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SEI Investments Company (NASDAQ:SEIC)
Q3 2019 Earnings Call
Oct 23, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Third Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

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

Alfred P. 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 third quarter 2019. I'll then turn it over to Dennis to cover LSV and the investment in new business segment. After that, each of the business segment leaders will comment on the results for their segments with one exception. Since Wayne Withrow is on vacation, Steve Onofrio, Head of Sales and Service for the Investment Advisors Segment will report on that business. Then finally, Kathy Heilig will provide you some important companywide statistics. As usual, we will field questions at the end of each report.

So let me start with the third quarter of 2019. Third quarter earnings increased by 3% from a year ago. Diluted earnings per share for the third quarter of $0.86 represents an 8% increase from the $0.80 per share reported for the third quarter of 2018. We also reported a 2% increase in revenue from third quarter 2018 to third quarter 2019.

Also during the third quarter of 2019, our non-cash asset balance under management increased by $1 billion. At the same time, LSV assets under management decreased by $3.3 billion. These increases in AUM were primarily due to market appreciation while the decreases were caused by negative cash flow. A milestone was reached at the end of the quarter, SEI reached the $1 trillion mark in total assets under management, assets under administration and advised assets.

In addition, during the third quarter of 2019, we repurchased approximately 1.4 million shares of SEI stock at an average price of $58.12 per share. That translates to $81.4 million of stock repurchases during the quarter.

Finally, in the third quarter, as part of the investments we make to create growth, we capitalized approximately $7.3 million of the SWP development and amortized approximately $12 million of previously capitalized SWP and IMS development.

Third quarter 2019 sales events, net of client losses totaled approximately $42.7 million and are expected to generate net annualized recurring revenues of approximately $33.2 million. We are satisfied with our third quarter sales results in our technology and operational businesses, and we are becoming bullish about our future. While slow contract negotiations in this tightly regulated environment is still considered a headwind, we are becoming less troubled as our active pipelines grow. Our asset management businesses continue to face with headwinds, while our advisor business began to see positive flows during the quarter. The institutional investment business with US corporate DB plans continues to be a challenge.

Now all that being said, there are bright spots. One is that across the company, we have fully engaged sales teams and a lot of activity; two, IMS sales continue to be strong; three, the advisor -- I'm sorry, the migration of advisors to SWP is now behind us. This allows our full attention to be on growth. And now four, we signed significant new SWP business. And fifth and last, we are moving forward with some of our promising new initiatives. Our market unit heads will speak to the bright spots and their specific sales activities.

This concludes my formal remarks, so I'll now turn it over to 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 segment heads. Dennis?

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

Thanks, Al. Good afternoon, everyone. I will cover the third quarter results for the investments in new business segment and discuss the results of LSV Asset Management. During the third quarter of 2019, the investments in new business segment continued its focus on the ultrahigh net worth investor segment through our private wealth management group and additional research initiatives, including the digital services and hosting opportunity and the modularization of larger technology platforms and the stand-alone components for the wealth management and investment processing space.

During the quarter, the investments in new business segment incurred a loss of $4.5 million, which compared to a loss of $2.9 million during the third quarter of 2018. This increase in loss reflects the growth of our private wealth management business more than offset by other areas of investment.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the third quarter. LSV contributed $37.6 million in income to SEI during the quarter. This compares to a contribution of $41.7 million in income during the third quarter of 2018. Assets during the third quarter were down approximately $3.3 billion. LSV experienced net negative cash flow during the quarter of approximately $3.5 billion, which was offset by market appreciation. Revenue for LSV was approximately $121.2 million and performance fees were minimal. Our effective tax rate for the quarter was 18.9%. And I will now take any questions.

Questions and Answers:

Operator

[Operator Instructions] And we actually have no lines queuing up at this time.

Alfred P. West -- Chairman and Chief Executive Officer

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

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

Thank you, Al. For the third quarter of 2019, revenues for the segment totaled $117.3 million, which is down 1% as compared to our revenue in the third quarter of 2018. This year-over-year revenue decrease was due primarily to some of the client losses previously announced, along with these decreased [Phonetic] revenue in our asset management business.

Our quarterly profit for the segment of $6.5 million increased $4.5 million as compared to the third quarter of 2018. Our third quarter profit is down $1.8 million as compared to our profit in the second quarter of 2019 due mainly to two items. As a sign of maturity, our development work has moved from larger items to maintenance and product enhancements. We expense this type of work as it occurs and do not capitalize it. Second, in Q3, we had the effect of mid-year compensation adjustments, which contributed to our expense increase in Q3 compared to Q2. We continue to manage expenses tightly but with an eye in supporting the growth momentum we are building in new events.

And turning to sales activity for the quarter, we signed approximately $18.8 million in net sales events. Additionally, we had $7.3 million in onetime events. These events included the following: The two deals previously discussed on our second quarter call. As a reminder, they are CIBC US private wealth management, who is a leading North American financial institution, its US private wealth management business offers investment management, wealth strategies and legacy planning solutions. The second was a longtime client law firm Dorsey & Whitney. During the quarter, we also signed two additional clients to SWP. Both our existing Trust 3000 clients, which are scheduled to migrate their existing books of business to the SEI Wealth Platform in the second half of 2020.

Additionally, as you might have seen in the press, we are pleased to announce that after the quarter end, but before today's call, we entered into an agreement with the Principal Financial Group to provide our Trust platform to service their acquired Wells Fargo institutional requirement and Trust business. The deal is not included in our announced events for this quarter and we will work over this quarter to finalize the contract. This deal is significant for us not only from a financial standpoint but also Principal as a market leader and we are encouraged about the opportunity to expand our relationship from here.

And turning to an update on our TRUST 3000 business. In the third quarter, we successfully converted three TRUST 3000 clients to the SEI Wealth Platform. They were BMO Wealth Management, Rockland Trust Company and Security and Trust company. All three conversions went very well and demonstrated our ability to increasingly scale our implementation strategy as well as prove our value proposition against the increasingly aggressive competition. We also recontracted one TRUST client with the contract term of 5 years. As an update on our backlog, our total signed, but not installed backlog is approximately $48.6 million in net new recurring revenue, not including the Principal business mentioned previously.

From an asset management standpoint, total assets under management ended the period at $22.6 billion representing flat quarter-over-quarter and slightly lower year-over-year assets. We did see negative cash flows of $106 million, however, we continue to build a strong global pipeline in our AMD business.

Turning to a couple of client updates. First an update on the Department of Interior business that we previously disclosed will be leaving us. After several rescheduled conversion date, this business did reconvert [Phonetic] offer TRUST platform at the end of the third quarter. The full effect of that loss will be in our fourth quarter numbers and as mentioned several times before, we will need to navigate this headwind as we continue to gain momentum and grow our business.

Also during the quarter, we worked with Wells Fargo on a number of initiatives. As mentioned previously, Wells has recently sold their institutional retirement and TRUST business. Also as disclosed in the past, Wells continues to have other important and impressing technology projects and have recently had the appointment of a new CEO. In light of the need to change priorities, Wells Fargo has informed us that it must pause the scheduled SWP implementation in order to redirect resources to other more immediate technology leads, including the IRT conversion. SEI is working closely with Wells Fargo on these other priorities and we will be providing Wells with professional service support around these initiatives.

Currently no dates have been finalized for when the SWP implementation will restart and we will work with Wells in their current priorities in the interim. These recent developments have demonstrated to us that there are factors that have significant influence over Wells expense and business priorities that are not within our control. Consequently, we cannot reasonably estimate the timing of implementation. Accordingly, we will not be giving updates on new conversion dates until Wells finalizes them. More importantly, we will focus on the momentum of the business is generating both the US and UK and focus on implementing our current growing backlog, including the conversion of the IRT business, which will result in a new client to SEI to Principal Financial Group.

In closing, I would like to highlight our momentum. As you can see by our backlog of signed, yet to be installed clients combined with our market activity, we feel resurgence of growth momentum. We have an active pipeline across the US and UK and look to continue that momentum into 2020. We feel well positioned to grow our private banking business and feel we have great opportunity offering the power and capabilities of all of SEI's Technology and Processing platforms across the wealth management market. We are excited for the future.

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

Operator

[Operator Instructions] We do 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, Head of Global Wealth Management Services

Good afternoon, Rob.

Robert Lee -- KBW -- Analyst

Quick question. So just to make sure I understand kind of the moving pieces. The $18.8 million of net sales, I mean, if I remember correctly when you had talked about CIBC and the other transaction in the last earnings call. That was about $16 odd million of recurring sales, is that $18.8 million kind of include that $16 million, the new and then you're also backing out Wells from that?

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

No. So you're right, up until the Wells point. So if you remember, we announced CIBC, you heard I mentioned CIBC at the end of the second quarter call, we did not include that in those events. They are included in Q3 events, the $18.8 million. Wells has no impact on that net sales number. They are still a client, and we still have them in the backlog. What is -- that is a net number though that $18.8 million, so it takes in the sales, the gross sales we had minus any net downs or losses in clients for the quarter as normally we announced.

Robert Lee -- KBW -- Analyst

And did I have it correct that the Wells and the other one were about $16 million recurring, you had announced them in the last quarter?

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

You keep mentioning Wells, I think, if I'm not -- if I'm hearing --

Robert Lee -- KBW -- Analyst

CIBC, sorry.

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

CIBC. Yeah, CIBC is the other one we announced last quarter at $16.2 million [Phonetic]. And then we had other events this quarter. There is other events plus CIBC. And I believe it was Dorsey, minus any net downs or losses is what results in the net $18.8 million for the quarter.

Robert Lee -- KBW -- Analyst

Okay. Great. Thanks for taking my question.

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

Sure, no problem.

Operator

Thank you. And for our next question, we'll go to Chris Donat at Sandler O'Neill. Please go ahead.

Christopher Donat -- Sandler O'Neill -- Analyst

Hey, good afternoon, Steve.

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

Good afternoon, Chris.

Christopher Donat -- Sandler O'Neill -- Analyst

Just on the Department of Interior contract, can you remind us what the revenue -- the expected revenue hit should be in the fourth quarter and is there are any expense offset you expect for fourth quarter or over time with that?

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

Well, Chris, not to be smart, but we never really told you the amount. We don't really talk to specific amount. I think there was speculation on the amount. But it is a larger amount, it was a very profitable account. And again, that will all come out in Q4, but we don't specifically tie revenue to individual clients.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay. And then just on the expense side, there is -- should I assume that there is -- will there be any expense change related to this or not really?

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

A very little expense change.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay. All right.

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

Any of those expense savings we've been working on all along the way. So, very little.

Operator

Thank you. And we'll move now to Chris Shutler at William Blair. Please go ahead.

Christopher Shutler -- William Blair -- Analyst

Hi, Steve, how are you?

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

Good. How are you, Chris?

Christopher Shutler -- William Blair -- Analyst

Good. So let's see, the -- I wanted to talk about the new conversions that happened in the quarter. So BMO and the other two. How should we think about the incremental revenue that we will see in Q4 from the combination of those clients relative to the current quarter, to Q3?

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

Well, I'd say two things. One, keep in mind on TRUST, Chris, typically there -- we only announce in the events, we announce them. We only announce the net up from the SWP pricing from the TRUST 3000. Two, I would say the net uptick in revenue from them and others will be somewhat muted by the Department of Interior loss and other losses. So it will probably get lost a little bit in the shuffle of the revenue decreases versus the revenue increases.

Christopher Shutler -- William Blair -- Analyst

Okay. And then the -- I know it's tough to isolate clients, but like Wells is the fact that they are kind of putting a pause on things, how does that impact the P&L?

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

Well, Wells is still an active client and a large client for TRUST 3000 and will continue to be. And also we will continue as I mentioned in the script, we will continue to work with them on a number of initiatives that we can -- currently are working on with them, but also some new initiatives on some of the new projects they have. So I would expect some of our onetimes and implies to continue.

Christopher Shutler -- William Blair -- Analyst

Okay. And then lastly, TRUST 3000 attrition and net downs, you mentioned a couple of times. Could you maybe give any more specifics on what happened in the quarter there if anything?

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

We did have one loss of TRUST 3000 client that was netted out of our events and we also had one recontract for 5 years that I mentioned.

Christopher Shutler -- William Blair -- Analyst

And now in [Phonetic] the net down?

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

Well, there was a net down of revenue from the lost clients that we netted against our gross event, but that is in that net $18.8 million.

Christopher Shutler -- William Blair -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] We do have a follow up from Robert Lee at KBW. Please excuse me, no, we have no one in queue at this time now.

Alfred P. West -- Chairman and Chief Executive Officer

Thank you, Steve. And our next segment today is Investment Managers and Steve Meyer will also discuss this segment. Steve?

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

Great. Thanks again, Al. And turning to Investment Managers. For the third quarter of 2019, revenues for the segment totaled $112.2 million, which was $10.9 million or 10.8% higher as compared to our revenue in the third quarter of 2018. This year-over-year revenue increase was due primarily to net new client fundings and existing client expansion.

Our quarterly profit for the segment of $40.3 million was $4.3 million or 12% higher as compared to the third quarter of 2018. Higher profits were primarily driven by an increase in revenue offset by a smaller increase in personnel expense and investments. Third-party asset balances at the end of the third quarter of 2019 were $638 billion or 5% higher as compared to the asset balances at the end of the second quarter of 2019. This was due to an increase in assets due to net new client fundings of $21.1 billion, as well as market appreciation of $9.8 billion.

And turning to market activity. During the third quarter of 2019, we had a very strong sales quarter with net new business events totaling $15.1 million in recurring revenues. Encouragingly, these sales were diverse and spanned our entire business and included both new-name business and expansion of wallet share with current clients.

These events included the following highlights: In our alternative market unit, in the third quarter, we converted a $16 billion debt the workshop from a competitor and launched several new multi-billion dollar funds to our growing private equity business. In our traditional market units, we continue to have success across all product lines and particularly in collective investment trusts. We are also pleased to announce a mandate one in our '40 Act turnkey series Trust from $1 trillion global manager who is establishing a family of mutual funds. SEI Archway had new sales events in both the single-family office and multi-family office market segments.

At the end of the third quarter, our backlog of announced, but not yet converted business was $39.6 million, an increase of $1.2 million over the end of the second quarter of 2019. From a market standpoint, we remain excited at the growth opportunities ahead of us. Our vision is to provide the leading integrated platform covering the front, middle and back office for wealth managers. We feel the investments we have made in our technology and platforms have not only differentiated us, but they are resonating extremely well in the market.

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

Operator

[Operator Instructions] We go to Chris Shutler at William Blair. Please go ahead.

Christopher Shutler -- William Blair -- Analyst

All right. The expenses in the quarter, Steve, look like they bumped up $3 million quarter-over-quarter, just what was that related to how much of that was performance related given the strong sales?

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

Well, keep in mind, Chris, so sales we amortize, so it's less of the sales compensation, if that was your question. The $3 million was primarily a little bit like the private banking market, we had the impact of mid-year market compensation adjustments, we also had an increase in investments and an increase of -- obviously, we're bringing in business faster. So we're obviously hiring and adding people.

Christopher Shutler -- William Blair -- Analyst

So we should look at the -- I guess, we should look at that third quarter number as a jumping-off point for subsequent quarters?

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

I wouldn't say that necessarily. I would say, depending on where we stick with investments and we continue to look to scale the business. I think I've said this before, it's tough to look at a quarter-over-quarter look from -- especially from an expense standpoint. As you can see, we're in a pretty good sales mode and I want to keep that sales mode up and certainly adding the expense we have to add to support that revenue. So depending on quarter-over-quarter, that will impact it.

Christopher Shutler -- William Blair -- Analyst

Okay. And then just I wanted to also ask about the trillion dollar manager. Could you just explain that a little bit more, what exactly you want and who this client is?

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

Well, certainly we can't mention the name, but it's a very large manager and similar to what we've looked at with other business, we think this is an initial product that they are looking to start. They have quite a bit of funding to start a range of mutual funds that they have been looking for and they're asking us to provide the full service full front, middle, back-office and we are looking at this as an opportunity to starting new relationship and expand from there.

Christopher Shutler -- William Blair -- Analyst

All right. Thank you.

Operator

At this time, there are no more questions in queue. Please continue.

Alfred P. West -- Chairman and Chief Executive Officer

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

Stephen M. Onofrio -- Senior Vice President, Sales and Service, Independent Advisor Solutions by SEI

Thanks, Al. In the third quarter of 2019, we continue to build sales momentum after the completion of the migration onto the SEI Wealth Platform. We also continued our focus on value-added technology development and client technology adoption. Third quarter revenues totaled $103 million, up only slightly from the third quarter of last year. These results were primarily driven by market appreciation, offset in part by negative cash flow in the first six months of this year. Expenses were down over 3% from last year's third quarter, savings were realized in most categories with technology leading the way. We did have increased direct cost primarily tied to our managed accounts growth, but other savings more than offset these increases.

Our profits increased $2.2 million from last year's third quarter due to cost savings, assets under management were essentially flat from the third quarter of 2018 with market appreciation being offset by negative cash flow. During the third quarter, our net cash flow was a positive $70 million. We are encouraged with our quarterly progress as we regain sales traction. We recruited 75 new advisors during the quarter and our pipeline of new advisors remains active.

In summary, during the third quarter, we posted a good profit results and while cash flow is short of where it needs to be, it is trending in the right direction. We are focused on reaping the benefits of the SEI Wealth Platform now that we are fully migrated. I welcome any questions you may have.

Operator

[Operator Instructions] We first go to Glenn Greene at Oppenheimer. Please go ahead.

Glenn Greene -- Oppenheimer -- Analyst

Yeah. Hey, good afternoon. Could you just give us any color on if you're getting any traction, given that you've now converted to SWP in terms of new pools of assets or higher -- bigger advisors or just sort of a different pool of advisors that might be being attractive, it's not really showing up yet in the flows, but it give us a sense for what you're seeing in terms of business activity.

Stephen M. Onofrio -- Senior Vice President, Sales and Service, Independent Advisor Solutions by SEI

Well, whether they would be a larger advisors or a larger share of an advisor's book. The expanded services of the Wealth platform, include the ability to consolidate advisors on one platform. I think it would be a good option to a broader segment of advisors as we move forward.

Glenn Greene -- Oppenheimer -- Analyst

Okay. Thank you.

Operator

And next we'll go to Robert Lee at KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great. Thanks for taking my question. Just also give me a little bit of color on the flows. I mean, you mentioned kind of feel like you're seeing some benefit from reengagement of sales. But are you seeing our advisors kind of starting to reengage more of their clients. I mean, kind of lack of better way of putting in any signs kind of rerisking or whatnot? Or is this really just a function of more sales, I mean, out there, more focused on generated -- generate. Just trying to get a sense of kind of the underlying momentum?

Stephen M. Onofrio -- Senior Vice President, Sales and Service, Independent Advisor Solutions by SEI

I don't think it's necessary related to the advisors clients rerisking. I think we're encouraged by the sales that we have in the short term, we're headed in the right direction. It's difficult to predict going forward, but we have seen a correlation between the time that we spend with the advisors helping them to adopt the technology, the new wealth platform technology after the migration and the ease in doing business with SEI, so we're seeing a correlation in asset growth based on that work that we've been doing.

Robert Lee -- KBW -- Analyst

And maybe just one follow-up, I think Wayne -- Wayne has definitely talked in the past about, you've been seeing good demand for your -- I guess your ETF allocation product, which I assume has somewhat lower fee structure compared to more traditional products. Is that still the case and, I guess, to some degree, maybe been a little bit surprise that the fee rate, if you just look at revenue to average AUM has held up pretty well, despite kind of some of the underlying shifts. So I don't know if there is -- are we making too much of this kind of movement to the ETF kind of allocation product or kind of what's helping support kind of fee rate where it is?

Stephen M. Onofrio -- Senior Vice President, Sales and Service, Independent Advisor Solutions by SEI

Well, I think you're right, I mean, fee pressure is real in the industry and we've only had a slight impact to ours, and I do believe that the result of the continued growth of our ETF program. It's also the growth in our mutual fund models that offer the option of our large cap passive fund. But I think the real strength of SEI is the fact that we have a fully comprehensive SME program, a comprehensive mutual fund program, we offered in taxable and tax managed. And when you look at in the advisors business, they have a diverse set of clients that use all of those products. So the blended fee that we receive is across the entire product line, which we think is more resilient to market pressure.

Robert Lee -- KBW -- Analyst

Okay. Great. Thanks for taking my question.

Operator

And at this time we have no further questions in queue.

Alfred P. West -- Chairman and Chief Executive Officer

Thank you. Thanks, Steve. Our final segment today is the Institutional Investors segment. Paul Klauder will report on this segment. Paul?

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

Thanks Al. Good afternoon, everyone. I'm going to discuss the financial results for the third quarter of 2019. Third quarter revenues of $80.3 million decreased 4% compared to the third quarter of 2018. Third quarter operating profits of $43.1 million was flat as compared to the third quarter of 2018. Operating margin for the quarter was 53.6%. Revenues were impacted by negative client fundings, client fee reductions associated with successful rebids and currency impact versus the third quarter of 2018.

Operating profits were positively impacted by two one-time expense items: one, lower-than-anticipated sub-advisor expenses in certain products in the third quarter of 2019; and two, an operations error [Phonetic] that resulted in a higher than normal expenses in the third quarter of 2018. Quarter-end asset balances of $89.5 billion, reflect a $2.5 billion decrease compared to the third quarter of 2018. This decrease is driven primarily by negative client fundings.

Net sales were negative $1.7 billion for the quarter. Gross sales were $1.1 billion, however, client losses were about $2.8 billion. Losses were primarily tied to three clients. Two losses were acquisition-related and one loss was an unsuccessful rebid of a long-term client.

The unfunded new client backlog at the quarter-end was $650 million and we would expect the majority of this to fund in the fourth quarter. The new client signings were diversified across new clients in endowments and foundations, UK Fiduciary Management, US defined benefit and a UK defined contribution win.

We believe the new business focus on longer-term asset pools across all global markets is paying dividends for the business and our sales pipeline is strong. We continue to stay focused in all client situations, especially those that are in rebid process or in M&A activity. Thank you very much. And I'm happy to entertain any questions that you may have.

Operator

[Operator Instructions] And our first question will come from Patrick O'Shaughnessy with Raymond James. Please go ahead.

Patrick O'Shaughnessy -- Raymond James & Associates, Inc. -- Analyst

Hey, good afternoon. I was just hoping to dig into your commentary about lower than anticipated sub-advisor expenses. Is that a onetime issue, some sort of catch up in the quarter, because I think your commentary suggested it was onetime or is that something that we could think about kind of be sustained going forward?

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

Yeah, it was -- Patrick, it was just onetime for the quarter. So some of our alternative investment, sub-advisor expenses we make an estimate based on the contract where the run rate is. And in this particular quarter, two of the alternatives we were overaccrued for the first two quarters and we had a true up. So we had lower expenses in the third quarter and also a write down of what the expenses were for the first six months. So we're able to get that onetime benefit for the quarter only. So that's not an adjusted run rate.

Patrick O'Shaughnessy -- Raymond James & Associates, Inc. -- Analyst

Got it. And then maybe a bigger picture question about margins. I think it's, obviously, somewhat unusual to see a business that's having top line pressures showing the year-over-year margin improvements that you guys have shown year-to-date and it does sound like some of that might be non-recurring in nature, but how do you think about the sustainability of margins kind of in this general range?

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

That is what I would just say that it's a good management, but I guess that's not a good answer. I think we've been very smart at managing expenses and doing it judiciously, but also looking at the business strategically. When we have the Investor Day, we'll be talking about some other initiatives that we're looking for to really springboard us into other incremental markets that we're not in now. So there may be some investment from that standpoint. We've got a benefit of getting more diversification and alternative investments. The reality is, is that we're more efficient and how we service our clients, technology is part of that process now, that wasn't part of the process, maybe 3, 4 or 5 years ago. But as we move forward, the sustainability of 53% profit margins earn-out [Phonetic] there for the business given some of the headwinds that we would expect that to come down. And more importantly, we're really thinking about how we get focused on long-term growth and how we get into new markets to be able to get us back a growth engine for SEI.

Patrick O'Shaughnessy -- Raymond James & Associates, Inc. -- Analyst

Great. Thank you.

Operator

And next we'll go to Chris Donat at Sandler O'Neill. Please go ahead.

Christopher Donat -- Sandler O'Neill -- Analyst

Hey, Paul. Actually, the Patrick's question, the way you covered it that satisfies me and I don't want to make any more trouble for you with Dennis.

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

Thanks, Chris. I appreciate it.

Operator

Thank you. We'll move then to Robert Lee at KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great. Thanks. Good afternoon, Paul.

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

Hi, Robert.

Robert Lee -- KBW -- Analyst

Hey. Just kind of curious, I mean you gave some color about the backlog and the sources of it and maybe if you could update us on some of your USBC initiatives. I know it's something you guys have talked about is channel you had some priority on, although it feels like it's been, maybe a little tough sledding getting too much there, can you maybe just give us a quick update on what you see there?

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

Sure. Well, I'll just pivot real quick to the UK. So our master trust in the UK, which is our largest way that people consume our defined contribution services was approved by the FCA . So we had a nice incremental win in the third quarter of a new client coming into that. So we're quite positive about that as we move forward, because we're one of the early ones that got the approval.

Pivoting to your question with respect to the US, it has been slower on DC. One of the realities with regard to defined contribution plans as we still are in a market that ostensibly is going up. So there is not as much pain on the line up for client sponsors. Consequently, there are less likely to change their diversification options.

So I've talked about this before. This is one of those markets that if we had some more volatility and we had some frustration either as a participant level or at the sponsor level, we think we would be in a better position for getting the multi-manager kind of white label approach into DC plans. We're still actively talking to a lot of our defined benefit customers. But again, it's a little bit of an inertia just because the line-ups are doing pretty well .

We do think long-term and again, we're talking about the Investor Day about some other things that could happen in the 401(k) defined contribution world that we think could be beneficial. But we don't see them on the short-term horizon, there would be more long-term initiatives.

Robert Lee -- KBW -- Analyst

Great. And maybe just a quick follow-up, I mean -- and then going back to the sub-advisor expense question, could you size that what that impact was in the quarter?

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

That was about $800,000.

Robert Lee -- KBW -- Analyst

Okay. Great. Thanks so much.

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

Yes, no problem. Thank you.

Operator

Thank you. Next we have Chris Shutler at William Blair. Please go ahead.

Christopher Shutler -- William Blair -- Analyst

Hey, Paul.

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

Hi, Chris.

Christopher Shutler -- William Blair -- Analyst

So I want to follow up on that, and just -- so you just gave the onetime benefit from sub-advisor. On the second piece, the operations error, I guess, can you size that? And can you just reiterate, exactly what that item was?

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

Yes, that was from the third quarter of 2018 . That was a little bit --

Christopher Shutler -- William Blair -- Analyst

Got it.

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

So it's not in 2019. So it's a little bit less than $1 million that was in 2018. So from a comparative perspective, that's why I called that out.

Christopher Shutler -- William Blair -- Analyst

Okay. Got it. Makes sense. Thank you.

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

Thank you.

Operator

There are now no more questions in queue .

Alfred P. West -- Chairman and Chief Executive Officer

Thank you, Paul. Before I turn it over to Kathy Heilig, I'm going to give the mike to Steve Meyer to cover something that's come up.

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

Yeah, this is just a response, Chris, just two follow-ups. One, you had asked about the Department of Interior. I get to plead ignorance because it was pretty steep [Phonetic], but apparently we did in the Q4 of 2017. I have a conversation during the call about the amount of that client was $17.8 million. So I just wanted to clarify that. And secondly, on the expense uptick, Chris, that you brought up the one thing I think you are probably looking for that might help you in our personnel expense an uptick, due to the performance of IMS. We did do a catch up for our IC [Phonetic] because where we are attracting [Indecipherable] in the quarter. So that one time uptick was about $2.4 million for the year. I just want to follow-up to clarify this. Thanks.

Alfred P. West -- Chairman and Chief Executive Officer

Thank you. And now, Kathy, I'd like to give you few companywide statistics.

Kathy C. Heilig -- Chief Accounting Officer & Controller

Thanks, Al. Good afternoon, everyone. And I do have some additional corporate information about this quarter. Third quarter 2019 cash flow from operations was $163.9 million or $1.6 per share, bringing year-to-date September cash flow from our operations to $381.5 million or $2.45 per share. Third quarter free cash flow was $144 million, and year-to-date free cash flow is $324.2 million. In the third quarter, we had capital expenditures excluding capitalized software of $12.3 million, a significant part of that was related to our facility expansion. In the fourth quarter, we would expect to have capital expenditures excluding capitalized software of $15 million and about half of that would be related to the facility. Our projected capital expenditures for next year are about $40 million, and again about half of that is related to the facility.

We also would like to remind you that many of our comments are forward-looking statements that are based upon assumptions that involve risks and that the financial information presented in our release and on this call is unaudited. In some cases, you can identify forward-looking 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, or when our unfunded backlog may fund, the benefits we will derive from our investments, our ability to manage our expenses and scale our offerings, the timing of our implementations in conversions, the services we may provide to clients, the momentum of our businesses, the strength of our pipeline and growth opportunities and our ability to execute on and the success of our strategic objectives. You should not place undue reliance on 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 the assumptions upon which we base our forward-looking statements are reasonable, they could be inaccurate. Some of the risks and important factors that could cause actual results to differ from those are described in our forward-looking statements can be found in the risk factors section of our Annual Report on Form 10-K for the year 2018.

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

Operator

[Operator Instructions] We do have a question from Chris Shutler at William Blair. Please go ahead.

Christopher Shutler -- William Blair -- Analyst

Hey guys, just a couple more. First for Dennis, on the investments in new business, the expenses grew about $1 million sequentially in Q2 and then another $1 million sequentially in Q3. Could you just explain why that was -- I think you said, growth in the private wealth management business. But just explain what that was and how sustainable that is?

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

And -- the growth in expenses is really a result of spending on some of our newer initiatives that we're capturing those costs and the investments in new business segment. And the two that I mentioned on the call earlier were the digital services offering, we called SEI IT services, so that will be used to call hosting services. So the development and build out of that, those capabilities and beginning to take those to market as well as some of the modularization work on different technology components around the company that we believe are going to open up access for those capabilities to new markets. And then those costs were offset by growth in the private wealth management business.

Christopher Shutler -- William Blair -- Analyst

Okay, got it. Yeah.

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

You bet.

Christopher Shutler -- William Blair -- Analyst

So it sounds like those expenses at current run rate, that's the run rate in Q3 is the [Speech Overlap] going forward.

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

Yeah, we're going forward with that.

Christopher Shutler -- William Blair -- Analyst

Okay.

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

And then we'll spend more time with that on the Investor Conference as well.

Christopher Shutler -- William Blair -- Analyst

Okay, great. And then one last one for Steve on Wells. Just curious when were you made aware of Wells being on hold and was it post the new CEO coming on board and any idea if this pause by Wells was specific to SEI or if they paused a bunch of their IT projects or any more color that would be great?

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

Well, as far as when we knew, we've been in conversations with Wells over the past several weeks. I would not tie this directly to the new CEO. I think there's a number of things on Wells is in place that caused that. As far as speculating to other providers, I do not believe this is just focused on SEI. But from our standpoint, I don't want to speak for Wells or speculate on their point, on their part. I think the most important thing out of this is Wells has asked us and -- their time and need for us to be a good partner. And that's what we're going to do. We've done that for the past 40 [Phonetic] years and quite frankly, I think that all [Phonetic] as we get is that we're putting our clients needs before [Phonetic] ours, we're a little disappointed obviously in pushing this, but we're going to continue to work on their current priorities, Wells will continue to be a large client of SEI. And I think the bigger story for us and private banking is the large backlog we have that is growing in the momentum that is putting off and that's what I want to focus on.

Christopher Shutler -- William Blair -- Analyst

And I guess confidence, there is no change in the long-term relationship with Wells as a result of this extremely high or how you would describe it?

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

Well, again, my view is, Wells, we've had a long history of 40 years with Wells and I expect that to continue for a very long time. They are currently a large client and will continue with that. And as I said, we're going to help them work on their current priorities right now as we wait for them to look at when they can reconsider SWP base [Phonetic]. And when they are ready to reconsider SWP base, we're ready and logging [Phonetic] in.

Christopher Shutler -- William Blair -- Analyst

Okay. Thank you, Steve.

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

Sure.

Operator

Our next question is from Robert Lee at KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great. Thanks for taking my follow ups. Actually, Steve, maybe I just have one or two quick questions for you. The onetime revenue the $7 million, did that -- I assume that all flowed through in the quarter. I mean, I know every quarter you've got some, but there are no --?

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

No, as I said, the $7.3 million [phonetic] announced was obviously is tied to new business implementation about $1 million of that flowed in Q3. The rest will come in over the next 12 or so months.

Robert Lee -- KBW -- Analyst

Okay, great. And then I know you have -- I don't think you've mentioned in this call and I apologize if you did and I missed it, but the CIBC fairly large new client, any sense of when do you think that's going to begin coming on board?

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

Well, we're in active implementation with them, obviously, there is a large project on their side and our side. We will look to work through the next 12 to 14 months, but I think it will be phases that we start to brand toward the end of 2020. But obviously, there is an implementation fee that will start to recognize as we go through the implementation as well.

Robert Lee -- KBW -- Analyst

Great. And then maybe Dennis, I just had a quick question for you. I mean, obviously, I know the tax rate moves around with particularly around the options and equity-based comp and things, but how should we be thinking of kind of any change in kind of your expectations for a quota [Phonetic] normal tax rate or kind of basic quota tax rate?

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

I mean fourth quarter will look more like first and second quarter. Third quarter, we also get the benefit of tax years closing out. So you get some reserve -- reversals as a result of benefit us. So third quarter -- third quarter is usually a quarter where the tax rates are little bit lower historically, fourth quarter will be similar to the first and second, more than 21% range.

Robert Lee -- KBW -- Analyst

Thanks for taking my questions.

Operator

And now, there are no further questions in queue.

Alfred P. West -- Chairman and Chief Executive Officer

Thank you. And so ladies and gentlemen, our sales results were solid this quarter and we are encouraged by the size of our pipelines and the progress we're making throughout the company. Further, we believe that the investments we are making in our platforms and organization will help us benefit from all the changes taking place in our industry. Now before you go, please note that we are holding an Investor Conference in November 12th and 13th at SEI's Oaks headquarters. And dinner will be served on 12th, followed by the Conference in the 13, and I hope you'll make it. Thank you very much for attending this afternoon and have a great day.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Alfred P. West -- Chairman and Chief Executive Officer

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

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

Stephen M. Onofrio -- Senior Vice President, Sales and Service, Independent Advisor Solutions by SEI

Paul F. Klauder -- Executive Vice President, Head of the Institutional Group

Kathy C. Heilig -- Chief Accounting Officer & Controller

Robert Lee -- KBW -- Analyst

Christopher Donat -- Sandler O'Neill -- Analyst

Christopher Shutler -- William Blair -- Analyst

Glenn Greene -- Oppenheimer -- Analyst

Patrick O'Shaughnessy -- Raymond James & Associates, Inc. -- Analyst

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