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Waddell & Reed Financial Inc (NYSE:WDR)
Q4 2019 Earnings Call
Feb 4, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Waddell & Reed Financial, Incorporated Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Mike Daley, Vice President, Investor Relations. Please go ahead.

Mike Daley -- Vice President, Chief Accounting Officer and Investor Relations

Thank you. On behalf of our management team, I would like to welcome you to our quarterly earnings conference call. Joining me on our call today are Phil Sanders, our CEO; Ben Clouse, our CFO; Brent Bloss, our COO; Dan Hanson, our CIO; Shawn Mihal, President of our Retail Wealth Management Business, Waddell & Reed, Inc.; and Amy Scupham, President of Ivy Distributors, Inc.

Before we begin, I would like to remind you that some of our comments and responses may include forward-looking statements and non-GAAP financial measures. While we believe these forward-looking statements to be reasonable, based on information that is currently available to us, actual results could materially differ from those expressed or implied due to a number of factors that we reference in our public filings with the SEC.

We assume no duty to update any forward-looking statements. Materials relevant to today's call, including a copy of the press release that contains a descriptions of these non-GAAP financial measures and a reconciliation to GAAP and supplemental schedules have been posted on the Investor Relations section of our website at ir.waddell.com. I would now like to turn the call over to Phil.

Philip J. Sanders -- Chief Executive Officer

Thanks, Mike. Good morning, everybody. Thanks for joining us. Today, we reported net income of $16 million or $0.23 per share for the fourth quarter, which included a non-cash impairment -- asset impairment charge, a pension valuation charge and severance expense, all totaling $0.28 per share. On an adjusted basis, net income of $36 million or $0.51 per share compared favorably to an adjusted $0.49 per share last quarter.

For the full year of 2019, adjusted net income was $137 million or $1.87 per share compared to an adjusted $179 million or $2.23 per share during the prior year. Despite the lower net income, as we transition our business model, we generated strong operating cash flow during 2019, and we have continued to demonstrate targeted expense control, having reduced controllable operating expenses another 5% compared to last year and 11% compared to 2017, excluding the asset impairment.

As we wrap up 2019 and look forward to the upcoming year, I would like to briefly recap where we've come from and how we're thinking about the road ahead. For the past couple of years, we have spent time on these calls, highlighting the foundational changes and operational improvements that were necessary for our Company to improve the structural outlook for all aspects of our business. Understanding this would not be a short-term process. We were committed to doing what was needed to set our Company up for long-term sustainable success.

During this time, we have added significant resources to our investment management and distribution operations, transformed our proprietary broker dealer into a fully competitive independent wealth manager, evolved our organizational structure to ensure agility and clear lines of accountability, advanced our culture by further investing in our people through talent management, leadership development and diversity inclusion efforts and continued streamlining our operations resulting in meaningful cost savings.

Importantly, we have been able to do this while maintaining an exceptionally strong balance sheet and returning significant capital to shareholders by way of dividends and share repurchases. In fact, in the past year alone, we have returned over $228 million to shareholders and reduced our shares outstanding by over 10%. With much of the heavy lifting and foundational improvements behind us, we are now in a better position to sharpen our focus on growth initiatives that support our longer-term vision.

Our business model has evolved and is somewhat unique in our industry, with both an asset management and a wealth management business. With the transformation of our wealth manager, we are now in a position to grow that business for the first time in years. We believe this represents a real opportunity for our Company. Over time, a thriving Wealth Management business combined with an institutional caliber asset manager should result in a more stable operating model with better and long-term -- long-term growth prospects.

As we move forward on this path, we are focused on several key strategic enablers spanning both businesses and our overall enterprise that we believe will be essential to our future success. These include competitive products and pricing, continued focus on strong core processes and performance metrics, the ability to leverage technology and analytics as a strategic asset, across the organization, having a growth culture and a more agile organization, sharpening our brand awareness in the marketplace, and finally, effectively allocating capital through internal investment initiatives as well as taking advantage of potential dislocations and acquisition opportunities in the asset management and wealth management industries.

We acknowledge this is not an easy undertaking. We also understand that we continue to fight asset flow headwinds. These headwinds, can be attributed to several factors, which include our own asset manager's performance and product mix, the proprietary heritage of our wealth manager and the industry dynamics that all active equity managers are facing.

Nevertheless, we believe we are now in a much stronger position to deal with, and to overcome these challenges and are excited about the opportunities for our Company as we look ahead. Bottom line, it's about transitioning to a growth mindset and capitalizing on the hard work and dedication of our employees and repositioning our Company amid a challenging industry backdrop.

Now looking back on 2019. It was an exceptional performance here for the financial markets broadly as stocks around the world turned in one of the strongest years in the last decade. The S&P 500 index finished 2019 up over 30%, marking its best year since 2013. Bonds rallied [Phonetic] as well, pushing the yield on the ten year treasury note down to near all time lows before approaching 2% as we ended the year.

Together, stocks and bonds saw their largest simultaneous gains in more than two decades. The equity market up trend was supported in part by an improving economic outlook, progress in US-China trade talks, three interest rate cuts by the Federal Reserve, continued low unemployment and healthy consumer confidence levels.

Notwithstanding the strong market backdrop through 2019 and into early January 2020, market volatility has increased of late and bond yields have declined, reflecting global growth uncertainties. Despite the strong markets, flows across the industry throughout 2019 were heavily weighted toward fixed income products at the expense of active equity products as investors remain cautious in somewhat risk averse.

Given our asset mix, this backdrop proved especially challenging for us throughout the year, as sales were down significantly compared to the prior year.

In addition, our international core equity product was challenged from a performance and flow perspective during the year and had an outsized impact on year-over-year flows. This trend has continued into 2020. In total, redemptions improved slightly compared to 2018 and we are encouraged by renewed interest and opportunities in several of our strategies, notably, large cap growth, which was recognized by Barron's as a top sustainable fund for the third consecutive year, as well as our core bond and emerging market equity strategies.

In addition, our mid-cap income opportunity strategy continues to garner interest. The product has generated strong performance and has been in positive net flows over the past year. Certainly, we have opportunities for better execution in terms of our investment performance and product distribution. But overall industry flow trends this year also highlight the need and potential benefits of a more diversified product set and flow profile.

Investment performance during the fourth quarter was impacted by the market's rotation into value, cyclical and low quality stocks, which had an outsized impact on our shorter-term performance. However, the long-term trajectory continue to show improvement in the trailing three and five-year performance on an equal weighted basis. Three and five-year performance was consistent as measured by the percentage of assets ranked in the top half of their respective Morningstar universes [Phonetic].

As we have noted in recent quarters, we believe our longer-term performance improvements reflect a pay-off from the investments we have made in recent years and to enhancing our research staff, portfolio management teams, technology and risk management capabilities. I'd now like to cover a little -- in a little more detail the significant progress we made in 2019 in delivering on a number of initiatives, all with the goal of best serving our clients, shareholders, employees, advisors and communities.

Within IT investments, our asset management business, we continue to add resources with a focus on improved investment performance and processes. We were pleased to add the experience of Dan Hanson as Chief Investment Officer during the year, and Dan has already made a notable impact both internally and externally with key partners.

We also work to strengthen our relationships with key industry consultants and believe we have made meaningful progress during the year. We remain committed to our strategy of expanding and diversifying our product offering as appropriate, including offering existing strategies in additional vehicles that clients find appealing such as model delivery where we introduced seven strategies in 2019. As pricing continues to narrow amid ongoing competition in our industry, we continue to review our pricing structure across our product platform to ensure we are competitive.

While currently 76% of our product fees [Phonetic] by assets are either at or below industry average, pricing is just one of the components of product competitiveness. We know we have more opportunities in the future to build on our sales and servicing model and demonstrate our institutional caliber investment capabilities to win in the marketplace. Taking a look at progress in our wealth management business, we continue to build on our value proposition to financial advisors through enhancements to technology, products and a leading service model.

Our advisor network has largely stabilized with over 1,300 licensed advisors and associates at year-end. We have boosted our recruiting efforts nationally and have an expanded national recruiting team in place. Our recruiting teams are working closely with wealth management field leaders and external recruiting firms to attract, build relationships with, and ultimately add experienced financial advisors to Waddell & Reed's national network. A core tenet of the transformation of the wealth management business is having a comprehensive product offering, specifically within fee based advisory products.

We now offer nine different advisory products, offering our financial advisors access to nearly 5,000 mutual funds from over 100 different fund families. This also includes a wide universe of ETFs and other general securities. On the technology front, adoption of Waddell One, our centralized advisor technology platform available to all financial advisors and associates continues to be strong. This new platform provides direct connectivity to several of the firm's existing technology partners. We're also progressing on the other key components of our business administration program, including enhanced reporting, improved data analytics and a simplified business processing model.

Specifically, last month we initiated a pilot launch of a new sales force integrated data repository, allowing seamless access to data and reports across the business. From a broader enterprise standpoint, we are creating an organizational structure that allows us to conduct business in a more effective manner by focusing on our core competencies. To that end, efforts directed toward technology and analytics as well as culture are essential to our long-term success and remain an important area of emphasis for our Company.

We believe continued investment in technology and leveraging the capabilities of data driven insights will not only improve, but also shorten decision making time, allowing us to enhance organizational agility and compete more effectively in the marketplace. Similarly, we will continue to advance our culture by further investing in our people through talent management and leadership development with a strong focus on diversity and inclusion initiatives.

We know these efforts are basic building blocks to developing a growth culture and will allow us to increase connectivity, collaboration and efficiency while we push forward on our key strategic initiatives. We also announced the culmination of our new headquarter's location search by signing a lease for an innovative, distinctive and sustainably designed building in the heart of downtown Kansas City, Missouri.

The new structure will consolidate our headquarter's workforce into one building and accommodate our strategic growth initiatives, while bringing a progressive building to the heart of the city. Ben will share more details on the financial components of our new headquarters in just a moment.

I'll now turn it over to Ben to discuss the quarterly and full year 2019 financial results. Ben?

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Thank you, Phil and good morning everyone. As Phil noted, we reported net income of $15.9 million, or $0.23 per share. On an adjusted basis, this was $36 million or $0.51 per share. The quarter included a $12.8 million non-cash asset impairment charge related to our corporate-owned buildings and the elimination of our internal aviation operations and a $11.2 million non-cash charge related to the annual revaluation of the pension plan liability and $2.3 million in severance expense related to the outsourcing of our transfer agency operations.

The adjusted $0.51 compared favorably to the adjusted $0.49 per share we reported last quarter, primarily due to continued expense control and unrealized gains in the investment portfolio. I will start by covering our overall asset profile in more detail, followed by a review of our operating results.

I'll conclude with our expense guidance for 2020 and a summary of the financial components of our headquarter's move. Wealth management assets under administration ended the quarter at $60.1 billion, and increased 5% compared to the prior quarter and 17% compared to the prior year.

The increase compared to both prior periods was due to strong market gains and growth in net new advisory assets, partially offset by ongoing migration away from brokerage. We continue to see momentum in advisory asset growth as client demand continues to result in a move from brokerage to advisory, which is consistent with our long-term expectations in the wealth management business.

Net new advisory assets for the year grew compared to 2018, as we continue to see stronger adoption across our advisory products, including our newest products, map direct and our guided investment strategies product. Ivy assets under management ended the quarter at $70.0 billion, an increase of 2% from the prior quarter, while average assets under management of $69.1 billion were down 2%. In total, net outflows of $3.4 billion were elevated in the quarter, most notably, due to the institutional channel where redemption activity included $800 million related to two significant redemptions, although both clients have continued relationships with the firm. Within our unaffiliated channel, sales were down compared to both the prior quarter and last year as Phil mentioned. At the same time, redemption rates improved compared to both prior periods as stronger performance and fee adjustments have helped retention across our distribution network.

Ivy Investments' AUM within our affiliated wealth management business experienced consistent levels of net outflows with similar sales and redemption rates across the prior quarter and current quarter periods with net outflows being slightly elevated from a year ago. Turning now to the financial results. Total revenue for the quarter was $270 million and decreased slightly compared to the prior quarter as stronger U&D revenues were more than offset by lower investment management fees, while shareholder service fees were flat.

U&D revenues increased primarily due to higher advisory assets under administration in our wealth manager. Investment management fees were lower due to lower average assets under management, partially offset by a higher effective investment management fee rate. The effective fee rate was 63.6 basis points and increased due to higher fund fee waivers -- waiver expenses in the prior quarter. We generated revenue of $1.1 billion for the full year 2019, which was down 8% due to the decrease in average assets as well as the full-year impact from the targeted fee cuts we made in late 2018.

Operating expenses included the $12.8 million asset impairment charge primarily related to several owned buildings which we are in the process of selling in connection with our headquarter's move and the elimination of our internal aviation operations. The quarter also included $2.3 million in severance expense related to our transfer agency outsourcing.

Adjusting for those items, and the $3 million of severance from the prior quarter, fourth quarter operating expenses decreased primarily due to lower compensation and benefits costs from the lower headcount as we completed the transition of our transfer agency operations. Controllable expenses, which are comprised of compensation, G&A, technology, occupancy and marketing, totaled $103.6 million after adjusting for the asset impairment compared to $104.5 million last quarter.

Technology and G&A expenses were higher due to project related spending, but were more than offset by the lower compensation costs I mentioned, and lower occupancy costs from the ongoing transition in the field real estate model. Additionally, depreciation expenses were lower $1.1 million due to fully depreciated capitalized development assets. As you know, we are also in the process of winding down our pension plan and expect a final distribution in the middle of 2020.

The ultimate distribution and cash payments will be largely dependent on participant elections, which will be finalized later this year. Full year controllable expenses totaled $416 million excluding the asset impairment and decreased 5% compared to last year. We've been pleased with the continued progress on reducing targeted expenses, while continuing to invest in key areas like improved technology and investment management resources.

As we previously mentioned, while we will face expense headwinds from continued technology investments in addition to normal inflation, we expect to be able to offset those costs through lower occupancy from our field real estate transition as well as other targeted efficiencies in 2020. We currently expect controllable expenses for the full year of 2020 to be in the range of $420 million to $425 million. Given some of the structural changes in our business, especially the transfer agency outsourcing, I also wanted to provide more detailed line item guidance for 2020.

We expect compensation and benefits costs in the range of $250 million to $252 million, which is flat with 2019 excluding severance as merit [Phonetic] and hiring in key areas will be offset by the transfer agency outsourcing savings. We expect G&A costs to be in the range of $90 million to $92 million and expect technology costs around $55 million. Occupancy will also decrease meaningfully to a range of $16 million to $17 million as we continue to transition field real estate offices through the end of 2020. And marketing and advertising will be in line with 2019.

Additionally, we expect depreciation costs to again decrease meaningfully to a range of $14 million to $16 million for the full year as we continue to shift our technologies toward software as a service arrangements. The effective income tax rate was 28.3% for the quarter, which included discrete items of $1.1 million. We expect the tax rate in 2020 to increase slightly to a range of 24% to 26% including the impact of any additional non-recurring or discrete items.

We ended the year with cash and investments of $820 million. During 2019, we repurchased $154 million of stock and paid $74 million in dividends supported by our continued strong cash flow generation. As previously indicated, we intend to strike a balance in utilization of our capital and strong cash flow between continued return to shareholders and funding of the strategic enablers, Phil outlined, which include organic and potentially inorganic opportunities to drive growth.

Finally, I'd like to cover some of the details on our planned corporate headquarters relocation and the estimated financial components. First, let me reiterate that our foremost goal is a workplace environment that meets the needs of our future workforce and enables us to attract and retain top talent to accelerate our growth strategy and continue the evolution of our culture.

We expect completion of the building and move during 2022. In connection with the move, we expect to receive local property tax and earnings tax abatements estimated at $29 million, which will be presented as a reduction in both the compensation and benefits and G&A expense lines in our P&L.

In addition, we expect to receive state tax incentives of $62 million to be realized in both compensation and benefits and income taxes. These savings will be earned over various time periods and are subject to satisfaction of certain future obligations, including employment and compensation targets. After accounting for the various incentives, new lease terms, and the other impacts related to our move, we do not expect an increase in costs over the lease term as compared to our current headquarter's estimated run rate.

Operator, we would now like to open the call for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Dan Fannon with Jefferies & Company. Please go ahead.

Daniel Fannon -- Jefferies & Company, Inc. -- Analyst

Thanks. So I appreciate the detailed expense guidance for next year. I was hoping maybe you could give us a sense of kind of what the revenue backdrop you're assuming to hit those ranges. And then, just to clarify, on the occupancy, the -- no change to run rate, is that based on the $16 million to $17 million in 2020 that you're forecasting?

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Sure, Dan, it's Ben. I could start with revenue. We don't have any particular expectations of significant change there obviously that's highly dependent upon the market and what occurs there. Amy or Phil could provide more guidance, but we'll continue to be looking at pricing as well to ensure we're competitively positioned.

But again, no particular significant changes that we -- that we are looking at there. In regard to the run rate for the facility that's accurate with the one caveat being as we complete our field real estate transition which will largely conclude this year, there is an impact on 2021. So an incremental reduction there as well as many of those leases that we are exiting as we transition those two being leased by our advisors or to them finding their own space, many of those are back loaded in 2020.

So there'll be an impact to run rate in '21. I think I got all the pieces there, but --

Daniel Fannon -- Jefferies & Company, Inc. -- Analyst

Okay. Yeah. That's helpful. And then I guess just further clarification on the pricing kind of discussion, I think you've highlighted in your prepared remarks just the slowing of redemptions and part of that being some of the pricing changes you've made. So I think on a go-forward basis, how should we think about you using price more as a means of change in behavior?

Philip J. Sanders -- Chief Executive Officer

Hi. This is Phil, I might start at a high level and if Amy wants to jump in, she can. I think a while back, we did a more comprehensive review and I believe it was like ten strategies we made some significant adjustments which we've outlined in the past and we've kind of -- are cycling through that now, but we also indicated that as we look forward, I think it's likely to be more on a kind of an ongoing review process, but ensuring we're competitive across key strategies and that type of thing.

So, as you know, this is a moving target in our industry, there isn't like you can make a few adjustments, and then you're good to go. It will be an ongoing basis, but I think it will be more of a one-off type of deals going forward.

Amy J. Scupham -- Senior Vice President-Distribution

I don't have anything to add.

Philip J. Sanders -- Chief Executive Officer

Okay.

Daniel Fannon -- Jefferies & Company, Inc. -- Analyst

Okay, thank you.

Philip J. Sanders -- Chief Executive Officer

Yeah.

Operator

The next question is from Michael Carrier with Bank of America Merrill Lynch. Please go ahead.

Sameer Murukutla -- Bank of America Merrill lynch -- Analyst

Hey, good morning. This is actually Sameer Murukutla on for Michael. Thanks for taking the question. Just a quick one, I know in the last call you talked about just the advisor count maybe 2020 being an inflection point, and I saw that in January, you -- there was an addition of five advisors. So can you just provide some more detail on when you think that inflection will happen? Is it something that's been -- maybe happening in 1Q or something it's later on down the line?

Shawn M. Mihal -- Senior Vice President-Wealth Management

Yeah, hello, good morning. This is Shawn. I'll go ahead and field that question. Yeah, we're certainly continuing to watch the advisor head count and really looking at the backdrop over the course of 2018 and 2019. 2018 -- and we really didn't spend much time on the recruiting front and heading into 2019, we're really focused on building out our continued efforts inside of our wealth management business from a technology advisor support model, all the value proposition, things that were discussed during the comments on the call. Through 2019, we really focused on building out our recruiting department of adding [Phonetic] -- recruiting directors across the country and recruiting specialists supporting those efforts with those recruiting directors.

So as we turn from 2019 into 2020, we are putting a more of an emphasis on recruiting with increasing the recruiting activities through that national market that we've created, as well as through the comprehensive packages, which we feel are very competitive for attracting advisors to Waddell & Reed.

We believe with that happening, we will start to see some shifts in 2020 with increasing the headcount. So we feel confident that with the expectations moving forward, we will continue to see recruiting growth there. We did announce we did add five advisors there in the month of January, and we're continuing those efforts to work our recruiting pipeline.

Operator

The next question is from Bill Katz with Citi. Please go ahead.

William Katz -- Citigroup -- Analyst

Okay. Thank you very much for taking the questions this morning. Just coming back to the headquarter relocation opportunity, I apologize, I missed the two component pieces. Please reiterate that. But the bigger question is, what's the timeline to phase in those savings?

Philip J. Sanders -- Chief Executive Officer

So Bill, I think you're asking about the incentive components, correct me if I'm wrong.

William Katz -- Citigroup -- Analyst

Well, you had laid out some savings you're going to get by moving the headquarters, right? I think you said some tax abatement that's going to show up in comp and G&A, I just missed the two component pieces, I apologize. So I just want to get those numbers again, and the phase-in period associated with that -- will that be 2022, or is that something ratable over the time frame?

Philip J. Sanders -- Chief Executive Officer

Sure. Well, there are two incentive components, Bill. There is a local property and earnings tax abatement which we estimate at $29 million and there is a -- a state tax incentive of $62 million, both of those span various different time periods over the term of the lease and would begin impacting our results in 2022 in conjunction with our move in.

I'll just repeat my comment, which is, once we take those incentives into account as well as the new lease terms and all of the other impacts related to that move, we do not expect a -- an increase in costs over the lease term compared to our run rate here in our current facility.

William Katz -- Citigroup -- Analyst

And that's on the occupancy line? Okay. Maybe a bigger picture question as you sort of look to sort of increase the growth on the financial advisors and so forth. Could you talk a little bit about how you see the payout ratio in the wealth management business migrating? And now speaking [Phonetic] in another way, any way you can give us an update on January flows?

Shawn M. Mihal -- Senior Vice President-Wealth Management

Bill, I believe that -- yeah, this is Shawn, I think what you're -- what you're asking now is the advisor payout ratio, Bill [Phonetic], I just to clarify?

William Katz -- Citigroup -- Analyst

Yes, correct. In the wealth management channel.

Shawn M. Mihal -- Senior Vice President-Wealth Management

Yeah. So currently, we are -- our advisor grid tops out at 94%. We've seen advisors both existing advisors moving to various different teaming arrangements, which has some impact to the overall average advisor payout ranges which with the changes that we made with real estate, we increased the grid for the advisor payout going from 2018 to 2019. So with those changes along with some teaming up aspects, I think we saw an average advisor payout in the 84% to 85% range.

We think that's levelized to a certain extent, although, and certainly with the teaming arrangements we could see some modest increase in that advisor payout range, it's something that we continue to watch.

Amy J. Scupham -- Senior Vice President-Distribution

And then Bill, this is Amy, I'll answer your question on the January flows. When you look at flows in January, quarter over quarter from 4Q, we have seen a slight uptick. That being said, redemptions are continuing right around the same rate as 4Q with a slight improvement in net sales overall, as you look at January.

I think on a positive note, what we're seeing is an improving pipeline. So as we look throughout 2019, we had multiple final's [Phonetic] presentation opportunities, none of which came to fruition, but getting the opportunity is certainly something that is a nice start and a turn in, whether it's key industry consultant sentiment or a large -- a large distribution partners overseas or that sort of thing. So we're seeing a nice improvement and a pickup in interest in categories where there is large flow opportunities such as our security and core bond or core plus category and the large cap growth space.

William Katz -- Citigroup -- Analyst

Thank you.

Operator

The next question is from Glenn Schorr with Evercore ISI. Please go ahead.

Glenn Schorr -- Evercore -- Analyst

Thank you. Curious on your comments on the seven existing strategies delivered through models in 2019. I'm not sure over which period of time in '19, but curious on any experience to -- has it produced flows and what the fees are relative to the underlying fund and if there are other SMAs in motion for the retail channel. Thanks.

Amy J. Scupham -- Senior Vice President-Distribution

Yeah. Hi, Glenn, this is Amy. The flows have been very, very small so far. We started them in May of 2019, located on the Envestnet platform, at which point we were able to start having further conversations with other distribution partners. We do have a couple of opportunities in what I would call the final phases of the pipeline, whether they're in contract negotiation and start-up phase or those getting ready to go to finals.

So we're seeing some nice opportunity in having increased conversations, particularly in our RIA space. So there is more to come on that, and then as we look at model delivery or the SMA market, in general, yes, we're always looking at do we have them available in the appropriate strategies. So we are in discussions of starting up a couple of -- a couple more at this time.

Glenn Schorr -- Evercore -- Analyst

Okay. And I'm curious in your prepared remarks, you had a comment on capital allocation. We've seen some deals in the RIA wealth management space across the industry. I'm curious, are those the type of things that theoretically fit for Waddell to augment and grow the wealth management channel.

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Hi, Glenn. It's Ben. We're certainly looking in that space and we are keen observers of the price and multiple escalation that's going on there. As we think about our wealth management business and M&A opportunities there, it's really about driving scale. We have the infrastructure and we're building the technology and we believe we have the grid and the support platform to have much larger scale than we do today.

And so, again, we're certainly looking in that space, but our strategy really is to scale up that business to become larger than it is today.

Glenn Schorr -- Evercore -- Analyst

Okay. Thank you.

Operator

The next question is from Robert Lee with KBW. Please go ahead.

Robert Lee -- KBW -- Analyst

Great. Thank you. Thanks for taking my questions. Maybe the first one on capital management. Phil, you kind of -- you worked through the original $200 million target you had set [Phonetic] that if you had exactly how long [Phonetic] six or seven quarters ago and it looks like this quarter actually exceeded that. So how should we be thinking of share repurchase and use of capital going forward? Is it -- is there kind of another kind of target dollar you're thinking of -- or should we think of it as being returning a 100% of net income. So how should we think of that?

Philip J. Sanders -- Chief Executive Officer

Well, I think we -- I think our balance sheet strength is definitely a key differentiator in this industry with respect to a lot of things in motion and how the potential dislocations and opportunities here. So -- that flexibility is something that we enjoy and I think we said in the past, I expect well, these opportunities are not mutually exclusive. In other words, I feel like we can be active in repurchasing shares, but also be active in potential opportunities that come our way.

I think, Ben has highlighted in the past that our intention is not really to see our cash balance grow. So to the extent that we don't find attractive investment opportunities, we're likely to be a little bit more aggressive on share repurchase, obviously depending on price and so forth, but we've been pretty persistent and pretty active in the market and I don't really anticipate any significant changes in our behavior pending something real or unique transformational opportunities that come our way.

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Robert, it's Ben, I might just add for a little context, we spent $37.5 million in the quarter on buybacks versus just a little bit over $40 million in third quarter. So relatively consistent, and I think as Phil said, we'll continue to be opportunistic with that. One other factor to bear in mind is that you referenced to net income, but we do have some significant differences between net income and free cash flow.

And so, we're really thinking about it on a cash flow basis as well, which allows us, as I said in my comments, even more flexibility there.

Robert Lee -- KBW -- Analyst

Sure. And then -- I appreciate that, and maybe just as a follow-up, Ben, I mean, I appreciate the detailed expense guidance, but couldn't write that fast quite frankly, would it be possible just to go -- was G&A, if you could refresh what your comments were for G&A and comp expense?

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Sure. I would be -- I would be happy to. So for 2020, our guidance is compensation and benefits in a range of $250 million to $252 million which is -- which is generally flat to '19 excluding the severance. We expect G&A in a range of $90 million to $92 million, technology at approximately $55 million, occupancy we expect to come down to a range of $16 million to $17 million, marketing to be consistent, I believe about $9 million and then depreciation, we expect to come down significantly to a range of $14 million to $16 million.

Robert Lee -- KBW -- Analyst

Okay, great. Thank you.

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Sure.

Operator

The next question is from Kenneth Lee with RBC Capital Markets. Please go ahead.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi. Thanks for taking my question. Just one on the wealth management business, it sounds as if -- in your prepared remarks, you mentioned that it sounds as if a lot of the heavy lifting in terms of the restructuring is done at this point. And now it's more of a focus on growth opportunities, but just curious, at this point, is the business achieving stand-alone profitability?

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Ken, this is Ben and I'll let Shawn maybe add anything he wants to add. We don't do segment disclosures currently. We've certainly done a number of evolutions of our external disclosures as we have modified the way we are operating the business. I think we'll likely get to that point somewhere in the -- in the future, but we don't -- we don't disclose that level of detail today, beyond our -- beyond our U&D breakdown.

Kenneth Lee -- RBC Capital Markets -- Analyst

Got you. Understood. And just one follow-up if I may, you also touched upon continued investments needed within technology. Could you just quantify whether, how much of that is a portion within the technology line item expense and whether this is a -- whether the ongoing investments are expected to go out [Phonetic] over the next one or two years or just roughly give us a sense of the trajectory in terms of the evolution of the cost. Thanks.

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Sure. Those are really concentrated in technology and G&A with most of it really being in G&A through additional resourcing to help us through those transitions. We have some specific plans for that to be ongoing during 2020 as we're continuing to be very focused on the wealth management technology transition that you heard us talk about through our comments and we've talked about publicly, trying to deliver best in class platform to our advisors and have the best processing experience and most efficient experience that we can.

Beyond that, I would probably be a little bit more generic to say that technology is going to be a significant component of our strategy going forward, and I expect we'll continue to have the investment there. We certainly haven't firmed up particular plans or dollar amounts or ranges beyond 2020, but I'll just leave it by saying I think it will -- it will continue to be a significant piece of what we're doing and of investment that we're making in the business.

Kenneth Lee -- RBC Capital Markets -- Analyst

Understood, very helpful. Thanks again.

Operator

The next -- excuse me -- the next question is from Patrick Davitt from Autonomous Research. Please go ahead.

Patrick Davitt -- Autonomous Research LLP -- Analyst

Hey, good morning guys. I have a follow-up on the HQ guidance. When you say you don't expect an increase in occupancy cost over the lease term, is that meaning that the increase is actually being offset by all the abatements? Or is there just the straight no increase in the abatements will be additive to the operating margin? Just trying to square that.

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Well, there is a couple of things going on there, Patrick, certainly those abatements are factored into our modeling on that, that gets us to a consistent run rate like I described. One other factor that's an important component of that is efficiency and there are may be a few pieces to that as we move into a new facility, it will operationally be more efficient as we are focused on lead design and some of those aspects versus a significantly older facility or group of facilities where we are today.

Second, our layout and actual utilization of the space will be significantly more efficient than it is today. We, of course, like anybody in an older facility have some constraints on what we can do, and our new facility will allow us to overcome all of that again and as you've heard us say, really create an environment that helps attract and retain talent and helps drive our strategy going forward through better agility and collaboration and communication.

And then one last piece would be, we will have lower employee head count, we just had a 10%-ish reduction related to our transfer agent outsourcing. So we will physically have fewer employees than we have historically had here on this campus. So in addition to the incentive component, there are a number of those kind of -- I call them efficiency factors that will be significantly different in our 2022 state versus where they are today.

Patrick Davitt -- Autonomous Research LLP -- Analyst

Okay. So the absolute occupancy costs probably will go up, but then there's all these offsets. Is that the fair way to think about that, or not?

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

I think that's close. I wouldn't agree with the first part about the absolute, but there are all those things kind of weighing together in that math.

Patrick Davitt -- Autonomous Research LLP -- Analyst

Okay. And then last, quickly, are there any known redemptions like the couple you called out in 4Q?

Amy J. Scupham -- Senior Vice President-Distribution

Hi. No, there is no further redemptions and just for clarification on a previous comment that I made, sales in January are up. Redemptions, I would say are flat to up, versus the fourth quarter, which is creating an improved net sales environment from -- in January from Q4.

So I just wanted to make that clarification. But no, we have no notifications of any large redemptions coming.

Patrick Davitt -- Autonomous Research LLP -- Analyst

Thank you.

Operator

[Operator Instructions]. The next question is a follow-up from Michael Carrier with Bank of America Merrill Lynch, please go ahead.

Sameer Murukutla -- Bank of America Merrill lynch -- Analyst

Hey, it's Sameer again. I just wanted to come back to the discretionary expense guide. Given that 4Q came in better than expected, can you just give some color on the flex that you kind of built into the discretionary expenses if the environment takes a turn for the worse?

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Sure. We certainly are cognizant of that and would make and would respond to that if and when we had a significant market movement. We do have some flexibility in our expense base, of course, and we also have some things that do directly move in relation to our asset levels.

In addition to that, as I said earlier, we will continue to be very focused on ensuring that we are operating as efficiently as we can and taking some of that savings to the bottom line when we can, but also continuing to ensure that we're investing in those things that we believe are growth drivers for the long term. You won't -- I believe see us overreact in the short term. We are definitely taking a very long-term view as we think about our cost base and operations of our Company and what we are doing there.

I don't know if you want to add to that. Okay, thank you.

Philip J. Sanders -- Chief Executive Officer

No, I think that's right. We're certainly having some ability to adjust to unusual market conditions, but as Ben said, not likely to overreact to every market move because we -- we're kind of playing a number of game here.

Operator

The next question is a follow-up from Bill Katz with Citi. Please go ahead.

William Katz -- Citigroup -- Analyst

Okay. Thanks for taking the extra questions and sorry to keep coming back to the same topic. So just coming back to your expense guide for a moment, I apologize. When you mentioned that you'll get these savings, are they effective in 2022 or would they be effective exiting 2020 as you think about the occupancy discussion.

And then, are there incremental savings to be had on compensation as you look out into 2021 as you further rightsize the platform as -- relative to the guidance you gave this year for 2020.

Philip J. Sanders -- Chief Executive Officer

Hi, Bill. In regard to real estate, as we complete our transition, which is -- won't be 100% complete in 2020, but the vast, vast majority will be complete in 2020. We will have some incremental savings that will be realized in 2021. I think that's in a range of $2 million or $3 million that would impact our occupancy line there in that year.

In regard to your other question, I think you were more focused on the -- on the headquarters. There is no impact there in the near-term at all, obviously we had the asset impairment. Aside from that, there is no impact in our next couple of years and again the overall run rate, we believe will be consistent post move in 2022.

William Katz -- Citigroup -- Analyst

Okay. And just one last one from me, and thank you for taking all the questions for me. Ben, you mentioned a little bit of an improvement month to month. I guess there's some seasonality in that, how would you stack up January versus a year ago?

Amy J. Scupham -- Senior Vice President-Distribution

January sales versus a year ago are slightly down, but redemptions are about equal to January of a year ago.

William Katz -- Citigroup -- Analyst

Okay, thank you very much, I appreciate all the patience.

Philip J. Sanders -- Chief Executive Officer

Sure.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Phil Sanders for any closing remarks.

Philip J. Sanders -- Chief Executive Officer

Okay. Thanks to everybody. We certainly appreciate your interest and look forward to catching up with you soon. Thank you.

Operator

[Operator Closing Remarks].

Duration: 54 minutes

Call participants:

Mike Daley -- Vice President, Chief Accounting Officer and Investor Relations

Philip J. Sanders -- Chief Executive Officer

Benjamin R. Clouse -- Senior Vice President and Chief Financial Officer

Amy J. Scupham -- Senior Vice President-Distribution

Shawn M. Mihal -- Senior Vice President-Wealth Management

Daniel Fannon -- Jefferies & Company, Inc. -- Analyst

Sameer Murukutla -- Bank of America Merrill lynch -- Analyst

William Katz -- Citigroup -- Analyst

Glenn Schorr -- Evercore -- Analyst

Robert Lee -- KBW -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Patrick Davitt -- Autonomous Research LLP -- Analyst

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