Ladies and gentlemen, thank you for standing by. Welcome to the SEI third quarter 2019 earnings call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions, and instructions will be given at that time. If you should require assistance during the call, please press star then zero, and an operator will assist you offline. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Chairman and CEO, Al West. Please go ahead.
Welcome, everyone. All of our segment leaders are on the call, as well as Dennis McGonigle, SEI's CFO, and Kathy Heilig, SEI's Controller. I'll start by recapping the third quarter 2019. I'll then turn it over to Dennis to cover LSV and the investment in new business segment. After that, each of the business segment leaders will comment on the results of their segments, with one exception. Since Wayne Withrow is on vacation, Steve Onofrio, head of sales and service for the Investment Advisor segment, will report on that business. Finally, Kathy Heilig will provide you with some important company-wide statistics. As usual, we will field questions at the end of each report. Let me start with the third quarter 2019. Third quarter earnings increased by 3% from a year ago.
Diluted earnings per share for the third quarter of $0.86 represents an 8% increase from the $0.80 per share reported for the third quarter of 2018. We also reported a 2% increase in revenue from third quarter 2018 to third quarter 2019. Also during the third quarter 2019, our non-cash asset balance under management increased by $1 billion. At the same time, LSV assets under management decreased by $3.3 billion. These increases in AUM were primarily due to market appreciation, while the decreases were caused by negative cash flow. A milestone was reached at the end of the quarter. SEI reached the $1 trillion mark in total assets under management, assets under administration, and advised assets. In addition, during the third quarter 2019, we repurchased approximately 1.4 million shares of SEI stock at an average price of $58.12 per share.
That translates to $81.4 million of stock repurchases during the quarter. Finally, in the third quarter, as part of the investments we make to create growth, we capitalized approximately $7.3 million of the SWP development and amortized approximately $12 million of previously capitalized SWP and IMS development. Third quarter 2019 sales events net of client losses totaled approximately $42.7 million, and are expected to generate net annualized recurring revenues of approximately $33.2 million. We are satisfied with our third quarter sales results in our technology and operational businesses, and we are becoming bullish about our future. While slow contract negotiations in this tightly regulated environment is still considered a headwind, we are becoming less troubled as our active pipelines grow. Our asset management businesses continue to face headwinds.
While our advisor business began to see positive flows during the quarter, the institutional investor business with U.S. corporate DB plans continues to be a challenge. All that being said, there are bright spots. One is that across the company, we have fully engaged sales teams and a lot of activity. Two, IMS sales continue to be strong. Three, the migration of advisors to SWP is now behind us. This allows our full attention to be on growth. Four, we signed significant new SWP business. Fifth and last, we are moving forward with some of our promising new initiatives. Our market unit heads will speak to the bright spots in their specific sales activities. This concludes my formal remarks, I'll now turn it over to Dennis to give you an update on LSV and the investment in new business segment.
I'll turn it over to the other business segment heads. Dennis?
Thanks, Al. Good afternoon, everyone. I will cover the third quarter results for the Investments in New Business Segment and discuss the results of LSV Asset Management. During the third quarter of 2019, the Investments in New Business Segment continued its focus on the ultra-high net worth investor segment through our private wealth management group and additional research initiatives, including the digital services and hosting opportunity and the modularization of larger technology platforms into standalone components for the wealth management and investment processing space. During the quarter, the Investments in New Business Segment incurred a loss of $4.5 million, which compared to a loss of $2.9 million during the third quarter of 2018. This increase in loss reflects the growth of our private wealth management business, more than offset by other areas of investment.
Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the third quarter. LSV contributed $37.6 million in income to SEI during the quarter. This compares to a contribution of $41.7 million in income during the third quarter of 2018. Assets during the third quarter were down approximately $3.3 billion. LSV experienced net negative cash flow during the quarter of approximately $3.5 billion, which was offset by market appreciation. Revenue for LSV was approximately $121.2 million, and performance fees were minimal. Our effective tax rate for the quarter was 18.9%. I will now take any questions.
Ladies and gentlemen, if you wish to ask a question, please press one, then zero on your touch-tone phone. You will hear an acknowledgment tone. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press one and then zero. One moment for the first question. We actually have no lines queuing up at this time.
Okay. Thank you, Dennis. I'm now going to turn it over to Steve Meyer to discuss our private banking segment. Steve?
Thank you, Al. For the third quarter of 2019, revenues for the segment totaled $117.3 million, which is down 1% as compared to our revenue in the third quarter of 2018. This year-over-year revenue decrease was due primarily to some of the client losses previously announced, along with decreased revenue in our asset management business. Our quarterly profit for the segment of $6.5 million increased $4.5 million as compared to the third quarter of 2018. Our third quarter profit is down $1.8 million as compared to our profit in the second quarter of 2019, due mainly to two items. As a sign of maturity, our development work has moved from larger items to maintenance and product enhancements. We expense this type of work as it occurs and do not capitalize it.
Second, in Q3, we had the effect of mid-year compensation adjustments, which contributed to our expense increase in Q3 compared to Q2. We continue to manage expenses tightly, but with an eye in supporting the growth momentum we are building in new events. Turning to sales activity for the quarter, we signed approximately $18.8 million in net sales events. Additionally, we had $7.3 million in one-time events. These events included the following. The two deals previously discussed on our second quarter call. As a reminder, they are CIBC Private Wealth Management, who is a leading North American financial institution. Its US Private Wealth Management business offers investment management, wealth strategies, and legacy planning solutions. The second was a longtime client, law firm Dorsey & Whitney.
During the quarter, we also signed two additional clients to SWP, both our existing TRUST 3000 clients, which are scheduled to migrate their existing books of business to the SEI Wealth Platform in the second half of 2020. As you might have seen in the press, we are pleased to announce that after the quarter end, but before today's call, we entered into an agreement with the Principal Financial Group to provide our trust platform to service their acquired Wells Fargo institutional retirement and trust business. The deal is not included in our announced events for this quarter, and we will work over this quarter to finalize the contract. This deal is significant for us not only from a financial standpoint, but also Principal is a market leader, and we are encouraged about the opportunity to expand our relationship from here.
In turning to an update on our Trust 3000 business, in the third quarter, we successfully converted three Trust 3000 clients to the SEI Wealth Platform. They were BMO Wealth Management, Rockland Trust Company, and Securian Trust Company. All three conversions went very well and demonstrate our ability to increasingly scale our implementation strategy, as well as prove our value proposition against increasingly aggressive competition. We also recontracted one trust client with a contract term of five years. As an update on our backlog, our total signed but not installed backlog is approximately $48.6 million in net new recurring revenue, not including the Principal business mentioned previously. From an asset management standpoint, total assets under management ended the period at $22.6 billion, representing flat quarter-over-quarter and slightly lower year-over-year assets. We did see negative cash flows of $106 million.
However, we continue to build a strong global pipeline in our AMD business. Turning to a couple of client updates. First, an update on the Department of the Interior business that we previously disclosed would be leaving us. After several rescheduled conversion dates, this business did deconvert off our trust platform at the end of the third quarter. The full effect of that loss will be in our fourth quarter numbers, and as mentioned several times before, we will need to navigate this headwind as we continue to gain momentum and grow our business. Also during the quarter, we worked with Wells Fargo on a number of initiatives. As mentioned previously, Wells has recently sold their institutional retirement and trust business. Also, as disclosed in the past, Wells continues to have other important and pressing technology projects and have recently had the appointment of a new CDO.
In light of the need to change priorities, Wells Fargo has informed us that it must pause the scheduled SWP implementation in order to redirect resources to other, more immediate technology leads, including the IRT conversion. SEI is working closely with Wells Fargo on these other priorities, and we will be providing Wells with professional service support around these initiatives. Currently, no dates have been finalized for when the SWP implementation will restart, and we will work with Wells on their current priorities in the interim. These recent developments have demonstrated to us that there are factors that have significant influence over Wells' expense and business priorities that are not within our control. Consequently, we cannot reasonably estimate the timing of implementation. Accordingly, we will not be giving updates on new conversion dates until Wells finalizes them.
More importantly, we will focus on the momentum the business is generating in both the U.S. and U.K., and focus on implementing our current and growing backlog, including the conversion of the IRT business, which will result in new client to SEI, to Principal Financial Group. In closing, I would like to highlight our momentum. As you can see by our backlog of signed, yet-to-be-installed clients, combined with our market activity, we feel a resurgence of growth momentum. We have an active pipeline across the U.S. and U.K. and look to continue that momentum into 2020. We feel well-positioned to grow our private banking business and feel we have great opportunity offering the power and capabilities of all of SEI's technology and processing platforms across the wealth management market. We are excited for the future.
That concludes my prepared remarks. I'll now turn it over for any questions you may have.
Ladies and gentlemen, once again, if you have a question, please press one and then zero at this time. Please press one and then zero with any questions. We do have a question from Robert Lee with KBW. Please go ahead.
Great. Thanks. Good afternoon, Steve.
Good afternoon, Rob.
Quick question. Just to make sure I understand the moving pieces. The $18.8 million of net sales, if I remember correctly, when you had talked about CIBC and the other transaction in the last earnings call, that was about $16-odd million of recurring sales. Does that $18.8 include that $16, the new, and then you're also backing out Wells from that?
No. You were right up until the Wells point. If you remember, we announced CIBC, or mentioned CIBC at the end of the second quarter call. We did not include that in those events. They are included in Q3 events, the $18.8. Wells has no impact on that net sales number. They are still a client and we still have them in the backlog. That is a net number, though, that $18.8. It takes in the sales, the gross sales we had, minus any net downs or losses in clients for the quarter as normally we announce.
Did I have it correct that the Wells and the other one were about $16 million recurring when you had announced them last quarter?
You keep mentioning Wells, I think, Rob. If I'm hearing-
I apologize. CIBC. Sorry.
CIBC. Yeah. CIBC and the other one we announced last quarter at 16 too, and then we had other events this quarter.
Those other events plus CIBC, and I believe it was Dorsey, minus any net downs or losses is what results in the net $18.8 million for the quarter.
Okay. Great. Thanks for taking my question.
Sure. No problem.
Thank you. For our next question, we'll go to Chris Donat at Sandler O'Neill. Please go ahead.
Hey. Good afternoon, Steve.
Good afternoon, Chris.
Just on the Department of the Interior contract, can you remind us what the expected revenue hit should be in the fourth quarter, and is there any expense offset you expect fourth quarter or over time with that?
Well, Chris, not to be smart, we never really told you the amount. We don't really talk to specific amounts. I think there was speculation on the amount. It is a larger amount. It was a very profitable account. Again, that will all come out in Q4. We don't specifically tie revenue to individual clients.
Okay. Then just on the expense side, should I assume that will there be any expense change related to this or not really?
Very little expense change.
Okay. All right.
Any of those expense savings we've been working on all along the way. Very little.
Thank you. We'll move now to Chris Shutler at William Blair. Please go ahead.
Hey, Steve. How are you?
Good. How are you, Chris?
Good. Let's see. I wanted to talk about the new conversions that happened in the quarter. BMO and the other two, how should we think about the incremental revenue that we will see in Q4 from the combination of those clients relative to the current quarter, to Q3?
Well, I'd say two things. One, keep in mind on trust lifts, typically, we only announce in the events when we announce them. We only announce the net up from the SWP pricing that's from TRUST 3000. Two, I would say the net uptick in revenue from them and others will be somewhat muted by the Department of the Interior loss and other losses. It'll probably get lost a little bit in the shuffle of the revenue decreases versus the revenue increases.
Okay. I know it's tough to isolate clients, but like Wells, is the fact that they are kind of putting a pause on things, how does that impact the P&L?
Well, Wells is still an active client and a large client for TRUST 3000 and will continue to be. We will continue, as I mentioned in the script, we will continue to work with them on a number of initiatives that we currently are working on with them, but also some new initiatives on some of the new projects they have. I would expect some of our one-times and in-flights to continue.
Okay. Lastly, TRUST 3000 attrition and net downs, you've mentioned it a couple of times. Can you maybe give any more specifics on what happened in the quarter there, if anything?
We did have one loss of a TRUST 3000 client that was netted out of our events. We also had one recontract for five years that I mentioned.
That was a net down?
Well, there was a net down of revenue from the lost clients that we netted against our gross events, but that is in that net $18.8.
Okay, thank you.
Sure.
If there are further questions, please press one and then zero at this time. We do have a follow-up from Robert Lee at KBW. Please excuse me. No, we have no one in queue at this time now.
Thank you, Steve. Now our next segment today is investment managers, and Steve Meyer will also discuss this segment. Steve.
Great. Thanks again, Al. In turning to Investment Managers, for the third quarter of 2019, revenues for the segment totaled $112.2 million, which was $10.9 million or 10.8% higher as compared to our revenue in the third quarter of 2018. This year-over-year revenue increase was due primarily to net new client funding and existing client expansion. Our quarterly profit for the segment of $40.3 million was $4.3 million or 12% higher as compared to the third quarter of 2018. Higher profits were primarily driven by an increase in revenue, offset by a smaller increase in personnel expense and investments. Third-party asset balances at the end of the third quarter of 2019 were $638 billion, or 5.1% higher as compared to the asset balances at the end of the second quarter of 2019.
This was due to an increase in assets due to net new client fundings of $21.1 billion, as well as market appreciation of $9.8 billion. In turning to market activity, during the third quarter of 2019, we had a very strong sales quarter with net new business events totaling $15.1 million in recurring revenues. Encouragingly, these sales were diverse and spanned our entire business and included both new name business and expansion of wallet share with current clients. These events include the following highlights. In our alternative market unit in the third quarter, we converted a $16 billion diverse shop from a competitor and launched several new multibillion-dollar funds to our growing private equity business. In our traditional market unit, we continue to have success across all product lines, particularly in Collective Investment Trusts.
We are also pleased to announce a mandate one in our 40 Act turnkey series trust from a $1 trillion-dollar global manager who is establishing a family of mutual funds. SEI Archway had new sales events in both the single family office and multifamily office market segments. At the end of the third quarter, our backlog of announced but not yet converted business was $39.6 million, an increase of $1.2 million over the end of the second quarter of 2019. From a market standpoint, we remain excited at the growth opportunities ahead of us. Our vision is to provide the leading integrated platform covering the front, middle, and back office for wealth managers. We feel the investments we have made in our technology and platforms have not only differentiated us, but they are resonating extremely well in the market.
That concludes my prepared remarks. I'll now turn it over for any questions you may have.
At this time, question and answer is open. Please press one and then zero. We go to Chris Shutler at William Blair. Please go ahead.
All right. The expenses in the quarter, Steve, look like they bumped up about $3 million quarter-over-quarter. Just what was that related to? How much of that was performance related given the strong sales?
Well, keep in mind, Chris, so sales we amortize, so it's less of the sales compensation, if that was your question. The $3 million was primarily a little bit like the private banking market. We had the impact of mid-year market compensation adjustments. We also had an increase in investments and an increase of, obviously, we're bringing in business faster, so we're obviously hiring and adding people.
We should look at the, I guess, we should look at that third quarter number as a jumping-off point for subsequent quarters?
I wouldn't say that necessarily. I would say, depending on where we stick with investments and we continue to look to scale the business. I think I've said this before. It's tough to look at a quarter-over-quarter look, especially from an expense standpoint. As you can see, we're in a pretty good sales mode, and I want to keep that sales mode up and certainly adding the expense we have to add to support that revenue. Depending on quarter-over-quarter, that will impact it.
Okay, I wanted to also ask about the trillion-dollar manager. Could you explain that a little bit more, what exactly you won and who this client is?
Well, certainly we can't mention the name, but it's a very large manager. Similar to what we've looked at with other business, we think this is an initial product that they are looking to start. They have quite a bit of funding to start a range of mutual funds that they have been looking for, and they are asking us to provide the full service, full front, middle, back office. We are looking at this as an opportunity to start a new relationship and expand from there.
All right. Thank you.
At this time, there are no more questions in queue. Please continue.
Thank you, Steve. Our next segment is investment advisors. Stephen Onofrio, standing in for Wayne Withrow, will cover this segment. Steve.
Thanks, Al. In the third quarter of 2019, we continued to build sales momentum after the completion of the migration onto the SEI Wealth Platform. We also continued our focus on value-added technology development and client technology adoption. Third quarter revenues totaled $103 million, up only slightly from the third quarter of last year. These results were primarily driven by market appreciation, offset in part by negative cash flow in the first six months of this year. Expenses were down over 3% from last year's third quarter. Savings were realized in most categories, with technology leading the way. We did have increased direct costs, primarily tied to our managed accounts growth, but other savings more than offset these increases. Our profits increased $2.2 million from last year's third quarter due to cost savings.
Assets under management were essentially flat from the third quarter of 2018, with market appreciation being offset by negative cash flow. During the third quarter, our net cash flow was a positive $70 million. We are encouraged with our quarterly progress as we regain sales traction. We recruited 75 new advisors during the quarter, and our pipeline of new advisors remains active. In summary, during the third quarter, we posted good profit results, and while cash flow is short of where it needs to be, it is trending in the right direction. We are focused on reaping the benefits of the SEI Wealth Platform now that we are fully migrated. I welcome any questions you may have.
Once again, we invite you to press one and then zero with any questions. We first go to Glenn Greene at Oppenheimer. Please go ahead.
Yeah. Hey, good afternoon. Could you just give us any color on if you're getting any traction, given that you've now converted to SWP in terms of new pools of assets or a higher, bigger advisors or just sort of a different pool of advisors that may be being attracted? It's not really showing up yet in the flows, but give us a sense for what you're seeing in terms of business activity.
Well, whether they would be a larger advisors or a larger share of an advisor's book, the expanded services of the Wealth Platform include the ability to consolidate advisors on one platform. I think we would be a good option to a broader segment of advisors as we move forward.
Okay.
And next-
Thank you.
Next, we'll go to Robert Lee at KBW. Please go ahead.
Great. Thanks for taking my question. If I could get a little bit of color on the flows. You mentioned kind of feel like you're seeing some benefit from re-engagement of sales. Are you seeing, are advisors kind of starting to re-engage more of their clients? I mean, kind of lack of a better way of putting it, any signs kind of re-risking or whatnot, or is this really just a function of more salesmen out there more focused on generating? Trying to get a sense of kind of the underlying momentum.
I don't think it's necessarily related to the advisor's clients re-risking. I think we're encouraged by the sales that we have in the short term. We're headed in the right direction. It's difficult to predict going forward, but we have seen a correlation between the time that we spend with advisors, helping them to adopt the technology of the new SEI Wealth Platform technology after the migration, and the ease in doing business with SEI. We're seeing a correlation in asset growth based on that work that we've been doing.
Maybe just one follow-up. I think Wayne has definitely talked in the past about you've been seeing good demand for your, I guess, your ETF allocation product, which I assume has somewhat lower fee structure compared to more traditional products. Is that still the case? I guess, to some degree, maybe been a little bit surprised that the fee rate, if you just look at revenue to average AUM, has held up pretty well despite kind of some of the underlying shifts. Are we making too much of this kind of movement to the ETF kind of allocation product or kind of what's helping support kind of fee rate where it is?
I think you're right. Fee pressure is real in the industry. We've only had a slight impact to ours, and I do believe it's the result of the continued growth of our ETF program. It's also the growth in our mutual fund models that offer the option of our large cap passive fund. I think that the real strength of SEI is the fact that we have a fully comprehensive SMA program, a comprehensive mutual fund program. We offer it in taxable and tax-managed. When you look at an advisor's business, they have a diverse set of clients that use all of those products. The blended fee that we receive is across the entire product line, which we think is more resilient to market pressure.
Great. Thanks for taking my question.
At this time, we have no further questions in queue.
Thank you. Thanks, Steve. Our final segment today is the institutional investor segment. Paul Klauder will report on this segment. Paul?
Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the third quarter of 2019. Third quarter revenues of $80.3 million decreased 4% compared to the third quarter of 2018. Third quarter operating profits of $43.1 million was flat as compared to the third quarter of 2018. Operating margin for the quarter was 53.6%. Revenues were impacted by negative client fundings, client fee reductions associated with successful rebids, and currency impact versus the third quarter of 2018. Operating profits were positively impacted by two one-time expense items. One, lower than anticipated sub-advisor expenses in certain products in the third quarter of 2019. Two, an operations error that resulted in higher than normal expenses in the third quarter of 2018. Quarter end asset balances of $89.5 billion reflect a $2.5 billion decrease compared to the third quarter of 2018. This decrease is driven primarily by negative client fundings.
Net sales were a negative $1.7 billion for the quarter. Gross sales were $1.1 billion. Client losses were about $2.8 billion. Losses were primarily tied to three clients. Two losses were acquisition-related, and one loss was an unsuccessful rebid of a long-term client. The unfunded new client backlog at the quarter end was $650 million, and we would expect the majority of this to fund in the fourth quarter. The new client signings were diversified across new clients in endowments and foundations, U.K. fiduciary management, U.S. defined benefit, and a U.K. defined contribution win. We believe the new business focus on longer-term asset pools across all global markets is paying dividends to the business and our sales pipeline is strong. We continue to stay focused on all client situations, especially those that are in rebid process or in M&A activity.
Thank you very much, and I'm happy to entertain any questions that you may have.
Once again, ladies and gentlemen, please press one and then zero at this time for any questions. Our first question will come from Patrick O'Shaughnessy with Raymond James. Please go ahead.
Hey, good afternoon. I was just hoping to dig into your commentary about lower than anticipated sub-advisor expenses. Is that a one-time issue, some sort of catch-up in the quarter? I think your commentary suggested it was one time. Is that something that we could think about being sustained going forward?
Yeah, Patrick, it was just one time for the quarter. Some of our alternative investment sub-advisor expenses, we make an estimate based on the contract of where the run rate is. In this particular quarter, two of the alternatives, we were over-accrued for the first two quarters, and we had a true out. We had lower expenses in the third quarter and also a write-down of what the expenses were for the first six months. We were able to get that one-time benefit for the quarter only. That's not an adjusted run rate.
Got it. Maybe a bigger picture question about margins. I think it's obviously somewhat unusual to see a business that's having top-line pressures showing the year-over-year margin improvements that you guys have shown year to date. It does sound like some of that might be non-recurring in nature, but how do you think about the sustainability of margins in this general range?
Dennis is looking at me and just saying it's darn good management, but I guess that's not a good answer. I think we've been very smart at managing expenses and doing it judiciously, but also looking at the business strategically. When we have the Investor Day, we'll be talking about some other initiatives that we're looking for to really springboard us into other incremental markets that we're not in now. There may be some investment from that standpoint. We've got a benefit of getting more diversification in alternative investments. The reality is that we're more efficient in how we service our clients. Technology is part of that process now. That wasn't part of the process maybe three, four, or five years ago.
As we move forward, the sustainability of 53% profit margins are now out there for the business, given some of the headwinds, and we would expect that to come down. More importantly, we're really thinking about how we get focused on long-term growth and how we get into new markets to be able to get us back to a growth engine for SEI.
Great. Thank you.
Next, we'll go to Chris Donat at Sandler O'Neill. Please go ahead.
Hey, Paul. Actually, you know what? Patrick's question, the way you covered it, that satisfies me, and I don't want to make any more trouble for you with Dennis.
Thanks, Chris. I appreciate it.
Thank you. We'll move then to Robert Lee at KBW. Please go ahead.
Great. Thanks. Good afternoon, Paul.
Hi, Robert.
Hey. Just curious. You gave some color about the backlog and the sources of it, and just maybe if you could update us on some of your U.S. DC initiatives. I know it's something you guys have talked about as a channel you have some priority on, although it feels like it's been maybe a little tough sledding, getting too much there. Can you maybe just give us a quick update on?
Sure
what you see there?
Well, I'll just pivot real quick to the U.K. Our Master Trust in the U.K., which is our largest way that people consume our defined contribution services, was approved by the FCA. We had a nice incremental win in the third quarter of a new client coming into that. We're quite positive about that as we move forward because we're one of the early ones that got the approval. Pivoting to your question with respect to the U.S., it has been slower on DC. One of the realities with regard to defined contribution plans is we still are in a market that ostensibly is going up. There's not as much pain on the line-up for plan sponsors. Consequently, they're less likely to change their diversification options. I've talked about this before.
This is one of those markets that if we had some more volatility and we had some frustration, either at the participant level or at the sponsor level. We think we would be in a better position for getting the multi-manager kind of weight level approach into DC plans. We're still actively talking to a lot of our defined benefit customers. Again, it's a little bit of an inertia just because the line-ups are doing pretty well. We do think long-term. Again, we'll talk about at the investor day about some other things that could happen in the 401(k) defined contribution world that we think could be beneficial. We don't see them on the short-term horizon. They would be more long-term initiatives.
Great. Maybe just a quick follow-up, and then going back to the sub-adviser expense question, could you size that for what that impact was in the quarter?
That was about $800,000.
Okay, great. Thanks so much.
Yep, no problem. Thank you.
Thank you. Next, we have Chris Shutler at William Blair. Please go ahead.
Hey, Paul.
Hi, Chris.
I wanted to follow up on that and just so you just gave the one-time benefit from sub-adviser. On the second piece, the operations error, I guess, can you size that? Can you just reiterate exactly what that item was?
Yeah, that was from the third quarter of 2018.
Oh, got you.
It's not in 2019. It's a little bit less than $1 million that was in 2018. From a comparative perspective, that's why I called that out.
Okay, got it. Makes sense. Thank you.
Thank you.
There are now no more questions in queue.
Thank you, Paul. Before I turn it over to Kathy Heilig, I'm going to give the mic to Steve Meyer to cover something that's come up.
Yeah, this is just a response, Chris. Just two follow-ups. One, you had asked about the Department of the Interior. I get to plead ignorance because it was pre-Steve, apparently we did, in the Q4 of 2017, have a conversation during the call about the amount of that client. It was $17.8 million. I just wanted to clarify that. Secondly, on the expense uptick, Chris, that you brought up, the one thing I think you were probably looking for that might help you, in our personnel expense and uptick, due to the performance of IMS, we did do a catch-up for our IC because where we are tracking against goals in the quarter. That one-time uptick was about $2.4 million for the year. Just wanted to follow up to clarify those things.
Thank you. Now, Kathy, I'd like to give a few company-wide statistics.
Thanks, Al. Good afternoon, everyone. I do have some additional corporate information about this quarter. Third quarter 2019 cash flow from operations was $163.9 million, or $1.06 per share, bringing year-to-date September cash flow from operations to $381.5 million, or $2.45 per share. Third quarter free cash flow was $144 million, and year-to-date free cash flow is $324.2 million. In the third quarter, we had capital expenditures excluding capitalized software of $12.3 million. A significant part of that was related to our facility expansion. In the fourth quarter, we would expect to have capital expenditures excluding capitalized software of $15 million, and about half of that would be related to the facility. Our projected capital expenditures for next year are about $40 million, and again, about half of that is related to the facility.
We also would like to remind you that many of our comments are forward-looking statements that are based upon assumptions that involve risks, and that the financial information presented in our release and on this call is unaudited. In some cases, you can identify forward-looking statements by terminology such as may, will, expect, believe, continue, or appear. Our forward-looking statements include our expectations as to revenue that we believe will be generated by sales events that occur during the quarter or when our unfunded backlog may fund, the benefits we will derive from our investments, our ability to manage our expenses and scale our offerings, the timing of our implementations and conversions, the services we may provide to clients, the momentum of our businesses, the strength of our pipeline and growth opportunities, and our ability to execute on and the success of our strategic objectives.
You should not place undue reliance on forward-looking statements as they are based on current beliefs and expectations of our management, subject to significant risks and uncertainties, many of which are beyond our control or subject to change. Although we believe the assumptions upon which we base our forward-looking statements are reasonable, they could be inaccurate. Some of the risks and important factors that could cause actual results to differ from those are described in our forward-looking statements can be found in Risk Factors Section of our annual report Form 10-K for the year 2018. Now, please feel free to ask any other questions that you may have.
For any questions, please press one and then zero at this time. We do have a question from Chris Shutler at William Blair. Please go ahead.
Hey, guys. Just a couple more. First for Dennis, on the investments in new business, the expenses grew about $1 million sequentially in Q2, and then another $1 million sequentially in Q3. Just explain why that was. I think you said growth in the private wealth management business, but just explain what that was and how sustainable that is.
I said the growth in expenses is really a result of spending on some of our newer initiatives that we're capturing those costs and the investments in new business segment. The two that I mentioned on the call earlier were the digital services offering, we call it SEI IT Services, so that what we used to call hosting services. The development and build-out of those capabilities and beginning to take those to market, as well as some of the modularization work on different technology components around the company that we believe are going to open up access for those capabilities to new markets. Those costs are offset by growth in the private wealth management business.
Okay, got it.
Okay.
it sounds like those expenses, the current run rate, that's the run rate in Q3 is.
Yeah
going forward.
Yeah, I would go forward with that.
Okay.
We'll spend more time with that at the investor conference as well.
Okay, great. One last one for Steve on Wells. Just curious, when were you made aware of Wells being on hold, and was it post the new ceo coming on board? Any idea if this pause by Wells was specific to SEI, or have they paused a bunch of their IT projects? Any more color there would be great.
Well, as far as when we knew, we've been in conversations with Wells Fargo over the past several weeks. I would not tie this directly to the new CEO. I think there's a number of things on Wells Fargo's plate that caused this. As far as speculating to other providers, I do not believe this is just focused on SEI. From our standpoint, I don't want to speak for Wells Fargo or speculate on their point, on their part. I think the most important thing out of this is Wells Fargo has asked us in their time of need for us to be a good partner, and that's what we're going to do. We've done that for the past 40 years, and quite frankly, I think the solace we get is that we're putting our clients' needs above ours.
We're a little disappointed, obviously, in pushing this, we're going to continue to work on their current priorities. Wells is continue to be a large client of SEI. I think the bigger story for us in private banking is the large backlog we have that is growing and the momentum that is putting off, and that's what I want to focus on.
I guess confidence that there's no change in the long-term relationship with Wells as a result of this extremely high or how would you describe it?
Well, again, my view is we've had a long history of 40 years with Wells, I expect that to continue for a very long time. They are currently a large client, we'll continue with that. As I said, we're going to help them work on their current priorities right now as we wait for them to look at when they can reconsider SWP dates. When they are ready to reconsider SWP dates, we're ready, willing, and able.
Okay. Thank you, Steve.
Sure.
Our next question is from Robert Lee at KBW. Please go ahead.
Great. Thanks for taking my follow-ups. Actually, Steve, maybe just have one or two quick questions for you still. The one-time revenues of $7 million, I assume that all flowed through in the quarter. I know every quarter you've had some.
No. The $7.3 announced, which obviously is tied to new business implementations, about $1 million of that flowed in Q3. The rest will come in over the next 12 or so months.
Okay, great. I don't think you've mentioned this call, and I apologize if you did and I missed it, but the CIBC, fairly large new client. Any sense of when you think that's going to begin coming on board?
Well, we're in active implementation with them. Obviously, there's a large project on their side and our side. We will look to work through the next 12-14 months. I think there'll be phases that we start to bring in towards the end of 2020. Obviously, there's an implementation fee that we'll start to recognize as we go through the implementation as well.
Great. Maybe, Den, I just had a quick question for you. Obviously, I know the tax rate moves around with, particularly around the options and equity-based comp and things. How should we be thinking of any change in your expectations for a "normal tax rate" or basic core tax rate?
Fourth quarter will look more like first and second quarter. Third quarter, we also get the benefit of tax years closing out. You get some reserve reversals as a result that benefit us. Third quarter is usually a quarter where the tax rate is a little bit lower.
Right
historically. Fourth quarter will be similar to first and second, more in the 21% range.
Great. Thanks for taking my question.
You're welcome.
Now there are no further questions in queue.
Thank you. Ladies and gentlemen, sales results were solid this quarter, and we are encouraged by the size of our pipeline and the progress we're making throughout the company. Further, we believe that the investments we are making in our platforms and organization will help us benefit from all the changes taking place in our industry. Now, before you go, please note that we're holding an investor conference on November 12th and 13th at SEI's Oaks headquarters. Dinner will be served on the 12th, followed by the conference on the 13th. I hope you can make it. Thank you very much for attending this afternoon, and have a great day.
That does conclude our conference for today. Thank you for your participation. You may now disconnect.