Good afternoon, and welcome to the IGM Financial fourth quarter 2018 earnings results call for Friday, February 8, 2019. Your host for today will be Mr. Keith Potter. Please go ahead, Mr. Potter.
Thank you, Patrick. Good afternoon. I'm Keith Potter, Treasurer and Head of Investor Relations, and welcome everyone to IGM Financial's 2018 fourth 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. We have Barry McInerney, President and CEO of Mackenzie Investments, and Luke Gould, Executive Vice President and CFO of IGM Financial. Before we get started, I'd like to draw your attention to the cautions concerning forward-looking statements on slide three of the presentation. Slide four summarizes non-IFRS financial measures using the material. On slide five, we provide a list of documents that are available to the public on our website related to fourth quarter results for IGM Financial.
And with that, I'll turn it over to Jeff Carney, who will review IGM's full year results starting on slide seven.
Thank you. Turning to slide seven, on 2018 highlights, IGM achieved record high adjusted earnings per share. 2018 also marked the second consecutive year where our two main operating companies gained market share. We're proud of our ability to deliver investment fund net sales of CAD 1.4 billion in a year that saw overall long-term industry net redemptions of CAD 7.4 billion. We managed our expense growth for the year to 5% relative to 2017, excluding restructuring provisions. This is in line with the guidance provided on the Q3 call and was driven in large part by fourth quarter expenses related to IG Wealth Management's brand launch and a ramp-up of our back office transformation activities.
We are reaffirming our 2019 guidance of 4% non-commission expense growth and 3% in 2020. As I've mentioned before, while there is discretionary spending that could be managed in a sustained market downturn, much of our spending is on business transformation that provides longer term savings, and we are focused on servicing our clients in this environment, as well as building new relationships. Turning to slide eight on the quarter, we ended the fourth quarter with total ending AUM of CAD 149.1 billion. While the industry experienced a tough fourth quarter, we note that we are now sitting at CAD 154.3 billion in AUM as of January 31st, 2019. We continued to gain market share in Q4.
Adjusted earnings per share for Q4 of CAD 0.75 is down 5% from last year as markets turned negative in the quarter. In January 2019, we made an additional investment of $50 million into Personal Capital. IGM is the largest shareholder in this company, with over a 20% ownership. We're very excited about the growth opportunity here. As at January 31st, 2019, Personal Capital has $8.5 billion in AUM, $650 billion in aggregated assets, and over 2 million users. We intend to enhance our disclosures on Personal Capital for our Q1 2019 results, and we'll share more insights on upcoming calls. Slide nine displays the performance of various indices and currencies, which provide the backdrop for the industry we have been operating in.
2018, and the fourth quarter in particular, brought market volatility and negative investment returns across major equity markets, including the S&P/TSX Composite Index, which declined 11.6% during the year. This volatile market, caused by global trade tensions, political uncertainty, and concerns around the stage of the market cycle, tested investor and advisor confidence. The beginning of 2019 has fared much better, with major market indices rebounding strongly during January. The TSX rose 8.5%, offsetting over half the losses experienced last year. However, it remains well below its mid-peak 2018 numbers. Slide 10 provides context for the industry fourth quarter and annual net sales.
Propelled by market volatility, the mutual fund industry ended the quarter with long-term fund net redemptions of CAD 15.6 billion, down CAD 19.5 billion from Q4 2017. As you can see in the chart on the right, the long-term mutual fund net sales rate also turned negative on the last 12 months trending basis. Industry ETF net creations remained positive during 2018 and the fourth quarter, though results in these product categories were also down year-over-year. Turning to slide 11 on our results for the fourth quarter. Investment fund net redemptions were CAD 225 million, down from net sales of CAD 749 million in Q4 2017, which reflects the challenging environment.
Adjusted net earnings of CAD 180 million was slightly below CAD 191 million in Q4 of last year. Q4 adjusted earnings per share were CAD 0.75. On slide 12, we show the segmented results for your reference. Now I'll go into the IG Wealth Management section. Turning to IG Wealth Management on slide 14, and starting with 2018 highlights. We continued to transform IG Wealth Management in 2018, including enhancements to products, segmented pricing and compensation, and the new brand launch. We also made strong progress towards our technology transformation, including launching a new client portal and completing our program roadmap for 2019. We are encouraged with the progress and have a full agenda for 2019, including accelerating technology transformation and conversion to Series U unbundled pricing for all clients.
2018 net sales of CAD 485 million during the year were strong, given the industry context, and gross sales were the second-best annual result in our history. Turning to the fourth quarter highlights and the results. In November, we announced some targeted pricing changes that I'll speak more to in just a moment. IG Wealth Management continued to capture market share as we focus on our high net worth solutions, which represents 48% of our gross sales. That's up from 45% in Q4 2017. We continue to experience solid asset retention, with long-term trailing twelve-month redemption rates that remains well below industry peers.
Turning to slide 15 on operating results, IG Wealth Management experienced net redemptions of CAD 125 million for the quarter, or 0.6% of average AUM, which is almost 7.5 times better than the advice channel long-term net redemption rate of 4.7%. On trailing twelve-month basis, you can see that the positive 0.5% net sales rate for IG Wealth Management is also well above the advice channel. We have just reported January net redemptions of CAD 39.7 million. We're entering the RRSP season with investor confidence being tested, which has created headwinds. That said, we plan to be in positive net sales for the RRSP season. Turning to slide 16, high net worth solutions represent CAD 41.5 billion of our AUM and 48% of total sales.
We also continue to make great progress in delivering better data and our focus on managed solutions, which now represents 50% of our AUM and 76% of our gross sales. Our unbundled fee structures, where the client pays the advice fee directly, now have CAD 25.3 billion in AUM and account for 76% of our high net worth sales. Slide 17 highlights our consultant productivity metrics for full year 2018. We have discussed on prior calls how we are transforming our distribution network. Our overall objective is to focus on our most productive consultant practices and increase team size and team proficiency. We also overhauled our recruiting practices to emphasize the quality of the recruits as the top priority. On the left side of the page, you'll see an intentional result of these strategic changes.
The first is to have stronger consultant practices, which in 2018 was slightly below 2,000. And second, having fewer but higher quality new consultants. Evidence for these improvements is reflected on the right side of the slide, where you'll see that the productivity of our recruits were up 33% during 2018, and this builds on the 90% increase achieved in 2017. Gross sales per consultant practice increased modestly. Overall, productivity increased 13% during the year. Slide 18 highlights the November fifteenth announcement of pricing enhancements at IG Wealth Management. The announcements included advisory fee reductions to households with over CAD 1 million in assets with IG Wealth Management.
We are further enhancing fee transparency by opening unbundled fee options to all clients during Q3 2019, and expect to have substantially transitioned most assets to unbundled solutions by mid-2020. The changes are expected to result in the reduction in IG's annualized weighted average fee rate of 3 basis points starting in Q2 2019, beyond the recent trend. Luke will speak to this in his remarks. Our competitive positioning is now strong across client segments for the cost of advice and comparable, and comparable product MER, as we are now better than 50th percentile on both metrics. Going forward, we see less pricing pressure on advisory fees, which should serve us well as we move to fully unbundled pricing this year.
These pricing changes, combined with our compelling product and service offering, positions us well in the competitive, mass affluent, and high net worth space. Slide 19 highlights our client rate of return historical redemption experience. IG Wealth Management's long-term trailing twelve-month redemption rate of 9.2% remains well below the industry average of 17.9%. I'll now turn it over to Barry to discuss Mackenzie's results.
Thank you, Jeff, and good afternoon, everyone. If you could please turn to slide 21, I'll start with a few 2018 highlights for Mackenzie. Our transformation is now complete following five years of hard work. We achieved a new all-time record high mutual fund gross sales level of CAD 10 billion and the best retail net sales in 20 years. Third-party advisors now rank Mackenzie in the top three for both mutual funds and ETFs. As we continue to execute on our strategy, Mackenzie is well on its way to being number one and delivering operating leverage, and we're now focused on executing our strategy and pivoting in a competitive environment. For the fourth quarter, the market volatility proved challenging for the investment fund industry. In that context, we continued to gain market share. Investment fund net redemptions were CAD 91 million.
Mackenzie's retail investment fund net sales were CAD 198 million, including strong contributions from both mutual funds and ETFs. This is in the context of long-term mutual fund net redemptions of over CAD 8 billion for the advice channel. Mackenzie's investment performance, as measured by Morningstar, improved in the quarter with a number of notable star rating upgrades. During the fourth quarter, multiple Mackenzie Investment management teams were also recognized by Lipper and Investment Executive for their strong investment performance. Slide 22 highlights Mackenzie's operating results for the fourth quarter of 2018. Q4 mutual fund gross sales of CAD 2.3 billion, an all-time record high, were up 4.2% year-over-year. Investment fund net redemptions of CAD 91 million compares to net sales of CAD 477 million last year. Mackenzie continues to capture market share versus peers.
Our long-term mutual fund net sales rate of 0.4% exceeded both the advice channel and the overall industry. If you included both ETFs and long-term mutual funds together, Mackenzie delivered an organic net sales rate of 3.5%. Fast-forwarding to January, Mackenzie's investment fund net sales are positive at CAD 30 million. So far, the RRSPs is off to a slower start than usual, as advisors spend time with clients reviewing their existing positions. Slide 23 provides details on our Q4 sales results. This quarter, we've displayed retail flows by category in the table to help you understand Mackenzie's broad-based strength in this very important space.
Mackenzie captured 7.4% of advice channel long-term mutual fund gross sales during the quarter, which represented a significant increase relative to the 2017 levels of 5.4%, and our gross sales capture rate improved in four of the five asset class categories. Mackenzie also recorded its ninth consecutive quarter of retail investment fund net sales, which totaled CAD 198 million in Q4, in a quarter where nearly all peers experienced mutual fund net redemptions. On slide 24, Mackenzie's ETF AUM was relatively unchanged quarter-over-quarter, as positive net creations from retail and Mackenzie mutual funds were offset by market returns and some rebalancing from IG and IPC. Mackenzie's full year 2018 ETF net creations were the third highest in the industry in Canada, among the 33 industry participants.
On slide 25, Mackenzie's long-term investment performance remains solid. Over 50% of mutual fund assets are in the first or second quartile over 1-, 5-, and 10-year periods. 47% of Mackenzie's AUM is in 4- or 5-star rated funds, the 4th highest in the industry, and up from 38% the previous quarter. Focusing on F Series, which is the most relevant for the IIROC channel, Mackenzie is very well positioned, with 17 of our 20 largest funds being rated 4- or 5-star in Morningstar, and 9 of these funds are rated 5-star. In slide 26, you can see that our growth-oriented boutiques, as well as the global equity and income and fixed income teams, continue to have a significant portion of their AUM in 4- or 5-star funds.
Ivy's investment style performed particularly well during the last quarter of the year, leading to Morningstar upgrades to four stars for some of Ivy's largest funds. Outperformance in down markets is the norm for this boutique. Finally, Mackenzie was recognized for industry-leading performance with a number of achievements at the 2018 Lipper Fund Awards. In addition, Phil Taller, the leader of our Mackenzie Growth Team, won the Investment Executive's 2018 Mutual Fund Manager of the Year. I'll now turn it over to Luke to review IGM's financial results.
Great. Thanks, Barry. Hi, everybody. So moving to page 28, I don't have much to add relative to what Jeff said, but just would indicate at the chart on the left, I'd remind that we did see an increase of 3.5% in our assets in January, which recovered about half of the 6.6% decline. And I'd also note, as of yesterday, we're up another 1% in client returns in February, so we've now recovered about 70% of the Q4 declines. Moving to page 29, you can see our earnings in CAD millions and in EBIT on the left, and you can see our margins on the right. And I'd highlight two things.
First, starting on the left charts, number one there, I'd call out the net investment income and share of associates' earnings of CAD 47.8 million in the fourth quarter, and would highlight this is down from Q3, and this does move around from quarter to quarter, but I'd call out a few items in there. Now, first, we do mark-to-market gains and losses on seed capital through earnings, and we had losses of CAD 3 million from equity market declines in the quarter. We also have some lumpiness in our proportionate share of Great-West Lifeco earnings, given that we record analyst estimates for each quarter, and we true-up for any difference in the subsequent one, and this quarter did have CAD 3 million of negative true-up from Q3.
I will also talk to some lumpiness in the net investment income line in IG's mortgage business on the coming slide. Second, you can see net non-interest expense of CAD 269 million in Q4. As mentioned by Jeff, we're in line with our full year guidance, and we did have Q4 costs associated with brand relaunch, as well as incremental costs associated with our transformation program. I'd note the brand relaunch is obviously designed to drive business growth, while the transformation program is designed to bring long-term cost savings to its shareholders. On the right, I'd say first at the top, you can see the gross revenue rate was stable for IGM overall, and I'm going to speak a bit more to that number in the IG section and Mackenzie section.
I'd call out the commission expense line, and you can see it was 67 basis points in Q3, and it's up to 71 basis points in Q4. I'd remind that on our last call, we made reference to changes to field management at IG, where we reduced the number of regional directors, and that we had a benefit in our Q2 results relating to this, and we're going to see some offset in Q4. And we did see that offset as we did reassign the responsibilities from these regional directors, and we had recruitment and training of dedicated compliance and recruiting resources that offset those reductions in Q3. I'm going to speak more to that in the IG section. Moving to page 30, you can see the income statement for IGM.
The first three points you can see on the right, I've covered, but I would speak to the fourth one. And you can see, I think everyone's noticed we did have a lower effective tax rate during the period, and this was a result of favorable developments on certain tax matters, and our tax expense reflects CAD 5 million related to this. Going forward, we would expect that 22% would be a more appropriate guidance, but we did have those favorable developments in this quarter's results. Moving to page 31, I'm going to spend a bit of time on this slide because there was such movement in Q3 and Q4 on it. So first, I'd highlight the annualized management admin fee rate on the left of 201.4 basis points.
That's very stable in relation to Q3, and you can see at the very bottom row, we did continue to see migration of the composition of our clientele in favor of high net worth clients. And so there was some very slight movement, but overall, very stable. And as highlighted by Jeff, we, we did, as everybody knows, introduce our, our segmented pricing for, for households in, in excess of CAD 1 million. We announced in November, it becomes effective Q2, and it is going to reduce this, amount by about three basis points starting in, in Q2. And now, a bit of time reconciling the asset-based comp rate and the sales commission rate.
So starting at the left, I'd remind, we did reduce our regional director complement from 92 people to 67 in the second quarter, and we did see the benefit in terms of cost savings from this in Q3. And you can see the rate going from 49.5 basis points to 48.5, and that was CAD 2 million per quarter. Also, in relation to those changes, in the commission rate line, you can see we went from 1.8% to 1.7%, and that was another CAD 2 million in savings. So CAD 4 million in savings in Q3. And again, that was timing, as we offset a lot of that through introducing centralized compliance and recruiting resources, which ramped up in Q3 and were fully in effect in Q4.
And that's what's caused all of those resources are on the asset-based comp line, and that's what's caused the rate to rise. In addition to this, we did have some non-recurring costs associated with that same initiative of about CAD 2 million during the quarter, and that was in that same asset-based comp line. And I would remind those changes we made to regional directors and changed their responsibilities was designed to enhance field management effectiveness while also providing long-term cost savings. And we're quite optimistic that we're going to be successful on both those fronts. I'm moving now to page 32, which has IG's income statement, and I've commented on the item one and commented on item two, on the fee rates and on commissions. I would give one further comment on net investment income and other.
You can see we earned CAD 10.9 million this period, down from CAD 13.3 million last quarter. I would note and remind, this is largely our mortgage results. While we, we employ hedge accounting, and we don't have the same element of volatility that we used to, there are still areas where we do have accounting mismatches in a period where rates change in different directions. We have some fair value adjustments that affected the quarter. You'll see it in the MD&A, and I'd point to Q3 as being more indicative of the ongoing run on this business. Moving to page 33, I'd highlight Mackenzie's weighted average fee rate on the left at 80.5 basis points, very stable with Q3.
I'd remind that we did introduce retail pricing enhancements in the second quarter. I'd also note, in relation to Barry's remarks, the retail business is performing very well, and, and this does have a bearing on the weighted average fee rate, given that that's higher margin business. Then on page 34, you can see Mackenzie's P&L, and the only item I'd highlight again is if you go to the net investment income in the second row from the bottom, you can see CAD 3.1 million in losses, and that was all seed, and there was nothing unusual there. It was all a decline in line with equity markets declines during the period. I'll turn it back to Jeff.
Great. Before we open the lines for questions, I'd like to wrap up by providing a brief look forward on slide 35. Market volatility is testing investor and advisor confidence in a way we haven't seen in a number of years. While January has brought with it a strong equity market rally, some of the underlying concerns, such as trade tensions and political uncertainty, remain top of mind today. It's in these types of environments where clients need the confidence that comes from working with a financial advisor and having well-developed plans. Advisors need the right product solutions and support to meet the needs of investors' increasingly complex financial lives. Across IGM Financial, we remain focused on executing against our client-centric strategies and One IGM approach to deliver future earnings growth.
This management team has demonstrated its ability to outperform peers and gain market share through a range of financial market conditions. The strategic decisions and business investments we have made over the past five years has reignited our operating companies. The work we're doing on our client-facing technologies and back office has only begun, and 2019 will be a very important year for us as we deliver on our major promises. As we mentioned, Mackenzie's transformation is complete. The company is well-positioned and focused on executing against its growth strategy. Mackenzie is primed for operating leverage and earnings growth. IG Wealth Management's transformation continued into 2019, adding to the impactful actions already taken to position the company to capture greater share of Canada's CAD 4.5 trillion wealth market and deliver long-term, profitable, organic growth.
We expect 2019 to be a year of continued improvement for IGM Financial, and I look forward to sharing our progress with you. With that, I'll now turn the call back to Keith Potter.
Thank you, Jeff. Patrick, if I could just have you open up the line for questions.
Certainly. We'll now take questions from the telephone lines. If you have a question and you're using a speakerphone, please lift 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 Geoff Kwan from RBC Capital Markets. Please go ahead.
Hi there. My first question was on your expense growth, kind of reiterating your guidance there. And I understand, Jeff, your comments around a lot of this stuff is kind of repositioning, reinvigorating the business. But historically, I thought in the industry, when you've had, you know, markets be down a little bit more volatile, often the kind of the comp or other aspects of consensus can kind of come down a little bit. So, was that reflected in the Q4, or is there something else there, as to why you're just reiterating the 4% for 2019?
No, there was no abnormal issues, and the 4% is the right number.
Geoff, you, you have a additional question is just how variable or what, what level of variability is in our non-interest expenses? Is that part of your question?
Yeah, like I said, it's. I just kind of thought historically, the expenses often come down a little bit when you've had the markets kind of behave as they've been.
Yes, we do have a small element for our non-interest expenses, some advisory fees, but absent that, for the most part, it's not variable with asset levels, and that includes our people costs. A lot of the drivers on our people costs in any given period relate to things like market share, investment performance, and the like. But as far as, you know, having the management team and all of our organization tied to AUM, that's not how we pay our people.
Okay. Okay, second question I had was on the IG side, the non-commission expense. It was, you know, kind of CAD 145 million Q1 to Q3 last year, and then obviously had a uptick with the rebranding stuff to CAD 160 million. How should we think about how that number is going to evolve, through 2019? Is it going to be kind of gradually bringing it down? Is it going to be a step function, or what's the kind of the, the sense that it should be?
It will be in the context of our hitting our targets that we've shared with you before. So we still, you know, we'll be, that's our plan is to deliver to the 5%, going to 4%, going to 3%.
Yeah, but what... Sorry, Jeff, within the quarter, so is it going to be a gradual decline from the 160 to get you to the 4%, or is there kind of going to be seasonality on how that expense plays out?
I mean, the seasonality is really around the RSP season when you elevate your advertising expenses. But outside of that, it's, you know, we're executing our programs, and there might be capitalization expenses that come through as we implement on our projects.
Geoff, it's a very good question on timing, and I'd guide you. We gave guidance throughout the year that we were kind of under our guidance for the first three quarters, and we didn't have our brand relaunch in Q4. So I would look to last year's seasonality for IGM as being more indicative to what you're going to see from us in 2019.
Okay. Okay, and just if I can ask one last question. Just given where the share price is and your balance sheet being pretty healthy, has there been thought around doing more share buybacks?
Yeah, we have been reflecting on that, Geoff. And you know our view on our stock. We're buyers, and we're just trying to manage all the opportunities that we have to deploy our capital against that very resisting one, which is do we engage in share buybacks at this time?
Okay. Thank you.
Thank you. The next question is from Gary Ho from Desjardins Capital Markets. Please go ahead.
Good afternoon. My first question is just on your advertising spend. Can you give us an update and on how effective this initiative has gone, whether that's kind of new client leads or new clients coming in the system or whatnot? How do you measure the success of this program?
Yeah, I'd start with sort of some of the facts. The fully integrated relaunch campaign reached over 85% of our target audience, and hopefully everybody on this call saw some of our commercials along the way. And it was right around the RSP season, obviously, where a lot of transactions take place with clients. So generated very positive sentiments. The early third-party tracking shows that our brand profile is resonating and has begun to translate into increased client acquisition. And there's Find an Advisor searches on Investors Group's internet that was up over 20% from the previous year, and 40% of that lift can be directly attributable to our digital marketing plan.
And we're realizing significant improvements in cost per acquisition as a result of that. And we feel very positive about the program, and so we look forward to seeing the increased activity. We've already seen it in the short term, but we expect to see more of it. And obviously, this isn't a one-time event. This is an ongoing investment that we're making in our brand over time to compete against the banks as well. And so, you know, we're excited about the recent response we've had from the advertising, and we'll continue to update you as we go forward.
Thanks. And then maybe that's a good segue into the kind of outlook that you kind of provide for the RRSP season, positive flows. Can you maybe comment on that, what you're seeing on the front lines, given, I guess, some nervousness from investors and maybe relative to last year, or kind of give us a insight there?
We worked hard early on in even before the season started to make sure that our consultants and we looked at where RSP opportunities were where we didn't have them and went in deep on all of those things to identify those opportunities. But mostly it was energizing the field and our leaders got out there and talked to them about the importance of this type of contribution because of the benefits you get from contributing to RSPs. So it's early but it's really picking up now. So it was a slow start but we're starting to see some increases in the last four weeks and it's accelerating.
Okay. And then switching gears, my last question, just on the Personal Capital, what is the strategic importance of that investment to IGM? You know, are you planning to leverage some of the technology expertise within the company, or how should we think about the increase in ownership there?
Yeah, I mean, I think you should. You know, the first thing to think about is that we're we really like this company. So we, I'm on the board of the company, and learning a lot in that. And so we think it's a company that has a really unique model, and I don't know how if people have done some homework on it or not, but what they've done is offered a free aggregation service. And there's a big amount of clients who have signed up for that free service, and it gives you an integrated statement.
And so, then the company can then look at that integrated statement and call, use their advisors to call them, and they can pick whatever segment they want to pick, because it's a variety of different types of financial consumers that are using these tools. But they go in there and then convert them in, you know, through an advisor, they convert them into a client. And so it's a, it's a very intelligent way to use advertising to tell the story of Personal Capital, that then translates into new clients, that then translates into economics for the firm. And, and so it's really exciting. And then you can target the type, the clients you want. So in, in this case, in this company's case, their target is in, in roughly the $250,000 million-$1 million.
And so it versus some of the robo-advisors, where they're more like $30,000-$50,000. So this is a mass affluent, high net worth model that's using the free aggregation service as its value proposition to then convert people into clients. And you know, they're doing it over and over again every day, and we're helping them to tell that story. And they've got an incredible technology stack that they've built. And the founders of this were the founders of Intuit. So if anyone used TurboTax or any of those kind of things, that was the founder who's created this company. And it's not easy to replicate what they've been able to do in their secret sauce.
So we think it's a company that we'll continue to monitor and watch, but, you know, longer term, we'd like to see, how they do, and if they do well, we'll probably continue to invest more.
I think, I forgot, it was last year or the year before, there were speculations that they might go public. Is there any update on that? Is that the plan or,
No, not at this time. I mean, I think it's, you know, the market volatility has made that a little more interesting. And then, now that we have, you know, continued to invest in them, they've got enough runway to keep going. And so, we're in a very good place, in our optionality here, and, we're excited about where this could go.
Perfect. Okay, that's it for me. Thank you.
Thank you. The next question is from Paul Holden from CIBC. Please go ahead.
Hi. Thank you. Good afternoon. So, another kind of more specific question on the SG&A. Over the last couple of years, there's been a little bit of a change in pattern in terms of the D&A expense that gets included in SG&A. So my thinking is that probably should increase in 2019, given the level of investment in 2018, but just wanted to to verify that.
Good question, Paul. Interestingly, the nature of what we're spending on, there's actually less capitalizable, if that's where your question is going, I think, amortization. But I would highlight a lot of disclosure we've introduced on, on IFRS 16 and, and leases. And so that's something that you will be seeing on January 1st, we have a lot of facilities across this country, and so we have about CAD 100 million in lease obligation that's coming on balance sheet as, as both an asset and a liability.
And what this means is we're going to be placing an element of what is now in the cash component of our non-interest expense as going to be part of the amortization, and that will be worth about CAD 25 million, that reclass I call it.
Okay. But that won't impact the gross amount, or will it? Because the pattern is a little bit different.
It's slightly lower than anything, but it's more or less net neutral.
Okay.
Yeah, it's a reclass. But your other question on with what we're investing in, so much of what we're spending on transformation otherwise-
... is not stuff that's capitalized. So you can expect most of our spending is actually, you know, period recognized.
Okay, that's, that's helpful. In terms of the redemption rate at IG, I mean, you highlight that it remains well below the industry, and it does, but it has ticked up a little bit recently, and maybe that's simply a function of market volatility and should be expected. But my question is, how do you look at that redemption rate? Like, is it simply money going from one IG fund to another, or money from an IG fund to cash with an IG advisor? Or is there any kind of additional leakage out of IG, and people are taking money back into deposits? Maybe some thoughts around that.
And, Paul, that question was on the IG redemption rate, right?
Correct, correct.
As you know, we disaggregate this in many ways. I'll first start with part of your question is, what is this? This is money that's leaving the IG family of funds. So this is money that's leaving our dealer, is the way that you can think through our dealers. Second, we break it down into a number of dimensions. The most key for us is account closures versus partial. When you think of something as an account closure, that's a client who's leaving us and leaving their planning relationship. The other component is, in many ways, fulfillment of the investment, meaning somebody's taking money out to fulfill the initial objective or otherwise doing something with it, consumption or otherwise.
And what I'd highlight in what we're seeing right now is that increase from 8.7% to 9.7% in the last year is a stable account closure rate, and that's less than half the rate and an increase in those partial redemptions. And it does correlate, as you can see, with industry activity and a lot of the sentiments and confidence that we've seen. So, that, that's what we know, and that's what I'd tell you on that one. I don't know if that's helpful.
That is helpful. So the follow-up question, in terms of that uptick of you know roughly a point or so year-over-year, are there solutions you can provide to help reduce that rate as you know again whether it's a function of market volatility or otherwise to keep it within IG Wealth?
The biggest thing, to the extent, and we've got good tracking on account closure and otherwise, of where money is going, if it was going to a competitor. But on this rate, it is tracking sentiment, and the Chart 19 that Jeff walked through, it's really make that point that we're out there day in, day out, making sure people are committed to their plan. And so that's what you see in this environment, is there's a little uptick in a more volatile environment. But we think that's the hallmark of what we do, is making sure we're working with people, and they're committed to their plans, and we don't see any noticeable uptick in a period like this.
Okay. Okay. Next question then, flipping to, to Mackenzie. I want to ask, a couple questions on sales into the IIROC channel. Specifically, you'd mentioned, you know, the focus on F Series because that's what IIROC advisors want. So maybe you can talk a little bit about penetration rates into IIROC, because I understand for the industry, notwithstanding the recent quarter, it's just- it's a long-term, downtrend in terms of the demand for mutual fund product in that channel.
Yeah, I'll, I'll speak in general terms, but but good question. Thank you. You know, as you know, we're you know, we're a multi, multi-channel firm, and that's retail, institutional. On the retail side, it's you know, focused on IIROC and MFDA and and integrated firms as well, those that have have both. And we're being... Last few years, we're being even more particular to understand their specific needs. For instance, MFDA, which has always been good to us, Mackenzie, for years. We've had a a good market share there. You know, we launched the fund of ETFs so they can get access to ETF via mutual fund, as example.
You know, we've launched precision tools last year, helped the advisors to have a desktop way of developing portfolios, as we focus to help them with portfolio construction and other component parts thereof. IIROC has been a real growth area for us, actually, for 3-4 years now. We historically have, you know, well before, you know, Jeff and I arrived, you know, we were- you could argue we were more of an MFDA shop at Mackenzie. Now, we're very nicely balanced. And the IIROC channels, again, you know, more ETFs. We started our ETF business actually 3 years ago with particular focus on the IIROC channels, so that we're doing very well in ETFs overall.
As you know, that and retail segment is mostly an IIROC play, although, of course, now we're broadening our, our ETF distribution, institutionally. And then the liquid alternatives, you're well aware of that story of us being first out of the gate and thinking, all of us thinking that's going to be a high-growth area. Again, that level of sophistication associated with alternatives, which, which really, helps an overall portfolio and helps investors risk-adjusted returns, is, is more of an IIROC play. So I don't know if I can specifically comment on, you know, the, the market share per numbers, but you could safely say that our market share gains that we've had now for quite a while, and they're accelerating, has been across the board, across all the channels.
And that's by design, as we again be more specific to needs that are varying now between those channels. And I think we've done a good job to date. And finally, as you know, with an ability to hit the marketplace with both mutual funds and ETFs, it seems to be resonating. I think we're one of the few firms that's growing both very quickly, but we're doing so with the same distribution channels and team at Mackenzie, same manufacturing, the same operations, which really provides us with a nice competitive advantage as to hit the marketplace and participate in the upswing in both. ETFs obviously did better than mutual funds last year in net creations through net flows. But our expectations are both going to grow going forward.
ETFs move faster because they're newer. Again, we've been saying this for quite some time now, that our approach to the marketplace, as a solution provider, is to get out there and use both of them as component parts in helping advisors build portfolios. I don't know if I answered your specific question, but again, the market share is by design and have been translating into increasing market share across the multiple channels that we've been penetrating.
Okay. No, that, that does answer my question, but I will provide one more follow-up to that. And I mean, the other thing you hear about the IIROC channel is it's particularly become price sensitive, and that probably plays into the ETF trend you talked about. But it sounds like you've, you know, you're having success with other solutions. Liquid alternatives is one you pointed to. If you have, you know, a good differentiated product or a solution for IIROC, is it still possible to sell into that channel at sort of, let's call it, a traditional fee type rate?
Yeah. I mean, I would say that, again, our experience with the IIROC has been, and you see the market share gains and the sales been very broad-based by asset classes. Some of those traditional, again, strong performance. We've, you know, we've made moves on our pricing to either simplify or to lower to remain competitive. We'll always monitor that and move when we have to. We think more pricing reductions will occur in Canada, but they'll be gradual and we'll act accordingly. So, no, we think you can. I see your point. It's a good question, but we think just taking IIROC specifically, yes, more focus on transparency, on fees.
When you go into a lower return environment that we all expect over the next five or 10 years, then there is more increased scrutiny on the fees as a percentage of the overall return. But our success has been broad-based, even within IIROC, both the more traditional type of our boutique offerings that have four or five star, obviously, competitive price, and the new offerings, the ETFs and the alternatives. So I think you can do a healthy blend still. I think that, in our experienced advisors, you know, they appreciate building blocks, appreciate strong performance, and they need to have a blend of mutual funds, ETFs, and traditional asset classes, and new ideas like, like, like the alt space, which will be a real particular focus for us going forward.
Actually, and Paul, but for the other one, I go back to page 23. I think this is an important point you're on. When you look at Mackenzie's retail disclosure we gave this period, which is new disclosure for us, and you look at the mutual fund sales, and we highlight the gross there. Like, I think it's key to say, like, over half of those sales are to the Big Six IIROC firms, and IIROC-licensed advisors is really kind of the core of who we serve. When you look at the product categories where people are choosing Mackenzie, it's broad, but you know, it's boring global equity. Barry already highlight the success we're having in many of those families, whether it to be the U.S. midcap, whether it be, Ivy Foreign, et cetera.
You know, these are our, our bread and butter. It's, as far as its margins and pricing, we're very competitive, but this is what we're selling there, and, and that is our core channel.
That's great. That's helpful. Thank you.
Thank you. The next question is from Graham Ryding, from TD Securities. Please go ahead.
So I just want to follow back on that, IFRS accounting question, at the risk of getting a little technical. Did you say CAD 25 million was moving from the other line in non-commission to the amortization line in the non-commission bucket at IG?
Yeah, that's right. With IFRS 16 on leases, we basically capitalize all the operating leases. And so now what will be recorded is amortization in what used to be lease expense.
Okay. So EPS real neutral, but benefit to EBITDA by CAD 25 million.
Yeah, and then the largest piece of that is amortization. There is also a piece that's obviously interest, but that's all reclassed.
Okay. Sticking with IG, could you remind us just in terms of your technology transformation project, I guess, what you've completed to date and what's to come? You know, and maybe a timeline.
Yeah. Mike's been, Dibden's been busy, so, that's the good news. We've launched a new industry-leading fund accounting service, successfully implemented. So, as you know, we took a write- down on a previous adventure of building our own. And so that's now up and running, and it's right at the front of the industry. So we've got a modern fund accounting capability, which will enable products and everything else that we do. We've got robotic processing automation going. So we've got six bots planned for the end of the year, and they will obviously do their job, and therefore, that will reduce human costs, and scale us as we go forward.
We've got a pilot rollout to our advisors for account opening, transfers, and account maintenance, and the full rollout will be Q2, 2019. We've got our new online portal going, and it's now available to clients, so they can get their statements and tax documents on their own and go into the site, and be able to address or access all of that. Our new digital advisor desktop, powered by Salesforce, is targeted to roll out in the second half of 2019, and that'll be a huge productivity driver. So, you know, Mike's been busy, and he's done a great job executing, and his team, you know, they've been together now for probably 18 months, and they're really getting up to full productivity.
Okay. Sounds like a lot's happening in 2019. Is it largely done by the end of this year, or is this still a multi-year process?
... Well, yeah, a big part of it will be done in the first two years, two and a half years.
Yeah, and a lot of 2019 is really executing on the vision and the design. So, I think through this year, there'll be a lot of clarity coming to you on exactly what we're doing on outsourcing and automation. So, it is really a year of lifting, and we'll be communicating with you on the way.
Okay, great. And then just my last question, the IG consultants, just what's the expected attrition dynamic? Would you expect the numbers to continue to decline in 2019 or stabilize?
Yeah, great question. So we want to basically have 2000 teams. And I think I said this early on when I joined, that you know, when there's the IRA or our IRA mo- not the IRA, RIA model in the US, you can look at. But our goal is to have very diverse skills within each team so that there's people who are insurance specialists, there's people who are tax knowledgeable, there's people that are. And these 2000 teams could grow very large in assets and what they're responsible for. So it's up to their energy and their passion and all the capabilities that we bring to them to grow their team as and their assets as big as they want to grow it.
So, you know, there could be a very, very large team with a lot of assets at some point in our company. We already have very large ones already, but it's... So we want to scale that up, so that's a big part of our story. But we also want to cap it at 2000, because if you don't have a cap, then we'll get back into a story of always just recruiting more and more. Now, if we get to 2000 teams, and every team's got CAD 500 million of assets or something, then we start thinking about where to go from there. But it's, so that's how you should think about it.
And then, as I said earlier, the new recruits that are coming in are just the screening process we run, because as you may or not remember, but we centralize recruiting. So now that we have professionals that actually are doing all the interviewing, and that's why the productivity is going up, and it's showing up in the numbers. So we feel really excited about where we are. But if you ask, you know, it's you should think about 2,000 teams and more productive because of the skill sets that are inside those teams.
Okay, that's helpful. And when you say team, like I look at your numbers, you, you break down. Are you referring to that greater than four years consultant practices?
Correct. Yeah.
Okay, so the new consultants that are, less than four years, that's through your recruitment pipeline, you're not referring to that?
No. But the new recruits that we did bring in are substantially higher in productivity than the historical ones were.
Got it. Okay, that's helpful. Thank you.
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.
Thanks. Yeah, Jeff, just going back to the IG consultants. If it's stable going forward, I guess the productivity ratio is going to be more important. And you know, kind of when you envision your full ninth inning of this IG revamp, you know, kind of what target are you targeting on that productivity ratio?
It's more, we've got a goal for the organization, and then we look at each team on their own. And, you know, some are going to be... It'll be a diverse group of that, but all of them are going to have to have a threshold of a certain amount to stay within that context. So the way I think about it, if you're doing your modeling and things, is just 2,000 teams, and they're going to grow, and you'll see the numbers every quarter as we talk about them, and we'll give you more color as we go.
Okay. And, and Barry, just on the liquid alts, can you just, update just us on the, on the traction? You guys were first out of the gate, and you mentioned it could be a, a, you know, a very, very big product line. I agree as well, too. And maybe just maybe talk about potential demand or, you know, potential liquid alt funds that, that you could be suited for the marketplace.
Yeah, sure. It's a great question. Yeah, we're very positive on that segment. And, you know, there's some that say that it might grow to CAD 100 billion size in Canada at some point in the future. So, and you're probably aware of what we launched last April is a multi-strategy liquid alternative. In other words, it consisted of a number of sleeves in it. Our experience, Jeff and I, in the US, with the multi-strategy categories, is the deepest category for liquid alts in the US. It allows advisors to have it all put together for them, so that they can plug it into a portfolio, as opposed to having to deal with all the different sleeves. So, it is an educational sell.
We're approved on multiple platforms now. Flows are coming in. I think we're over CAD 400 million in our, we call it MStar strategy, the multi-strategy. The way we design it, though, is that each of the sleeves itself their track record started from the date that we launched in April. So what we intend to do, which we, you know, we'll message and convey in due course, is start to offer some of the sleeves as individual offerings when we think it's appropriate to do so. You know, because the multi-strategy consists of long/ short, global macro, and market neutral, and they're all put together in one holistic solution.
But, that design allows us to pull them out and launch them individually if need be. So we'll monitor the demand for that.
Right.
We now are just really focused on the multi-strategy, obviously, with principally in the IIROC channel. And it's been well received. And you know what? Other competitors are launching, and that's a good thing, because all it's gonna do is educate quicker the industry. And there's a lot of different ways you can do this, and so we'll, you know, collectively, the industry will get up to speed quickly on it. And you know, we're very confident we'll gain our fair share of market share, and it should be a good, a nice growth area. And the fees are healthy and justifiably so, given what they can do with uncorrelated, particularly as we know, equities. We're getting towards the end of the bull run. We know the story.
Interest rates, although they've stopped a little bit rising, but at some point they're gonna start rising again. So you've got these liquid alternatives that are uncorrelated to both stocks and bonds, and they're really a nice sleeve to put into an overall portfolio.
Right. Okay. And just lastly, Luke, just on the interest expenses on the P&L, and I haven't found it yet, so maybe you can help me out. It's been very variable over the last two quarters. Is there something that causes that variability that I'm not aware of?
You say on the interest expense?
Yeah, on the interest expense line.
Yeah, we did some restructuring of our debt that we were really proud of earlier in the year. So we had CAD 375 million that was coming due in March of this year. We redeemed it early, and we partially funded it with an issuance of a 30-year deal that we did in July. And so that noticeably took down our interest expense, that restructuring.
Yeah.
Right now, where it's heading, it's we're at level state after that restructuring we did.
Okay, got it. I appreciate it. Thanks a lot, guys.
You're welcome.
Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Potter.
Thank you, Patrick. That will conclude our call, and thank you for your participation today, and enjoy your weekend.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.