) We have no questions coming. So, please continue.

Alfred West -- Chairman and Chief Executive Officer

So, ladies and gentlemen, these are difficult times and with despite the volatility, I'm encouraged by the direction each of our business lines has taken and the progress they are making. I believe this investments we are making that will help us benefit from all the changes taking place in our industry. Have a good day, and thank you for attending our call.

Operator

Thank you. And, ladies and gentlemen, this will conclude our teleconference for today. We thank you for using AT&T Executive Teleconference Service, and you may now disconnect.

Duration: 57 minutes

Call participants:

Alfred West -- Chairman and Chief Executive Officer

Dennis McGonigle -- Executive Vice President and Chief Financial Officer

Chris Shutler -- William Blair & Company -- Analyst

Steve Meyer -- Executive Vice President and Head of Global Wealth Management Services

Chris Donat -- Sandler O'Neill -- Analyst

Chris Shutler -- William Blair & Company -- Analyst

Robert Lee -- KBW -- Analyst

Glenn Greene -- Oppenheimer -- Analyst

Sam Hoffman -- Lincoln Square -- Analyst

Wayne Withrow -- Executive Vice President, Independent Advisor Solutions by SEI

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

Kathy Heilig -- Chief Accounting Officer and Controller

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