Waddell & Reed Financial Inc (WDR) Q2 2020 Earnings Call Transcript

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Waddell & Reed Financial Inc (NYSE: WDR)
Q2 2020 Earnings Call
Jul 28, 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 Second Quarter 2020 Earnings Conference Call. [Operator Instructions] [Operator Instructions]

I would now like to turn the conference over to Mike Daley, Vice President, Investor Relations. Please go ahead.

Michael J. DaleyVice President-investor Relations and Controller

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; Brent Bloss, our President; Ben Clouse, CFO; Dan Hanson, our CIO; Shawn Mihal, President of our 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 description 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. SandersChief Executive Officer

Good morning, and thanks for joining us. The second quarter brought our country, the economy and the stock markets on an unusual journey, as we started the period in the depths of a dramatic downturn amid the global pandemic. Despite the ongoing health pandemic, social unrest in the U.S. and economic uncertainty throughout the period, the U.S. stock market returned one of its strongest quarters since 1998.

Thanks, in part, to a broad and rapid Central Bank policy stimulus, investors have generally recovered much of what was lost through the downturn earlier this year. Historically, the typical market recovery from a recession has taken two to three years or more. This recovery to date has progressed quickly, although its sustainability remains in question. Enthusiasm about a gradual reopening of the economy has been muted by ongoing uncertainty regarding the resurgence of public health risks in more parts of the country and a concern that Q3 and Q4 could be more challenging from a public health perspective. Broadly, the financial markets remain strong.

While concern about another downturn remains, we do expect to see continued market leadership from companies with high-quality business models, which have delivered more consistent results. We believe this type of market environment is well suited for the Ivy approach to active investing, where we invest based on fundamentals, business models, management, leadership and valuation.

At the same time, within our wealth management business, our affiliated advisors focus on delivering disciplined financial advice, and long-term personal financial planning is as valuable as ever in helping clients achieve their financial goals. For our enterprise as a whole, across the changing circumstances, our shift to a remote work environment has not altered the comprehensive capability of our teams or the quality of service we are delivering to clients and our wealth management affiliated advisors.

Our COVID-19 steering committee and enterprise preparedness teams continue to meet regularly to effectively navigate these unique times and evaluate options for returning safely to the workplace over time. As we mentioned on our last earnings call, we have taken a holistic approach to managing through this environment with all stakeholders in mind; our clients, affiliated advisors, employees, shareholders and our community. Regardless of circumstances or environment, we are committed to steadily executing on our long-term vision and growth strategy.

As a reminder, that strategy consists of six key strategic enablers: 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.

I’d like to highlight some of the major steps we took over the quarter on these key focus areas. Within product and pricing, we supported clients by introducing new products in both businesses. In our asset management business, we introduced two additional strategies in our model delivery format, bringing our total offering to 9. These strategies are available in third-party retail, separately managed accounts and unified managed accounts.

We believe the opportunity in this space going forward is strong as wealth managers and financial professionals increasingly turn to model delivery because it provides them greater flexibility in vehicles as they provide financial plans for their clients. 76% of our assets under management are now priced at or below their respective peer median after the fee reductions that went into effect this quarter on our core bond and Large Cap Growth products as well as finalizing the closure of certain legacy unused share classes.

In our wealth management business, we introduced a high net worth suite of products and services designed to meet the needs of more affluent clients, while enabling affiliated advisors to offer a holistic, flexible approach to complex financial situations. We also introduced new separately managed account strategies in partnership with a range of institutional money managers, allowing affiliated advisors to offer the direct ownership, structure, transparency, tech strategy options and other benefits of SMAs to clients who may benefit. Within technology and analytics, we have filled the newly created position of Chief Analytics Officer.

This role will spearhead our efforts across the enterprise focused on our enterprisewide data analytics and artificial intelligence initiatives. We have also continued with our wealth management and asset management technology platform initiatives with the goal of improving our affiliated advisor and client experiences, enhancing sales enablement and improving internal operations. Lastly, we implemented additional digital and technology capabilities for our employees throughout the quarter for continued operational productivity and efficiency, while we navigate the work-from-home environment. We also made progress enhancing core processes and operating performance during the quarter.

In our asset management, and in our asset manager, we strengthened our institutional distribution model by launching new technology to create a more seamless client experience to support our continued progress in reducing AUM redemptions. In our wealth manager, we implemented a remote recruiting process that allowed us to maintain advisor recruiting activities despite the challenges associated with COVID-19. We expect these innovations will benefit our recruiting efforts even in a more normal environment, as we are able to leverage technology to more nimbly and quickly evaluate candidates in our strong pipeline.

Our entire wealth management team also did an extraordinary job converting our annual vision conference to a virtual format under challenging circumstances. Our annual conference has been part of our culture for more than 50 consecutive years, and we did not want to let this year’s plans for shared content and experiences be diminished due to the pandemic. Our team was able to quickly pivot to leverage technology-enabled solutions and create an interactive virtual 2-day experience that was attended by nearly 1,500 advisors, partners and home-office staff. In an effort to further drive our growth culture and organizational agility, we took additional actions to advance our diversity and inclusion initiatives.

We have made great strides to ensure we have a true culture of belonging within our organization. However, especially with recent events across the country over the past few months, we also know that we, as a society, an industry and a company, need to do more moving forward. Additional actions and steps we have recently completed and/or announced include conducting additional all employee learning session, called Days of Understanding, focused on racial diversity and justice. These sessions include guest speakers from our local communities. Also, beginning in 2021, we will observe June 10 each year as a paid company holiday. This will provide our employees the opportunity… [Technical Issues]

Operator

Pardon me. This is the conference operator. We appear to have lost Mr. Sander’s location. If someone else would like to pick up, or I can put the call back on hold? Your choice.

Benjamin R. ClouseSenior Vice President and Chief Financial Officer

I’ll continue on. It’s Ben. Apologize for the interruption, everyone. I’ll pick up where Phil left off, and hopefully, he will join us. As we progress into 2020 and 2021, we will hire two newly created roles, entirely dedicated to diversity and inclusion. First, a Head of Diversity and Inclusion, responsible for developing and delivering on the next evolution of our comprehensive diversity and inclusion strategy that is aligned with our purpose, vision, mission, values and business goals across the organization. The second role will focus on diversity outreach and sourcing.

They will work across the organization to enhance our community and industry diversity outreach and sourcing efforts, including the diversity of candidate pools for employment and affiliated advisors as well as minority and women-owned vendors and business partners. In addition to the COVID-19-related donations we made earlier this year, we have recently provided support to organizations to help focus on racial justice and diversity and better support our local underserved communities. With respect to brand, we have launched a full brand review that will include all three of our brands across the enterprise.

This is a multiyear effort, and we launched the first phase of this initiative in the second quarter and are partnering with a premier, well-respected global brand agency on this phase of the project. Lastly, in terms of capital allocation, our balance sheet enables us to maintain a regular capital return to shareholders by way of dividends and share buybacks, while also positioning us to pursue and finance strategic M&A if opportunities arise. In support of these efforts, we announced during the quarter that we have filled a newly created position of Vice President, Acquisition, Strategy and Integration.

We have been clear that inorganic growth is a key component of our strategy, and this position will play a vital role as we continually evaluate acquisition opportunities across wealth management and asset management. All of this progress highlights just some of the ongoing work we are continuing to deliver on our long-term vision and growth strategy. We continue to see evidence of progress across the enterprise and believe that our strategic positioning, our robust capital position, and most importantly, the resilience and adaptability of our people positions us well for growth in the future. Turning to a few details within both our asset management and wealth management businesses now.

Investments net flows improved this quarter, aided by meaningfully lower redemptions against our $2 billion in gross sales. In fact, redemptions improved 24% compared to the first quarter and 19% compared to the same quarter in 2019. Sales continued to be strong in our Mid-Cap suite with both, strategies and net positive flow for the quarter. While short-term performance has improved, we continue to see outflows in our international core strategy. Our distribution teams are working well remotely and continue to make traction across channels since we realigned the structure of our sales teams.

We continue to focus on providing our clients with high-quality service that meets their unique needs as well as highlight and provide access to our intellectual capital while keeping the safety and wellness of our employees and clients as our top priority. Turning to investment performance. Second quarter of this year was one of the best quarters for U.S. equities since 1998. The catalyst for the strong quarter was the resurgence in risk appetite in the market, following the securities repurchase securities purchase programs announced by the Fed, March 23, which marked the bottom in the first quarter sell off.

Equity markets, in particular, were driven by low-quality factors, which, over the long term, have proven to be detrimental to compounded returns. Our commitment to institutional caliber processes means that while we are mindful of short-term market dynamics, we remain focused on the long-term and maintain discipline and consistency in volatile times such as we have seen in the first half of the year. While absolute returns were strong, active managers generally did not keep pace with benchmarks in the second quarter. We maintained strong long-term relative performance across our quality-oriented growth franchises, owing to our long-term commitment to finding and investing in companies with differentiated long-term growth prospects.

Our international core equity strategy, which, as we have previously noted, has been challenged by negative flows, has more recently seen its relative value discipline results in improved investment performance. We continue to focus on delivering long-term success and communicate our discipline to our clients through our fundamental research and insights as we have through many market cycles. As we consistently enhanced our institutional caliber investment and distribution capabilities, our near-term focus will be on driving sales across a wide breadth of distribution opportunities while sustaining long-term performance improvement.

Turning to the wealth management business. It has held true to form this year as a consistent and stable aspect of our enterprise that individuals, families and businesses continue to find value in personal financial planning guidance from professional advisors. As we’ve shared in the past, the wealth management business is a key driver to our long-term vision and growth strategy. We’ve seen strong advisor recruiting results this year. And we think our differentiated service and support model, combined with our technology package and full product suite, are resonating with these newly added advisors as well as other advisors in our recruiting pipeline.

We also have been pleased to see continued strong growth in advisory assets, with the sixth straight quarter of positive net advisory flows. The fact that these inflows occurred despite a challenging market backdrop, illustrates the wealth managers’ ability to capture assets through market cycles. On the technology front, we further expanded our WaddellONE centralized digital data platform by introducing a comprehensive web-based and cloud-accessible integrated database, along with additional repository of processes, procedures and other information, both of which are now available to all affiliated financial advisors. Now I’ll turn to financial results.

We reported net income of $25 million or $0.38 per share compared to $22 million or $0.32 per share in the prior quarter. As was expected, revenues dropped due to the sharp decrease in asset levels as we headed into the second quarter. Lower operating expenses partially offset the lower revenue and were $7.9 million better, while investment income improved $22.9 million due to unrealized investment gains on our corporate and seed investment portfolios, net of our hedging strategy. Wealth management assets under administration ended the quarter at $59 billion and increased 14% compared to the prior quarter primarily due to the market rebound.

Net new assets improved compared to the first quarter, partially from stronger advisory sales as well as lower brokerage account redemptions. As you saw in the release, we’ve updated our definition of net new assets to include dividends and interest, which aligns with how others in the industry report this metric versus including it in market action. We have included a schedule presenting the historical data on our IR website, so you can see the impact of this change. Notwithstanding the updated net new assets definition, this quarter continued a multi-quarter growth trend in net new advisory assets with 3.3% annualized growth and an all-time high balance of $27.2 billion in advisory assets at quarter end. Our progress transforming the wealth management business continued in the quarter, and we were pleased to have another 11 advisors affiliate with the firm.

As you know, we just recently reinvigorated active recruiting efforts, and we’ve been pleased with the progress thus far in the year despite the challenges that remote recruiting brings. Since the beginning of the year, 21 advisors have affiliated with Waddell & Reed with combined prior firm assets under administration totaling over $1.4 billion. This strong recruiting, combined with continued low attrition, resulted in the advisor count inflecting modestly this quarter and stabilizing at 1,317 affiliated advisors and associates at June 30. Adviser productivity remained consistent as well at an average of over $460,000 in total gross revenue.

We believe our differentiated service and support model, combined with our technology package and full product suite are resonating with these newly added advisors, advisors in our recruiting pipeline and our legacy advisors. Ivy Investments under management ended the quarter at $65 billion, an increase of 16% from the prior quarter, while average assets under management of $61.7 billion were down 7%. I would only add to the detail on flows earlier in the call that we’ve been encouraged with the steady continuous improvement in flows. And while it’s still early, the potential of our redefined sales strategy has thus far proven worthwhile.

Turning to the financial results. Total revenue for the quarter was $240 million and decreased compared to the prior quarter, primarily due to the lower asset levels. Investment management fees were also lower due to a lower effective management fee rate, resulting from mix shifts as well as the targeted fee reductions implemented in the quarter on our Large Cap Growth and core bond products. U&D fees were lower as well due to lower advisory fees and service and distribution fees due to lower asset levels. In addition, sales commissions were lower $5.7 million as a result of reduced sales activity across insurance product lines. Operating expenses totaled $216.4 million and decreased $7.9 million compared to the prior quarter.

Distribution costs were lower $12.2 million due to the lower revenues, while controllable costs increased $4.9 million due to higher compensation, G&A and technology costs. Compensation increased as a result of the mark-to-market increases on equity compensation and our deferred compensation plan, both due to the market rebound. G&A expenses were higher $1.9 million, as we redeployed travel and entertainment savings into strategic initiatives across the organization. Technology costs also increased due to new software solutions deployed during the year.

While we did take several incremental actions to reduce controllable expenses through the first six months of the year, we were clear in our last earnings call that we would continue to take a long-term view and invest in the areas we think will allow us to come out of the pandemic in a strong position and drive our long-term growth strategy. While we will continue to closely monitor expenses for opportunities to drive additional efficiencies, we do expect the controllable expense run rate to return to our prior guided range of $105 million to $106 million per quarter for the remainder of this year, primarily related to continued strategic project investments but, of course, subject to the broader market environment.

The effective income tax rate was 25.3% for the quarter and was lower due to volatility of forecasted earnings, despite including discrete tax expense of $1.3 million related to shortfalls from the vesting of restricted shares. Based on current asset levels and the resulting forecast, we expect the tax rate to be at the high end of our prior guided range of 24% to 26% for the balance of the year. Cash and investment balances increased modestly compared to the prior quarter due to unrealized gains on the investment portfolio as well as operating cash flows which were partially offset by share repurchases and dividends.

We continue to be pleased with the strength of the balance sheet as we execute on our organic growth plans, while maintaining the flexibility to pursue inorganic opportunities, all while maintaining an active shareholder capital return program. Finally, we completed the settlement of our pension plan, which removes a $194 million gross liability from the firm.

We viewed this action as a win for both the company from a reduced cost of recordkeeping and compliance perspective as well as for participants who are able to access their balances and direct them in accordance with their overall retirement plan. We still maintain a competitive defined contribution plan, which we enhanced as part of this transition to include a discretionary company contribution component in addition to the matching component.

Operator, we would now like to open the call for questions, and I’m told that Phil has rejoined us.

Questions and Answers:

Operator

[Operator Instructions] The first question is from Glenn Schorr with Evercore. Please go ahead.

Glenn SchorrEvercore — Analyst

Okay. So I want to ask a question on your hiring of the executive on the M&A front. We’ve seen a little bit of a pickup in activity lately in the industry. So curious what you’re seeing overall? I see and then for you, specifically, with the balance sheet stronger, I’m curious on how you balance the healthy tension of wanting to probably buy something that’s in favor, higher fees and inflowing, but the higher valuations that come with that and your willingness to do so in this market, please?

Philip J. SandersChief Executive Officer

Okay. Thanks, Glenn. This is Phil. My apologies for dropping off earlier, and thanks to Ben for taking over. I guess this is highlights the challenges of working from home at different times. But I’d say maybe I’ll start, and Ben, I don’t know if you want to add on this. I think as the market has rebounded, there’s been a little bit more activity in terms of it filing a little bit. And obviously, this we’ve made no secret of the fact that over time, as we’ve kind of transformed the business model along with our strong capital position, we have the ability to jump-start our growth through acquisition opportunities or strategic investments and that type of thing.

I think, as you said, it will be I think on the asset manager side, it would likely be more specific with specific strategies or relatively focused areas that can augment existing strengths or broaden our portfolio. As you said, either uncorrelated asset classes that we don’t currently provide or excel. I think within the fixed income area, that’s not been a huge area of expertise for our company. Historically, we’ve been more equity-minded. So I think there’s opportunities on the margin to be active there. I do think acquisitions in the asset management area do present some specific challenges with respect to culture and integration, and we want to certainly be mindful of that.

I would also say that on the wealth management side, I think that is also an area that we’re very interested in. We’ve made significant progress in transforming the business model within our wealth management transition to an open architecture platform. As you’ve seen in the recent results, we’ve now really made a significant improvement with respect to the stabilizing the advisor count. And we’re optimistic that we can grow that business going forward. So there’s opportunities to scale that part of our company as well, which I think would be a long-term stabilizer to the overall business model.

And then finally, I would just say, obviously, share buybacks remain an area of focus as well. And we can be opportunistic there. So I’d say in this environment, it’s a good we have real strength in our balance sheet, in the financial profile, and it provides us a lot of opportunity to be flexible and take advantage of potential dislocations in this industry. So I might stop there. Ben, I don’t know if there’s anything else you want to add in terms of how we see that.

Benjamin R. ClouseSenior Vice President and Chief Financial Officer

I think that was well said, Phil. I would add one thing, which is we’re very pleased to have Charles join us, who will be focused, in particular, on M&A opportunities. And his addition as well as that focus is part of our continued strategic plan like we have laid out. So we are just marching forward in that respect.

Philip J. SandersChief Executive Officer

Okay. And Dan, I think you wanted to make one point.

Daniel P. HansonSenior Vice President and Chief Investment Officer

Yes. I’ll just add a point, Glenn. And Glenn, you rightly point out, there are areas in the market that are hot. They’re going to trade at higher valuations. The equally interesting part of that equation is there are other areas of the market where the market has a less demanding view of it because, in some cases, potentially a short-term dislocation challenges and whatnot, and that can very well be an opportunity. So the attitude we take is, is there a strategic fit with our investment capability within the asset management M&A rubric?

Does it advance our core who we are as Ivy as fundamental active investors as an institutional caliber platform. Can we complement and advance that core identity through our inorganic levers? And if so, valuation clearly is a part of all of that. But just as there are hot areas in the market, there is areas to add value by taking a longer view.

Glenn SchorrEvercore — Analyst

Thanks so much.

Operator

The next question is from Dan Fannon with Jefferies & Company. Please go ahead.

Dan FannonJefferies and Company — Analyst

Thanks. So I just wanted to talk about the advisor backlog and kind of the outlook for advisor growth. And if you could just talk about where that sits today. And I know you mentioned recruiting is getting a little bit easier, but also talk about the typical profile of the advisor that’s coming on your platform, year-to-date, the 21, I think, new advisors you’ve added?

Philip J. SandersChief Executive Officer

Sure. Shawn, do you want to take that one?

Shawn M. MihalSenior Vice President and Wealth Management

Yes. Thanks, Phil. And Dan, thanks for your question. We’re continuing to see even in midst of the COVID-19 impacts and the pandemic and having to do some alternate-type approaches with regard to recruiting virtually. We’re still seeing a strong pipeline that’s coming through the organization. We’re actually we look at the overall background and the typical profile. Our average recruiting has been right about that $400,000. And when we take the 21 advisors for the 2020 year average productivity is about $390,000. So consistent with that target that we laid out there. We’re trying to recruit toward that more high-producing-type advisor targeting around $400,000 in production.

With that, we’re seeing a relatively diverse background coming from a variety of different firms, independent banks, some wire house as well as the RIA channel. So a relatively diverse group that’s coming into the organization, but consistent with what our value proposition has been, which has been focused on the build-out of our competitive technology package, but more about the overarching support model that we’ve been providing to our advisors with detailed practice development services, advanced sales, diamond service support, things of that nature that have really driven the experience with those advisors.

So we’re seeing quite a bit of background there that’s driving that competitiveness around a multitude of different aspects and advisors that are coming into the organization. Again, the pipeline is remaining strong for us. We’ve seen five advisors on board in the month of July here with bringing in assets in that range of about $1.5 million prior firm trailing TGR, total gross revenue. So the pipeline is remaining active, and we’re working through some of the complexities related to the COVID-19 pandemic.

Dan FannonJefferies and Company — Analyst

Thank you.

Operator

The next question is from Mike Carrier with Bank of America. Please go ahead.

Mike CarrierBank of America — Analyst

Maybe first one, just on the net flows. Still in the unaffiliated channel, you guys saw a good improvement. We can see the trend in terms of the lower redemptions, still were fairly steady. But anything particularly driving that just in terms of like certain products or certain platforms you noticed like a significant change? Obviously, like industry trends got better, but just wanted to see if there was anything specific for Waddell.

Philip J. SandersChief Executive Officer

Amy, do you want to touch on that?

Amy J. ScuphamSenior Vice President and Distribution

Yes. Good morning, everybody. And thanks, Mike, for the question. I would say you’re right. The industry flows just generally got better, especially as it related to redemptions. But when we look at it product by product, with the Phil mentioned in his script of the improving short-term performance of international core, which is with the relative value strategy coming back in favor. And we saw some decreased redemptions in that strategy. That was a big driver, but we really thought across the board and more heavily in the strategies where we focus our sales efforts. So it really was across the board, but led by international core.

Mike CarrierBank of America — Analyst

Okay. And then just a quick follow-up. So on the fee rate, you guys mentioned the price changes and for everyone, the mix this quarter created a lot of volatility. I don’t know if you can parse that out in terms of the impact, but just trying to get a sense of what’s more normal just given the pretty significant move in the quarter?

Philip J. SandersChief Executive Officer

I don’t know Ben, do you want to take that?

Benjamin R. ClouseSenior Vice President and Chief Financial Officer

Sure. I would be happy to. Yes, a piece of that, of course, were the new fee waivers that we added on Large Cap Growth and core bond. And again, we expect those to have an annualized impact of $0.01 to $0.02. So of course, the quarter was a proportional piece of those. The other thing going on there was mix, in particular, ICE, or international core equity, flows, as Amy alluded, that shifted our fee rate a little bit. And then we are, as are many others, making up some of the rate on money markets just due to the low rate environment, that also had a very small impact in the quarter.

Mike CarrierBank of America — Analyst

Okay, thanks a lot.

Operator

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

Bill KatzCitigroup — Analyst

Okay, thank you very much for taking the questions. So just coming back to your distribution margin a little bit. Appreciate there’s probably some moving parts in that quarter-to-quarter. But it does look like it sort of squeezed down a little bit in terms of profitability. Could you talk a little bit about what might be driving that? Is there any sort of unusual items in there? Is that sort of the right way to be thinking about it looking ahead?

Philip J. SandersChief Executive Officer

Okay. Ben, you want to take a crack at that?

Benjamin R. ClouseSenior Vice President and Chief Financial Officer

Yes. I think part of that, of course, were lower asset levels, in particular, starting at the beginning of the period, which probably had the most significant impact on both wealth and asset management. As a reminder, most of our advisory assets in the wealth business are billed at first of the month based on asset levels. And so some of that is just the way the calculations work. And movement, of course, during the quarter was quite significant and, as you well know. We also had a little bit of a decline in sales in insurance products, again, in the wealth business that we mentioned in our comments that were contributing to that.

Bill KatzCitigroup — Analyst

Okay. That’s helpful. And then just as I think about the pipeline you had mentioned is pretty good. When you can you talk a little bit about which segments within the wealth management business that you’re really seeing the greatest opportunity set right now?

Philip J. SandersChief Executive Officer

Okay. Bill, are you referencing potential M&A opportunities or that type of thing?

Benjamin R. ClouseSenior Vice President and Chief Financial Officer

Well, sure. It was actually more of an organic argument, but I didn’t want to double down the inorganic question. But if you want to answer it that way too, I would be certainly open to your views.

Philip J. SandersChief Executive Officer

Yes. Well, Shawn, why don’t you talk about what you’re seeing in terms of on the recruiting front and the opportunities to add to our advisor count over time?

Shawn M. MihalSenior Vice President and Wealth Management

Yes. The pipeline we’ve been working has been relatively fluid for us. When we look really across the segment, most predominantly it’s the other independent channels, so other independent firms where we’re seeing most inflows of advisors coming into the what on reorganization. And I think what’s resonating there is really the overarching package that we’ve assembled here, a competitive technology, payout grids, overarching product and open architecture, development on our advisory programs that we’ve been working on for the past several quarters, but it’s really resonating around additional support models with advanced sales support through our Wealth Solutions Group, the materiality of our practice development team as well as field support that we have embedded out there.

We’ve done a lot over the course of 2020 to still maintain service levels and support models in light of COVID-19, evaluating the situation and doing a variety of different types virtual opportunities, including the migration of our in-person conference to a virtual-based conference that had a lot of success associated with it. So all of those things are resonating with advisors and promoting that opportunity to organically grow the organization with obviously seeing the inflection point modestly here this past quarter with an uptick in advisor headcount, just a modest uptake.

But it’s the first head count increase since the fourth quarter of 2015. So a lot of the work that’s been done over the last several quarters and couple of years to really drive to the competitiveness of the firm is resonating and what we’re seeing from those other independent firms is either coming from larger firms where the support isn’t as robust with regard to that more dedicated type of support that I mentioned through the various different personnel services, where we can compete, obviously, the technology and payout grids and things like that, but really giving that to those advisors that are not getting that type of support at larger firms, or at the lower smaller firms, having the opportunity to provide those overarching competitive packages with the support programs that I mentioned is really what’s driving that. And maybe I’ll refer back over to Phil and Ben on the inorganic M&A side.

Philip J. SandersChief Executive Officer

Okay. Thanks, Shawn. Ben, did you want to make a point there?

Benjamin R. ClouseSenior Vice President and Chief Financial Officer

Yes, Bill. I would add to Shawn’s comments just from a product perspective in addition to the points Shawn made in regard to advisors. We’re certainly focused on our advisory suite of products, which, as you know, we’ve expanded and grown. And as you heard in the comments, we are very pleased with the asset growth there. On the M&A side, just adding to Phil’s earlier comments in the wealth business, it’s really about driving more scale. So we believe we have a best-in-class grid. We are in the process of building out our technology to also be best-in-class and have made a huge amount of progress there. But believe we now have the infrastructure in place to support greater scale, more advisors with the platform that we’ve put together.

Bill KatzCitigroup — Analyst

Great. It’s helpful. If I know I’m violating the code here, but can I just squeeze one more question in? Just I appreciate that your flows have gotten better sequentially. But when you look month-to-month, like June was a little bit of a step back month on the retail side. Can you maybe talk a little bit what might have happened there despite sort of very elevated retail engagement just more broadly? And then how are things looking into July?

Philip J. SandersChief Executive Officer

Amy, do you want to take that?

Amy J. ScuphamSenior Vice President and Distribution

Sure. Sure. Yes. So Bill, we did see a little bit of a step back in June. It was actually more of an increase in redemptions in that month than it was a decrease in sales. When you look at July, you’re seeing, I guess, trends on par with June, maybe slightly better due to better redemptions. But I think what we’re seeing is a little bit of seasonality just going into the summertime months. Second quarter is generally one of our second best quarters of the year. And so the third is typically the worst. So we’re seeing we’re seeing a little bit of seasonality.

And then we’ve also seen that return to fixed income, heavy fixed income flow, especially across the intermediary marketplace. And then I would say, just to add a little bit more to that, Bill, for some context. When you look across our institutional channel, as we know, it’s a lumpy channel that can have big inflow, big outflow. We’ve had two consecutive quarters of no client losses and continue to see the pipeline growing there.

And I think that’s an important point to make because from a long-term flow perspective, you have a lot of institutional overlay in the intermediary and retail marketplace. And we’ve had some positive markers of success with some of those gatekeepers on that side of the business. And during the quarter, had two semifinals and one final presentation. So definitely progress on that side of the business as well, which will help the overall flow profile.

Bill KatzCitigroup — Analyst

Okay. Thanks for answering all the questions this morning.

Operator

The next question is from Michael Cyprys with Morgan Stanley. Please go ahead.

Michael CyprysMorgan Stanley — Analyst

Hey, good morning. Thanks for taking the question. Just wanted to ask about profitability, about 10% operating margin in the quarter here, down from around 15% or so where I think you’ve been operating for a number of quarters. Arguably, this current quarter impacted by the lower average AUM level. So I guess is there a minimum level of profitability that you’re kind of keeping in mind here that you’re managing the business too and a floor, if you will, and if it falls below which you’d consider more strategic changes. So just curious how you’re thinking about that? And as you look out over the next couple of years, what’s the right level of operating margin or pre-tax margin for Waddell over the next couple of years? How are you thinking about that?

Philip J. SandersChief Executive Officer

Okay. Ben, do you want to address that? Is Ben on the line?

Operator

Mr. Clouse is still connected, perhaps he muted his phone?

Philip J. SandersChief Executive Officer

Maybe I’ll just at a high level, Michael, I’d say I think with respect to the short-term volatility and profitability, I would say, I think we’ve been pretty clear. We’re managing the company for the longer-term. And the strength of the balance sheet and the financials allow us to kind of make the strategic investments we need to do to kind of get us where we need to be over the long term. So we’re not going to overreact to short-term volatility in the market.

And a lot of as you pointed out, a lot of that profitability metric was influenced by asset levels and that type of thing. But as we move forward, we think that will operate over time. We have a long-term opportunity here in terms of strengthening the profitability and the wealth management aspect of our business, and we’ll get to more competitive levels with respect to the enterprise over time. Let me see if Ben is back on. Ben, are you back on?

I don’t know. I think he is trying to get back on, Michael. So maybe we’ll go to the next question and have him circle back and when he reconnects and we can come back to that question.

Michael CyprysMorgan Stanley — Analyst

Yes. Sure. And I’m happy to follow up off-line as well. Maybe just a quick follow-up on some of the retail distribution initiatives, some of the new vehicles that you’re bringing to the marketplace on SMA model delivery. Just curious how you’re thinking about the opportunity set there? How much is that contributing, would you say, today to AUM and flows? And as you look out, what are sort of the next things on your to-do list there?

Philip J. SandersChief Executive Officer

Sure. I think, Amy…

Amy J. ScuphamSenior Vice President and Distribution

Yes. Mike, this is oh sorry, Phil.

Philip J. SandersChief Executive Officer

Yes. No. Go ahead, Amy.

Amy J. ScuphamSenior Vice President and Distribution

Yes. So as it relates to the model delivery or SMA portfolios today, it’s contributing very little to the overall flow in AUM picture. You’ll recall that we launched the first seven model delivery portfolios last May. So just a little bit over a year ago. We’ve seen some pretty good progress on the RIA side of the business and getting a couple of additional model placements and opportunities, which have a huge opportunity to drive flows. So I’ll give an example. One of the contracts that we signed last quarter is on a model provider that has over 100 bank trusts that utilize that platform. So the ability to drive flow that direction is going to be fairly substantial.

The work that we’re still in the midst of is working with our broker-dealer distribution partners for placement there. And the point of that is to be able to offer the flexibility of vehicles to their advisor basis based on whatever program they might be in and model delivery is certainly one of those, especially when you look across the domestic equity asset class. I think from a product development standpoint, we focus in we’re kind of focused in a couple of areas.

Certainly, we’re taking a look at the ETF structures, whether it’s fully transparent or semi-transparent. It’s still a discussion and a decision for us to make. But making sure that we’re paying attention to the newer vehicles out there in the marketplace that might be garnering flow. And then when you partner that with potential our current active capabilities that we have in incubator portfolios or potential acquisition or talent addition in other spaces could certainly add ability for us to launch a series of ETFs as well.

Philip J. SandersChief Executive Officer

Okay. Thanks, Amy. Michael, we do have Ben back on the line. So I might just ask him to add any question any perspective with respect to your question on the short-term dip in profitability given the market sell off.

Benjamin R. ClouseSenior Vice President and Chief Financial Officer

Yes. Sorry about that, Michael, about the technical difficulty. I apologize, I didn’t hear the answer. I would just give here would be my context. As a reminder, we operate two lines of business, asset management and wealth. So of course, you’re looking at a blended margin. As we talked about before, we have a number of initiatives that we’re pursuing to drive margin improvement. I don’t think we clearly have any particular floor. And as we talked about in the first quarter, we identified a number of savings initiatives or things to enhance the margin. But at the same time, we’re very much focused on the long-term and investments we continue to make in our business. And we are very much aligned as a management team and with our Board on that. So I apologize if that’s duplicative, but hopefully, that helps.

Michael CyprysMorgan Stanley — Analyst

Great, thank you so much. Appreciate the color.

Operator

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

Robert LeeKBW — Analyst

Hi, good morning. Thanks for taking my question. I guess my first question is just on comments around expense and the guided, the controllable expense guidance in the next couple of quarters. Just trying to get a feel for do you think beyond the next couple of quarters into next year, understanding that you’re in the process of moving headquarters, obviously, even investments to make. So is there any piece of that, that you feel like spend technology spend or otherwise, and we maybe start to see ease or fall off as we kind of move into 2021 at this point? Or are you or is there or is this really kind of at least right now, kind of thinking about good run rates as kind of normal inflation growth from here?

Philip J. SandersChief Executive Officer

Okay. Thanks for the question, Robert. Ben, do you want to address that?

Benjamin R. ClouseSenior Vice President and Chief Financial Officer

Yes. Robert, obviously, the farther out we look, the less precise we can be. I agree with your promise that inflation is a good proxy for expense growth. Of course, we will continue to look to offset that through efficiency efforts. In regard to the technology spend, I referenced, and the investments we’re making there. That will continue into 2021, at least for the first part of 2021, in particular, to our wealth management business.

Some of those technology investments are in areas of workflow and onboarding and things we’re doing to drive a better advisor and client experience that will result in some efficiencies ultimately once fully implemented. I would also remind you of our ongoing real estate transition, which we will largely have concluded by the end of this year that will also drive some margin improvement for us into 2021.

Robert LeeKBW — Analyst

Okay. Great. And maybe a follow-up, just in the wealth management business. Can you maybe update us on how Waddell audits preparing kind of in the sales mix. So for example, our just observation kind of seems like convention rate to tell. Then there but maybe sales in the wealth management channel of Ivy products have moderated. So are you seeing just even existing advisors just allocate more and more lending to the third-party products? And when you bring in a new advisor, what’s kind of your expectation over time as it relates to their ability to sell more Waddell product deal that is kind of your breakeven analysis.

Philip J. SandersChief Executive Officer

Yes. Shawn, do you want to take a crack at that one?

Shawn M. MihalSenior Vice President and Wealth Management

Yes. I’ll maybe start it off and certainly, Ben and/or others, Amy may want to comment as well. And when we look at this with regard to just inside the wealth management business, our overall ratio of affiliated funds was at about 64.8%. The prior quarter was about 64.3%. So not much change between the quarters. But when we look back a little further, the ratios at this time last year was about 67.6%. So what we’re really seeing is with regard to new sales going forward as we’ve opened the architecture is that new sales are going into a broader product set. So with existing advisors, legacy advisors as well as new advisors that are joining the organization, having a broader product set means that the sales are going to a broader space of opportunities there.

So we do look at reasonably what those expectations are for sales of affiliated funds going forward. But we know that those sales are going to, on a new sales basis, continue to reduce in some regard with regard to the open architecture of the platform. So on that wealth management side, we do expect to see that, that rate continue to shift. As we’ve seen here over the course of the last year just based on primarily new sales going forward, there likely will be some minor migration of assets that we’ve seen over the course of the last time here. But at least new sales going forward to a broader products that will lead to a more dispersion in that affiliated fund product mix. And I might just turn it over to Ben or to Amy to talk about the Ivy side.

Amy J. ScuphamSenior Vice President and Distribution

This is Amy. I’ll go ahead and make a couple of comments here. Yes, I would agree with everything that Shawn said as the advisors within the wealth manager have more selection across their advisory platform. In particular, we have a range of market share depending on which product that they’re using. And so I would expect to see a continued mix shift of less unaffiliated or more unaffiliated funds being utilized inside of that base.

However, as the wealth manager continues to grow and recruit new advisors, potential acquisitions, we do have the ability to compete inside of that advisor base as well. My expectation would be that we would that it looks very similar to what it does in our unaffiliated partners where your more competitive product can bring in up to tend to 10% to 15% market share in a fully open architecture, and it would move down from there. So it would just really be dependent on which product they’re using inside of the wealth manager and then the competitiveness of our individual strategies within that.

Shawn M. MihalSenior Vice President and Wealth Management

One last point I would add on that, which we’ve seen a bit of already. But certainly, over the longer term, our wealth management business provides greater balance and stability to our overall firm revenue as those assets are more resilient during periods of volatility and the and the work we’ve done in transitioning the business model and wealth has certainly helped those dynamics. So that’s another aspect of that as well.

Robert LeeKBW — Analyst

Great, thank you.

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. SandersChief Executive Officer

Okay. Thank you. Appreciate everybody joining us. And my apologies again for the technical difficulties at the start of the call. But as you can see, we’ve undergone quite a bit of a business model transformation over the last couple of years.

But given our strong capital position, really feel comfortable with the state of the world these days with respect to our model and how it’s evolved, and our ability to invest in continuing to build out our institutional caliber asset manager as well as now be positioned to really grow the wealth manager over time and the power of that business model through the combination of both an asset manager and a wealth manager supported by shared services functions really is quite unique in the industry and one that gives us a lot of confidence in terms of our ability to grow in the future. So with that, I will conclude. And just, again, thanks, everybody, and have a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Michael J. DaleyVice President-investor Relations and Controller

Philip J. SandersChief Executive Officer

Benjamin R. ClouseSenior Vice President and Chief Financial Officer

Daniel P. HansonSenior Vice President and Chief Investment Officer

Shawn M. MihalSenior Vice President and Wealth Management

Amy J. ScuphamSenior Vice President and Distribution

Glenn SchorrEvercore — Analyst

Dan FannonJefferies and Company — Analyst

Mike CarrierBank of America — Analyst

Bill KatzCitigroup — Analyst

Michael CyprysMorgan Stanley — Analyst

Robert LeeKBW — Analyst

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