Good afternoon, and welcome to the IGM Financial Third Quarter 2019 Earnings Results Call for Friday, November 1, 2019. Your host for today will be Mr. Keith Potter. Please go ahead.
Thank you, Patrick, and good afternoon. I'm Keith Potter, Treasurer and Head of Investor Relations, and welcome everyone to IGM Financial's 2019 third quarter earnings call. Joining me on the call today are Jeff Carney, President and CEO of IG Wealth Management, and President and CEO of IGM Financial. Barry McInerney, President and CEO of Mackenzie Investments. Luke Gould, Executive Vice President and CFO of IGM Financial. And we also have a special guest with Rhonda Goldberg, who's Executive Vice President and General Counsel of IGM Financial, who will be sharing our perspective on the Client Focused Reforms final rule today. Before we get started, I would like to draw your attention to our cautions concerning forward-looking statements on slide 3 of the presentation. Slide 4 summarizes non-IFRS financial measures used in this material.
On slide five, we have provided a list of documents that are available to the public on our website related to the third quarter results for IGM Financial. With that, I'll turn it over to Jeff Carney, who will review IGM's 2019 third quarter results, starting on slide seven.
Thank you. We ended September 30, 2019, with record high quarter and total AUM of CAD 162.5 billion, driven by investment returns generated by our clients. We had investment fund net sales of CAD 103 million, reflecting improving high net worth client acquisition at IG Wealth Management and continuing sales strength at Mackenzie Investments. Earnings per share were CAD 0.85 for Q3 2019. I'm pleased with the two announcements made in the quarter, which demonstrates our progress and commitment to leverage tier one providers to assist in our transformation. First, on September 20, we announced that CIBC Mellon has been selected to provide fund administration services to enhance operational efficiencies.
It made sense for IGM to perform these services in the past, but now industry standard solutions offered by globally scaled service providers creates new opportunities to further improve our cost structure. Second, we recently announced that IGM is adopting Google Cloud to manage data. This relationship will provide IGM with scalable, modern technology solutions to store data and use it to gain insights through advanced analytics. This will support decision making, provide insights to our advisors for use with clients, and overall support of our digital strategy and platforms across IGM. We expect these two announcements will deliver benefits to our clients and our shareholders, and gives us great confidence in achieving our non-commission expense growth guidance of 4% in 2019, and 3% in 2020.
The expected cost savings are notable and provides us with more flexibility and discretion over the coming 12 months as we sequence our other elements of our transformation journey. We look forward to sharing more transformation milestones as we continue to gain traction and accelerate the impact. Lastly, final rules on Client Focused Reforms were published during the quarter. Overall, there were no surprises, and we're pleased to see that the majority of our advocacy put forward in our comment letters was accepted by the CSA. Rhonda Goldberg will speak more to this in a moment, though I will say that the transformational changes we've made across our businesses over the past few years, it has positioned us very well from a regulatory reform standpoint. Slide 8 highlights the performance of major equity and fixed income indices.
Most markets were up slightly in the quarter, and since December 31st of last year, our clients have earned investment returns of 10%. Turning to slide nine, the industry advice channel experienced long-term mutual fund net redemptions of CAD 1.3 billion during Q3, representing a small improvement relative to the third quarter of last year. Turning to slide ten, on our results for the third quarter, average AUM increased to CAD 162.1 billion. That was up 1% year-over-year. Investment fund net sales were CAD 103 million during Q3 2019, compared to CAD 137 million last year. IGM's adjusted net earnings were CAD 202 million for the quarter, and adjusted earnings per share were CAD 0.85. That's up 4.9% from Q2 2019.
Slide 11 contains the breakdown of IGM's quarterly results across our segments. You can see earnings are up in all segments relative to Q2 2019. The main drivers for lower earnings in corporate and other relative to Q3 2018 is a decrease in the proportionate share of associate earnings from Great-West Lifeco of CAD 8 million, and the inclusion of Personal Capital losses of CAD 4.3 million. I will now turn the call over to Rhonda, who will cover IGM's perspective on the Client Focused Reforms.
Thank you, Jeff. As you know, on October 3rd, the Canadian Securities Administrators, the CSA, published reforms to enhance the client-registrant relationship, referred to as the Client Focused Reforms, amending National Instrument 31-103, the registrant regulation rule and its companion policy, which impacts dealer firms and advisors. The amendments are the outcome of a six-year public consultation process, seeking to better align the interests of registered firms and individuals with the interests of their clients. The CSA expects that the amendments will result in a new higher standard of conduct across all categories for registered dealers and advisors and their representatives.
Among the notable changes, the amendments will require registrants to put clients first when discharging their Know Your Client, Know Your Product, and suitability obligations, address material conflicts of interest in the best interest of the client, and do more to clarify for clients what they should expect from their dealers and advisors. Provided all ministerial approvals are obtained from CSA members, the amendments will come into force across Canada on December thirty-first of this year and will be phased in during a two-year transition period. IGM has been engaged throughout the consultation process, and we were pleased to see our advocacy reflected in the final amendments. We believe we are well-positioned across the company. Our focus at IG Wealth Management on financial planning and mandating the CFP designation equips our consultants to meet the heightened KYC and suitability obligations.
Our National Service Centre further allows for servicing smaller accounts, consistent with the CSA's guidance, allowing flexibility to tailor the reforms to the client's needs and the services provided. An emphasis both at IG and IPC on managed solutions aligns with the emphasis on portfolio suitability, and the breadth of Mackenzie's diversified solutions and competitive pricing and performance supports firms' and advisors' suitability obligations. It's also important to note that it's permissible under the Client Focused Reforms to have an exclusive or proprietary product shelf, with the companion policy providing guidance regarding the CSA's expectations for firms to address and document the resolution of material conflicts of interest.
Our recent actions to simplify and align consultant compensation with client outcomes at IG Wealth Management, as well as our move to a product shelf of leading sub-advisers with ongoing evaluation and monitoring of our product competitiveness, aligns with the new KYP and conflict expectations. IPC similarly has robust KYP processes. Our move away from DSC and towards fee-based product solutions at IG further supports the direction of the Client Focused Reforms. Overall, the IGM companies were well prepared for these reforms, and we do not foresee any implementation concerns. With that, I will turn it back to Jeff.
Thank you, Rhonda. Turning to IG Wealth Management's Q3 highlights on slide 14, AUM reached record quarter and high of CAD 90.8 billion. That's up 9.2% year-to-date, driven by positive investment returns for our clients. Net redemptions were CAD 291 million during the quarter, an improvement from CAD 537 million net redemptions in Q2 2019. These figures exclude net flows into high interest rate savings accounts, which were CAD 69 million during the third quarter. IG Wealth Management's gross sales increased 3.1% year-over-year, driven by continued momentum in high net worth and mass affluent segments, which experienced a 16.4% increase in sales into our high net worth solutions. The strength in high net worth was partially offset by lower sales in mass market segments, which is expected as we focus on our targeted markets.
The other point I'd make on IG sales is that our success in the high net worth space is significantly increasing consultant productivity, with a 17.5% increase in gross sales per licensed professional relative to last year. I'm excited about the progress that we're making on a number of our transformational initiatives at IG Wealth Management. I mentioned previously that we are targeting to have 2,000 teams across Canada and are committed to this. We are seeing that our new recruits will come from both our traditional sources as well as growing volumes of industry recruits. Our centralized screening program is working well to confirm high level of quality recruits.
While it will take time to achieve 2,000, I'm pleased with our progress and can advise that at the end of the third quarter, we have our best results in 3 years for volume and quality of recruits. I'm also encouraged to see our existing team showing confidence and hiring new quality team members to scale their practices. This illustrates strong optimism in our network. I'll also speak to another initiative in a moment, the rollout of our IG Living Plan Snapshot. Turning to slide 15, on our high-level operating results. As I mentioned, net redemptions of CAD 291 million in Q2 was an improvement quarter-over-quarter, and IG's gross sales are up 3.1% year-over-year. Slide 16 includes some additional perspectives on Q3 gross sales.
While total gross sales increased by 3.1%, sales into high net worth solutions reached CAD 1.1 billion, an increase of 16.4% relative to last year. I spoke to the strong momentum we are seeing in the acquisition of high net worth households last quarter. This trend further accelerated during the quarter, with gross sales from acquisition of new households with more than CAD 500,000, increasing 21.6% relative to the same period last year. We're very encouraged by this trend, and it demonstrates that our strategy is working, and IG Wealth Management's value proposition is resonating with this growing client segment. Offsetting this, we have seen gross sales decline in the mass market segment, which we expected. We've intentionally focused on segments where our value proposition is strongest.
As I mentioned on our last call, we launched IG's National Service Centre in 2018 that is focused on our mass market clients. As a reminder, the service center is resourced with a team of salaried financial representatives that help ensure we provide consistent level of service to all households. This also helps us free up consultant time to acquire and service high net worth and mass affluent clients. We continue to make progress in delivering better data with our focus on our managed solutions, which now represents 55% of our long-term AUM and 81% of all our long-term growth sales. Slide 17 highlights IG Wealth Management's long-term trailing twelve months redemption rate of 10.2%, which remains well below the industry average of 17.4%.
Turning to slide 18, IG Wealth Management has introduced the IG Living Plan Snapshot to measure Canadians' financial well-being. The tool is a proprietary online resource that provides Canadians with an indication of their financial well-being on a 0 to 100 scale across 5 dimensions. It brings together IG Wealth Management's expertise and experience in financial planning, digital technology, and data science to provide a snapshot at a time of how capable a household is of making their financial aspirations a reality. The snapshot is designed for Canadians who do not yet have a comprehensive plan, or who are already working with an advisor and are looking for a second opinion, creating an opportunity to initiate a conversation with an IG consultant.
Existing IG Wealth Management clients can benefit from a more comprehensive plan assessment and actionable next steps using existing details from their personalized financial plans while working with an IG Wealth Management consultant. This is one example of IG's commitment to offering superior financial planning to Canadians, and we look forward to other new initiatives being rolled out in the fourth quarter, including the first phase implementation of our Advisor Digital Desktop, powered by Salesforce. On that, I'll end my comments.
Thank you, Jeff. So we can turn to slide 20 to review Mackenzie's results for Q3. Mackenzie's investment fund AUM reached CAD 62.2 billion at the end of the third quarter of 2019, a new record high level and a 12% increase year- to- date. We continued to gain market share versus our advice channel peers in the quarter, with total investment fund net sales of CAD 491 million. Mackenzie's retail investment fund net sales were once again strong at CAD 378 million. This marked our 12th consecutive quarter of positive retail mutual fund net sales and our 14th consecutive quarter of positive retail ETF net creations. Mackenzie's investment performance also remains solid, with 48% of our mutual fund AUM in four- or five-star rated funds as at September 30.
We also received the results from Environics's latest advisor perception studies. These studies surveyed thousands of Canadian financial advisors to uncover their views on mutual fund and ETF sponsors. Mackenzie's results show continued progress on our goal to be the number one overall investment fund manager in Canada. We're particularly proud of our ongoing increases in sales penetration in both the IIROC and MFDA channels. I'll state more of these results in a coming slide. Slide 21 highlights Mackenzie's operating results. Q3 mutual fund gross sales of CAD 2.3 billion was an all-time record high third quarter result after adjusting prior periods to remove fund allocation changes. Total investment fund net sales were CAD 491 million, and Mackenzie continues to capture market share versus peers in the advice channel.
Our long-term investment funds, which includes both ETF and long-term mutual funds, had an organic net sales rate of 1.6% during the twelve months ending September 30th. Mackenzie experienced net redemptions of CAD 15 million in the institutional, sub-advisory, and other categories, excluding the impact of the previously disclosed CAD 1.2 billion MD Financial Management redemption. The MD-related redemptions were low fee sub-advisory accounts that have now been internalized. As we mentioned on the last call, the annual revenue impact is low at approximately CAD 1 million. I also spoke on the last call about our strong institutional pipeline, and I'm happy to report that our team continued to add wins to the pipeline during the third quarter.
At this time, we have approximately CAD 600 million of unfunded institutional and strategic alliance net inflows that are expected to fund over the next 3 to 6 months. Our continued retail sales momentum is presented on Slide 22. As I mentioned earlier, Q3 2019 marked the 12th consecutive quarter of positive retail investment fund net sales. Mutual funds and ETFs are consistently attracting positive net flows. Mackenzie's retail sales captured 7% of advice channel long-term mutual fund growth sales during the third quarter, and a line chart at the bottom of the slide shows the significant progress we've made over the last 3 years. On Slide 23, Mackenzie's ETF AUM reached the CAD 4 billion mark during the third quarter. Our traditional beta, strategic beta, and active ETF categories all experienced positive net creations this quarter.
Our ETF assets continue to be diversified across strategy and by client type. Retail makes up to approximately 50% of Mackenzie's ETF AUM. I'm pleased to share that this past summer, Wealthsimple added Mackenzie's ETFs to their client portfolio construction engine. Connected to this, we're adding new disclosure this quarter by breaking out the institutional component of our ETF business. This reflects instances where known partners have utilized Mackenzie ETFs in their own products. I included some of the highlights from the latest Environics Advisor Perception Studies on slide 24. Mackenzie remains third in overall perception in the mutual fund report. As I mentioned, our sales penetration improved once again in both the MFDA and IIROC channels.
We have traditionally been strong in the MFDA channel, and in recent years, we've built upon our strength in the MFDA, while also executing on a completely organic strategy to elevate our standing in the IIROC channel. We now hold a top 2 rank in both IIROC and MFDA channels. I'm extremely proud of the entire Mackenzie team's accomplishments. The success of the team's efforts and our strategy is evidenced in our net sales results quarter after quarter, as well as throughout these annual advisor perception studies. On slide 25, Mackenzie's investment performance remains strong. At the end of the quarter, more than 50% of our mutual fund assets were above median in the 1-, 3-, 5-, and 10-year periods, and 40% of our AUM is in 4- or 5-star rated funds. Turning to slide 26, value-oriented strategies remain out of favor.
Mackenzie's growth-oriented boutiques continue to have the majority of their assets rated four or five stars and are tracking significant net sales in the retail channel. Our global equity and income team and fixed income team are also performing very well. With that, I'll turn it over to Luke to review IGM's financial results.
Great. Thanks, very good afternoon, everyone. Let's turn to page 28, and I don't have many comments on this slide. I'd just say, as you know, financial markets were generally up in the quarter, and our investment fund assets increased by 0.8% and are at record high levels, as Jeff reviewed. I'd also note we did continue to see improvements in financial markets through October, and we will be reporting slightly improved asset levels once again when we release our October results on Monday. Turning to page 29, you'll see our consolidated IGM EBIT and the margin as a percent of average assets, and you'll see here it was a very clean quarter in terms of financial results. On the right, I'd highlight that the net fee revenue rates are stable at 122 basis points.
I'd also highlight in the bottom right, that non-commission expenses are down slightly as a result of seasonality, timing, and expense management. In the chart on the left, I'd highlight that the second stack from the top is our net investment income and share of associates earnings. And you'll see this has been running at around CAD 46 million each of the last two quarters. And I just highlight that, our share of earnings in this period from Great-West Lifeco was depressed by a CAD 4 million true-up of prior period results. We always accrue to analyst estimates and true up in the following quarter. So if you look at the level of earnings published by Great-West Lifeco on that Wednesday, you'll see that this line is actually running closer to CAD 50 million right now, as opposed to CAD 46 million actual quarter in the period.
Moving to page 30, a few comments on our consolidated income statement. At the bottom, you'll see that our CAD 0.85 EPS is down 7.6% from last year, which was our all-time record high quarter, and is up 4.9% from Q2. As you saw in the last slide, net fee rates as a percent of assets were very stable in Q3 relative to Q2, and point one that we've added in this slide highlights that net revenues are up as a result, both of higher average assets, as well as having one more calendar day in the quarter. The second point highlights that, while our proportionate share of associates' earnings is stable with Q2, is down notably from Q3 2018.
Part of this, as Jeff mentioned, is the inclusion of Personal Capital, where we started equity accounting for it in Q1 2019, and you can see that this was CAD 4 million. We don't have any slides on Personal Capital in the presentation today, but I, I would refer you to the supplemental info, and you'll see the growth at Personal Capital continues to be very strong, with tracked assets up 5% in the quarter and 23% year- to- date. And we did cross over the CAD 1 trillion Canadian threshold in tracked assets during the quarter. I'd also highlight that AUM for Personal Capital is up 7% in the quarter and 40% year to date, and is now at CAD 14 billion. So lots of strong growth at Personal Capital.
The other part of this decline was, the point I referenced in the last slide, that Great-West Lifeco earnings, which include a CAD 4 million true-up in this quarter's results, were down relative last year. And again, you can add back that CAD 4 million to get earnings closer in line to what they reported, on Wednesday. And then lastly, point 3 highlights are non-commission expenses, which are down CAD 5 million in the quarter and up CAD 8 million from last year. As Jeff mentioned, we are maintaining our full year guidance of 4% increase, from last year. We're also maintaining our 2020 guidance of a 3% increase in this line at the current time. I'd note, as Jeff said, we're very excited about the transformation initiatives that we discussed earlier, with CIBC Mellon and Google Cloud.
These initiatives provide many benefits, including noteworthy cost savings to IGM and its clients. I'd note that we're still finalizing definitive agreements, but we will be showcasing these and other initiatives as part of our Q4 results release in February. We will be providing any further expense guidance for 2020 in February, and also be providing guidance beyond that 2020 once we finalize our planning process. I turn now to page 31, and I note here you can see IG Wealth Management's fee rates and compensation rates. Again, very clean. I'd highlight that all rates are trending to plan and in line with guidance we provided earlier. I'd also note that, as Jeff highlighted, we continue to see improvement in high net worth.
In the table at the bottom left, you can see that our average assets now has 53% in high net worth series. As the composition of clientele continues to move towards high net worth, there is continuing impact on the net management fee rate that you can see above. At the current trend, we're down about 0.5 basis points in the quarter, and we do expect to continue at a rate of about 2 basis points per year as we do succeed on our high net worth strategy and do continue to see more high net worth as a percent of our average asset balance. Moving to page 32.
On IG's financial results, you can see earnings before interest and taxes of CAD 205.8 million were up 5.6% from last quarter and down slightly from last year. As mentioned on the last slide, the results are very clean, with fee rates moving very much as expected. I would note on the second point, that while expenses are down from Q2 as a result of seasonality, we do expect increases more in line with their full year guidance for Q4 as we roll out some key initiatives that Jeff discussed, like our Advisor Portal with Salesforce. We also will be increasing our marketing spend as we head into our RSP season, and we do expect a good RSP season coming out.
Moving to page 33, you can see the fee rates and the key drivers for Mackenzie's earnings. The only item I'd highlight here is, and you can see it in the stack bar on the left, is the loss of the CAD 1.2 billion sub-advisory mandate to MD early in the quarter. As mentioned by Barry, the fees were very low on this mandate, and as a result, you can see the net revenue rate has increased from 79.6% to 80.1%. Excluding the MD loss, the fee rates were very consistent with last quarter. And moving to page 34, you can see Mackenzie's earnings before interest and taxes were CAD 46.4 million, up slightly from Q2.
We did highlight in point one, that we had a slight loss on seed capital pertaining to some declines in emerging markets during the quarter. I would note on these, incubated mandates, we have had gains year- to- date. Moving to page 35, I conclude my comments by doing the usual highlight of our strategic investments. The key point I'd make is, there is about CAD 2.4 billion in value in these investments. We're pleased with the progress, and we're optimistic about the future. The only noteworthy event in the quarter is ChinaAMC was impacted by the strengthening Canadian dollar versus the yuan. But again, a lot of value here and, and again, a lot of optimism. With that, Patrick, I'll turn it over to you for questions.
Thank you. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please mute your handset before making your selection. If you have a question, please press star one on your telephone keypad. If at any time you wish to cancel the question, you may press the pound sign. Please press star one at this time if you have a question. There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Gary Ho from Desjardins Capital Markets. Please go ahead.
Thanks, and good afternoon. Just, maybe first question on the five-year transformation and specifically the two initiatives that you guys just talked about, the CIBC Mellon and Google Cloud, this quarter. Can you maybe elaborate a little bit more on, on it and how operationally and financially, how this could benefit, the firm over the next, near term and over the medium term?
Yeah, I can kick it off, maybe, and Luke can jump in as well. You know, we're modernizing our company and looking at the best providers globally. And so the Google relationship came out of a trip that we did and with all of our senior management, and spent some time with all of the fintechs that are driving the world these days. And you know, there's so much opportunity to take advantage of their scale and their investments and everything that they've built. And so from there, you know, we're launching our Salesforce obviously for our field, but we've also found other opportunities as well. And so we've got some projects that we're building together and working on together with the fintech world.
And so that's one theme. Second is on CIBC Mellon. You know, the world's changing and scale is getting bigger and bigger, and so when we saw this opportunity to find a new provider with CIBC Mellon, and the scale that they have compared to what we have, you know, it became very obvious that this was the right decision. And the economics from it is very powerful for us. And so because there's a lot of competition there, and so that's going to enable us to take those resources and invest them into our future.
Okay, great. Maybe just for Luke, you know, you're maintaining your non-commission expense guidance 4%. I think that would suggest CAD 273 million for Q4 or a 7.5% growth versus your Q3 number. I guess given that we're one third through Q4 already, you know, can you talk about the components that could make up that 7.5% increase in Q4? Or, you know, are you baking in some level of conservatism by maintaining the 4% + 4% guidance this quarter?
I'd say, so three key components. So number one is the rollout of our Advisor Portal. So that's our largest Salesforce, our CRM tool at IG Wealth Management. And so we do have a number of costs with implementing in the quarter. There are some change costs expected, as well as other implementation costs. So that's one clear thing that will be coming through in Q4. We do have increased marketing spend, as I mentioned, as we ramp up in advance of RSP season, and we do have some spend on other initiatives happening, including the migration of all our clients to our nominee platform as we start implementing Series U for all and at bundled pricing. So those are three key elements.
I would give clear guidance, we're going to meet or exceed or meet or be better than the 4% growth, but we are keeping that guidance in place. I'd also elaborate on Jeff's comments on the outsourcing of our fund administration custody to CIBC Mellon as well as Google. And would say as mentioned, and as you're querying about, there are meaningful cost savings. And so by meaningful, just on those two initiatives, it's about CAD 20 million a year, is what our expectation is. We are finalizing definitive agreements right now, but it does provide us a lot of flexibility in where we spend our money.
As you know, we're working to strengthen our offering to our clients and our advisors, and make sure that we're really doing everything we can to capitalize on our opportunity, while investing in transformation initiatives that are going to bring our costs down over the long term. That transformation journey, we're about halfway through right now and planting flags, but we do have more spend associated with bringing future opportunities to life. So that's kind of a summary of where we're spending our money and the nature of some of the benefits we're going to be realizing early on.
Great, Luke. And you said CAD 20 million, is that how much you guys are spending on that? Is that - or is that the savings?
Savings, that's the annual savings from those two initiatives that we expect. And that, and that's the savings to, to the corporation. We also have, benefits to our clientele, as part of the, the fund services and custody outsourcing.
Great. Just lastly, just on the use of the capital, Luke, I think you mentioned CAD 10 million investments in Wealthsimple in the quarter. I think your payout is in the mid-60% range, probably lower if you include the Great-West group. Just want to, you know, get an update on how you guys are thinking about excess capital, if you look out 12, 24 months. You know, are there opportunities to further invest in Personal Capital or China AMC, dividend growth, or perhaps, share buybacks?
We have a lot of flexibility right now on those choices. But we're obviously big fans of Personal Capital, and we're excited about their model, but we have other options as well, and so we'll share them with you as we go.
Yeah, and I think, Gary, we've given some guidance in the past, and, and we've been consistent on that. Dividends are very important to us. We're here to grow our dividends, and we're here to, to grow our earnings. And, and so you can expect as cash, as the dividend payout, as a percent of cash earnings gets closer to 65%, we would be, considering an increase. And as Jeff said, investments in fintech is something that, that, that we're excited about, as well as any other opportunities that come around to, to help us grow our business.
Okay, great. That's it for me. Thank you very much.
Thank you. The next question is from Geoffrey Kwan from RBC Capital Markets. Please go ahead.
Hi, good afternoon. Jeff, just had some questions for you on the net sales performance at IG. I think you had the slide where you were pointing to increasing the gross sales within the high net worth, but at the same time for the non-high net worth part, that has been coming down because you're not emphasizing growing that part of your business. And so, if that's the case, if I'm reading it right, then is you would need to really ramp up the high net worth gross sales to offset the lower or declining non-high net worth to help drive getting back to the black on net sales for IGs. Am I reading it right that way?
I'll let Luke start, and then I can comment.
Yeah, I'd say that's what you see, Jeff, is right. We're starting to see that execution on the high net worth strategy is clearly working. Q3 was a standout quarter, but we are having to offset a reduction in emphasis in acquiring clientele who have less complicated needs, and you can see that happening. I'd say overtaking the loss of the non-high net worth clients with high net worth is not a high hurdle for us to overcome. And so when we get the momentum in high net worth, it's going to be quite easy to exceed that slight reduction that we're seeing in the non-high net worth client acquisition. Does that make sense?
It does.
The drag's gonna go away.
Yeah, we've got a short-term blip where we've stopped acquiring a certain segment of clients, but we're starting to see the high net worth come through, and that will easily overcome.
Are you, are you willing to say kind of with your crystal ball, like, do you think that's something you can accomplish in, in 2020?
I'd say this management team is focused on that.
Yeah.
That's the momentum we're seeing right now in high net worth, and, as we move into our RSP season, that, that's what we're focused on, and it's accelerating.
Okay. And then, second question was on slide 17, talking about the redemption trends at, again, at IG. You know, it seems like historically, it didn't always really follow the industry trend that closely, but it's been ticking up for the last little bit, also with the industry. But just wondering, like, what's the reasons that this has been happening and kind of what your expectation as to how this trend plays out over the next, you know, 12, 24 months?
Yeah, I mean, we're basically following the industry. It's bumping along a little bit, but we're really optimistic about our sales. We think we're going to have an amazing RSP season. We just had an event with 1,200 of our consultants, and they are fired up. So, stay tuned, but we're feeling really optimistic right now, that and the field is very excited about our value proposition and the new tools that we're giving them.
Okay. If I can ask one last question, just on the overall, on the net redemptions. Obviously, it's been a very challenging industry environment. Do you think if the environment were to stay as it is right now, over the next year, do you think that you would be in a position to have positive net sales for 2020? Or is the industry environment going to have a, at the very least, a meaningful say as to how you guys perform next year at IG?
We absolutely believe we're going to get to net flows and positive gross sales and significant gross sales.
Okay. Thank you.
Thank you. The next question is from Tom MacKinnon from BMO Capital. Please go ahead.
Yeah, thanks. Good afternoon. I was just looking at the, as you kind of work to revamp your, consultant network, Jeff, I think you're to more of a team base. You seem to be working with a smaller pool of consultants. They're down like about 10%, over 10% year-over-year. What is your, what are your plans in terms of revamping your, consultants to a team approach, sort of in light of the fact that the number of consultants has been declining, and in particular, new consultants with less than four years experience is declining? So maybe you can talk around that, please.
Great question. In U.S., there's a different model. They're called the Registered Investment Advisors, and Schwab and Fidelity are big supporters of them through technology and everything else. And these RIAs, you know, there's one they can have CAD 10 billion, and you know, they build a value proposition, and they grow, and they use all of these incredible scaled capabilities from these incredible companies. And so we're sort of trying to model that same thing and have, you know, a big leader of the team and then diverse skills and, you know, have 10 to 12 to maybe 15 people on each of the teams. And, you know, it's when you have that, then you have diversity skills, you have specialist capabilities within the team, and you're confident.
And so, you know, we're gonna do everything we can to see who gets there the fastest. But, you know, there's a really good opportunity for us to do that. And when you have people on the team, and you're working with them, there's just more fun at work, and there's more energy at work. And when you're with two people or one person . It's a lot harder. So we're really encouraging the teaming and investing. And what's great is we're seeing that happening right now. Like, there are people who are hiring more people into their practices right now, and that's a great sign of that they're optimistic about staying with us and our future, but also the scale that we can bring to our company.
Yeah. When you say you're hiring more people and, I mean, the number of new consultants continues to decline. So I'm trying to figure out, how, should we be measuring the number of consultants, or should we be measuring the size of the people in these RIAs, if you will?
You should measure the number of teams, right?
Mm-hmm.
Which I said, we're targeting 2,000 teams. That's the measure you should look for.
Okay, so maybe and when do you think you'd be in a position to start disclosing the teams? And maybe should we be looking at sales by teams and things like that?
Actually, Tom, if you're looking at the supplement and the detail we provide on the consultant network, so the consultant practices is the number of teams.
Mm-hmm.
Which is 1,859. You'll see another line called Associates, and you can see 1,009 people there. Those are all employees within those practices. So the number of teams that we have is the 1,859. As Jeff's saying, those practices are very scalable. A, we're adding more associates underneath them, and B, you can do the - you can see the size. The average consultant practice is CAD 40 million right now, and we believe we have a lot of capacity to grow those practices, the productivity of those practices, as we move to high net worth and as we capitalize not just on our new tools, but also on our national desk for servicing clients with less complicated needs.
Okay. And then just a question on, you were, you were buying back stock at one point, and you haven't been buying back. Is there any reason for that? And it seems like you've got even, increased, you know, flexibility as a result of the, Google and CIBC Mellon arrangements as well. So, you know, is, is there any kind of strategy for the use of this in increasing free cash flow?
A good question. We did do, as you mentioned, some discrete share buybacks during the second quarter, and that was part of our participation in our sister company's substantive issuer bid, meaning we tendered proportionately to their bid to support them, and we disclosed to you in the market, we're going to use the proceeds to do some share buybacks, given that we had some flexibility, and we certainly believed it was a good opportunity. That said, our focus is on maintaining financial flexibility and making sure that we have the resources internally to focus on investment opportunities that we believe are going to be in front of us in the coming quarters.
Okay, thanks for that.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Hi. Thank you. It's Paul Holden here. I want to follow up on a few themes that have come up in the conference call and try and get a little more specific here, and I guess continuing the conversation on the number of consultant teams to begin with. When should we look for an inflection point in the growth rate there? Is that a 2020 story? Is it somewhere further out? When does that number stabilize and start to grow again?
Yeah, I mean, you know, it should be starting now. Like, we've had a lot of investments we've made that are allowing us to be more confident going forward in our investments. And you know, we had compensation changes. We've had a lot of things that have gone through our company, and I think the 1,200 people that were in that room now have all of the facts of what our model is and how to work within it, and they're really excited about their future. And so I think that's where basically what's happened. And, you know, there are pieces that we've been building along the way to get to here, a number of investments that we have made, including Salesforce coming shortly. And so, you know, it's allowing us to be a modern company and be efficient, and also deliver incredible outcomes for our clients.
Okay. And, Paul, I think you've seen and, you know, we're focused primarily on proficiency and the productivity of these practices. And so right now, when you look at the numbers, you can see we're at record all-time gross sales in Q3 of this year. So we're tied with our all-time record high of 2017, and we do have fewer people. The productivity improvement of the practices themselves has nearly doubled for those of more than four years. And what we're going to look to provide more disclosure on is the productivity improvements we've seen with new recruits. Our new recruit productivity is up 600% from 2016, when we tightened the standards.
So you can see the number of people has gone down, and we do think we're at or close to an inflection point as we make sure the teams we have are at the right standard. But the focus really has been for us on productivity, and we've got a lot of scalability with this current force of financial planners.
So is it fair to characterize then the decline in the number of consultant practices being a function of maybe teams or individuals that didn't fit with the new business model? Is that, is that fair?
Yes, that's fair.
Okay. Okay, good. Then I want to talk about the transition to unbundled fees at IG. So that's been ticking up a little bit slower than I would've expected, but you're planning in 2020 to kind of move the majority of assets, if not all the assets, to unbundled. When does the pace of change start to accelerate, and is there a particular catalyst we should look for that will lead to that increased rate of change?
This two big milestones coming right now, Paul. So, Q4 is the launch of Series U for all, where it will start being made available to some of our households with less than CAD 500,000, where they've previously been available to only high net worth. The other big one is the continued migration of accounts to our nominee platform. So over the last few months, we've had great progress. We've now got a majority of our accounts transferred. So you can think of there now being 800,000 accounts and hundreds of thousands being transferred over the summer in Q3. That migration will be complete by Q2 of next year.
By midway through next year, you could think of us selling substantively only unbundled products and having all of our clientele migrated over to them. But there is a lot of work to migrate that clientele to our nominee new platform, and we're more than halfway there right now.
We're also excited to see that our strategy of going upmarket is playing out, and you can see those in the numbers as well.
Okay. So if I'm, if I'm hearing that right, then really the inflection point should come sort of maybe a little bit in Q4, but more for Q1 next year.
Yeah, that's right.
Okay. Okay.
That seven months from December to June, really going from where we're at now to going to having substantively all of our assets and sales unbundled.
Okay, got it. That's, that's helpful. And then maybe just kind of a small couple of smaller questions. The penetration rate in the, Environics study you pointed out, I find interesting, but not quite sure how to read, what the penetration rate is. Is that, like, number of IIROC advisors that have a relationship with Mackenzie, or is there a different way to, to read it?
That self-penetration rate, that's the percentage of advisors actively selling Mackenzie products.
Got it. Okay, that's helpful.
Back in both IIROC and MFDA, that's a really big milestone.
Yeah, it's a good question. It's also a good sample size, too. But several thousand advisors are surveyed every year. I think it's over a 20-year track record now, the survey, Luke. So, very robust methodology to their surveying and very for themselves, obviously. It has shown over 20 years to be a very strong correlation to high rankings in those surveys to future sales. So, yeah, we're very pleased. Thank you.
Yeah. So, I mean, that's a very high number in terms of the percentage of planners or advisors that would be selling Mackenzie product. Any idea what the gap is to number one? Like how much further you could possibly go there?
We've got an exact idea of how far we are to number one.
We're competitive.
Yeah, we're tracking that way. That's our goal.
Yeah. In both channels, it's a similar gap to them. And so there's about, call it 8-10 points that we need to close there, and that would obviously be a profound acceleration in that sale to Mackenzie as that's closed.
It really ties in nicely with our multi-channel approach, too, because, you know, we've got a lot of products, funds and ETFs. You know, the needs of those channels are starting to diverge a bit in terms of what an MFDA advisor might need versus IIROC versus obviously robo and others. So we're really honing in, being more specific as to what we're delivering. I think it's resonating as well because they feel like we're listening to them and we're their business partners, we're their advocates. Clearly, obviously, we want them to use our funds, investment funds, but also we offer other services, technology and advice, and regulatory advice from Rhonda's team, free technology. So it's really on a really nice role.
So, but we take this survey very seriously because it's by far the best way for us to understand how engaged or not the advisors are across the country to us. And so there's many, many categories that comprise that survey that we just offered up a couple of the categories for you.
Okay, got it. That's helpful. One final one for me. We've seen a lot of momentum across the industry in fixed income sales. Mackenzie's seen its share of that piece of the market slipped a little bit in the last year. You're still positive net sales, but say the share has probably slipped a bit. Also seen you've internalized a couple of fixed income mandates. So maybe, if you have some comments on kind of what's happened there and how you view, market share going forward.
Yeah, sure. So, you know, flows for the entire 2019 is in, in the industry have been very pronounced in the fixed income. In fact, we've seen the same in the U.S. So, our fixed income sales have actually been very strong year-over-year, except for one exception, and it's nothing to do with performance. It's we had an exceptional year last year, 2018, with our floating rate offering. And that was a decision by a lot of advisors from a tactical allocation perspective, with the expectation at that point, of rates rising to get into floating rate. And then, obviously, that flipped everyone's expectation. Now, the other way of central banks pulling back on interest rates.
So, if you parse out the by strategy, our fixed income sales are pretty good, actually. They're holding year-over-year. But that floating rate is significantly down, which really powered a lot of our numbers last year. So, you know, we're multi-asset and we're multi-boutique. We have one fixed income team, and they manage nearly CAD 50 billion. They're very, very good, global interest rates, floating rate, high yield to EMD, you have it. So, we feel that we're well positioned competitively to compete against, there's, you know, there's one or two very strong fixed income competitors in Canada, and we stack up well against them.
But as well, you know, the probably, as we all know, change, there's probably a little slight qualitative rebalancing of portfolios this year towards the more fixed income to diversify a little bit away from perhaps an overweight in equities. So probably going forward, you'll see more balanced flows across assets, and we think we're well positioned between equities and fixed income and multi-asset and alternatives. So, but I just want a point of clarification with fixed income. I'm glad you caught - you picked it up because it was on one of the charts to show that it looked like we were down, and we are overall, just simply because of an asset allocation call by the advisors to pull back on floating rate.
Got it. That's, that's helpful. Thanks for your time.
Thank you. The next question is from Graham Ryding, from TD Securities. Please go ahead.
Hi, good afternoon. Maybe I could start at IG and just follow on from that consultants theme, but just maybe go at it a little bit differently. At the beginning of the year, you sort of said 2000 advisors with four years experience was the sort of desired optimal level. I presume at that time you had some visibility on, you know, how many teams were going to move into that four-year cohort, yet that number has declined, I think, by 6% year to date. So it suggests that the attrition has been higher than what you expected. What's your view, I guess, what's been driving that year to date, and why are you confident that you feel like there's an inflection point here and that number should start to start to grow?
You know, we've made a number of changes, and, you know, we're modernizing our experiences for our consultants, and so I think there's more appetite to join our company. And then, our recruiting has just been, you know, and the team that does it, it's professionalized, and so they've built a brand in the marketplace, and people want to join us. And so we've been more structural about recruiting. We've done more screening with our recruiting so that our quality stays really high. And, you know, we're holding to that standard. And so it's just, I think, that we're a place that people want to work. We've got a great culture in our company that is palpable. We've got growth in our company. We've got a shareholder with the power, of course, above us and family with us.
And so it's a really good place for consultants to work and to have the resources that they need to be successful and build their practices and run their businesses. And you know, we've had a cultural transformation, and it's harder to measure, but that's what's happened. And so everybody's coming into work every day feeling you know, either the operators or the consultants feeling energized. And so that drives growth. And then I'll let Luke comment.
Yeah, Graham, that, that 2,000 target, that wasn't a one-year target. That, that's the target saying, this is what we need to accomplish the goals we set for ourselves over the next five years.
Yeah.
It's, it just seemed like the first part of your question was suggesting we had a near-term target of 2,000.
Yeah.
Whereas our focus on 2,000 was saying, we got a lot of productivity opportunity and a lot of capacity with 2,000 teams, and to reach our goals, we can do it with 2,000 teams, and we're working to build up the number of team members, but 2,000 is our target here.
Yeah.
Okay, I thought, I thought you were basically suggesting that the attrition had stopped and that the four-year plus group should sort of stabilize at that level.
You're always going to have attrition just because of human behavior.
Right. Okay, and then just at Mackenzie, there was some ETF fee adjustments in August and September. What percentage of your ETF, I guess, AUM, is going to be impacted by those fee adjustments? And then what is there an expected sort of overall impact on that Mackenzie management fee rate?
Yeah, the most recent fee adjustments were traditional beta, or passive ETFs. And I think it shows up on one of the charts and graphs here. The revenue impact is quite de minimis, actually. Luke might be able to size it up for you, but it's quite. But where's my ETFs? Yeah, so on slide 23, you can see on the left, the breakdown of our roughly CAD 4 billion in AUM. And so traditional beta is one point, you see that, one point, around CAD 1.4 billion. So, yeah, so that's the AUM that's impacted by.
Yeah, it's all on traditional beta. Yeah, the impact was trivial.
Yeah.
It was, it was under CAD 100,000.
Okay. And the TOBAM fees, that's not going to have a big impact either?
No. No, not at all. You know, we're always monitoring continuously to make sure we're competitive. We're not price leaders, but we want to be competitive. So we scanned it and made some adjustments. You know, it's, you know, I think we're well sized, and we're very pleased with ETFs. You know, it's so far, so good. So more to come, more launches to come. I think we're moving up the rankings, which is critical, as scale is important in that business. But more importantly, again, just building blocks with our mutual funds to build effective portfolios for advisors.
Okay, great. And then my last question would just be liquid alts. You know, how's the advisor reception? Is that length of the sales cycle there proving to be longer than when you launch other products? And is there any plan to make the liquid alt product available at the IG level?
So, I'll take the Mackenzie side of the. So first of all, again, it remains a really important strategic new asset class for us. We're really excited by it. Sales cycles are longer. Absolutely. It's, you know, this is an educational sell to advisors to let them understand all the functionalities of the absolute return strategies, leveraging and shorting and long, you know, long, short, bull, macro, market neutral. So, a number of them is new, and but they're really effective risk diversifiers in the portfolio. So, sales are coming in. Sales cycles, yes, are longer. You probably see one of the statistics on the chart showing our market share went down quite a bit year-over-year.
That's simply because the denominator got so much bigger, because, effective January of this year, as you know, you're permitted by the regulators now in ETF or mutual fund format to to have these hedge fund-like strategies. So a lot more competitors came in. Some competitors might have had prior experience also with, with offering them in prior years, and they offer them in non-mutual fund vehicle. So, you know, some advisors are familiar with these types of strategies. I would say, probably majority are not familiar with them. So long sales cycle, flows coming in. A lot of, lot of you actually are estimating, which we agree with, by the way, that this could be a CAD 100 billion pool of assets, a new pool of assets in short order.
We're all working hard to get market share. We'll be launching more going forward. And again, just, if I could, just be repetitive from last call, we view them as two categories. One is the new types, hedge funds, absolute return strategies, were permitted beginning just this year, leveraging and shorting. But there's also the liquid alternative asset classes, like our Mackenzie Diversified Alternatives Fund, which has been around for four years, and that's about CAD 700 million in size, and other competitors have those, too. So, it's a really good asset class for portfolios, and probably particularly going forward, as expected volatility might increase in the marketplace. So thanks for asking.
At IG, is there any plans to make that product available at Investors Group?
We are working on that, as we speak.
Okay, great. That's it for me. Thank you.
Maybe on IG to add, we've got some experience in alts and illiquid alts. We've had a real property fund for over 20 years, as well as mortgage fund and others, and we haven't done a great job promoting to this constituency these capabilities, but we've had them for a long, long time.
Yeah.
Thank you. As a reminder, you may press star one if you have a question. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.
Good afternoon. Yeah, really appreciate the disclosure on the CAD 20 million of annual cost savings on the collaborations. You mentioned that, you know, with the cost flexibility next year, it's kind of focused on two items, strengthening offering, and I guess finishing the back half of your transformation initiatives. And I was wondering if you could just elaborate on those two points a little bit for us.
Sure, Scott, can you repeat the first part?
Earlier in the call, you talked about kind of using or redeploying that capital to strengthen your product offering. And then number 2 is to finish the back half of your transformation initiatives. I was just wondering if you could elaborate on both those issues a little bit into 2020.
Absolutely. So a lot of it, as we said, we've got discretion. A lot of where money is being allocated is on things that support business growth and client experience, as well as the continuation of the transformation program itself. So a lot of the transformation that was laid out by Mike Dibden, it does take investment, and so some of the proceeds from pilots that we've launched on these early initiatives will be used to really make traction on others. And the themes that we're focused on are much similar to the ones you've seen with CIBC Mellon and Google, involving outsourcing and automation. So that's kind of key areas for the transformation program.
The ones that we're focused on from a , I'll call it a client and advisor engagement, include the advisor portal, which is coming live later this year, and was discussed earlier, as well as other call it business development initiatives underway. I would say Keith's gonna kick me, but we actually are gonna be hosting an Investor Day in the first half of next year. We're just finalizing the date, and we are gonna be using that as a moment to showcase in much more detail, all of these initiatives we're bringing to life.
Is that gonna be in Toronto again?
It will be in Toronto.
Just to highlight a couple of the transformations, digitizing our processes, is one. The Salesforce, I've already mentioned.
Mm-hmm.
And then, we've got a number of potential other outsourcing opportunities that we're looking at right now. So, we'll keep looking for every opportunity to find more efficiencies and work with great partners.
Okay, great. And Jeff, just on the Investors Group side, you've had great success growing the high net worth platform, and I'm assuming you're capturing a lot of that from banks who are also focusing on that clientele segment. What do you attribute, you know, kind of the success or the early success of your traction there relative to the banks?
You know, it's, I mean, we're so early in this, it's ridiculous, but we've got a long runway ahead of us. When I got to the company and saw the CFP, you know, beliefs, and then the energy of the field, I knew that if we empowered them with the tools to be able to do their job, including products and everything else, that this company could do amazing things. And we have a great culture, which is the most important thing in any company. And then we have everybody on the same path. And we've had a lot of great conversations with our board, and they've supported us with a lot of capital to invest into our value proposition.
So, you know, I think it's momentum, and momentum creates confidence, and confidence creates new clients, and hopefully our share price going to up. But that will happen if we deliver the value proposition. So, you know. And then on the high net worth, we've got so much outside. We have not very large share, as you know.
Mm-hmm.
To see it coming so fast is really exciting. The pace of path of that and the pace of that, going forward, is only gonna accelerate because we've got more capabilities coming as well, and this, this is just the early days, and we don't even, we haven't even launched Salesforce.
Right. Okay, great. And then just last question, just on IPC. For the longest time covering this company, it used to be always in positive net sales and, you know, this year or the last few years, I've seen it in net redemptions. What's changed? Is it market conditions or has something changed that has changed the trajectory on the flows there?
They had a little departure, like, a few key departures that happened. I think it was about six or seven months ago, and that's kind of stabilized. So, I know that Chris and his team are out there recruiting as we're speaking, and it's just a blip, and they'll work through it.
Does, like, a bolt-on acquisition kind of maybe make sense on that platform, or is it more kind of organic initiatives to hire recruitments?
It's just, you know, focusing on recruiting and making sure that they're getting the right recruits. And I know they have a good standard on that, and they want to make sure that they bring in the right ones. And so we're not panicking at all on what's going on at IPC, and you'll see it growing again soon.
Okay, got it. Thank you very much.
Thank you. Once again, you may press star one if you have a question. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Potter.
Thank you, Patrick, and thanks for those attending the call today. Hope you all have a great weekend, and with that, we'll end the call.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.