IGM Financial, Inc. (OTCPK:IGIFF) Q3 2020 Earnings Conference Call November 6, 2020 8:00 AM ET
Keith Potter – Head of IR, Treasurer
James O’Sullivan – President & CEO
Luke Gould – EVP of Finance & CFO
Barry McInerney – President, CEO of Mackenzie Investments
Damon Murchison – EVP, Head of RD, Mackenzie Financial Corporation
Conference Call Participants
Gary Ho – Desjardins Securities Inc.
Geoff Kwan – RBC Capital Markets
Graham Ryding – TD Securities
Scott Chan – Canaccord Genuity Corp.
Tom MacKinnon – BMO Capital Markets
Thank you for standing by. This is the conference operator. Welcome to the IGM Financial Third Quarter 2020 Earnings Results Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Keith Potter, Senior Vice President, Finance. Please go ahead.
Thank you, Ariel, and good morning, and welcome to IGM Financial’s 2020 Third Quarter Earnings Call. Joining me on the call today are James O’Sullivan, President and CEO of IGM Financial; Damon Murchison, President and CEO of IG Wealth Management; 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 3 of the presentation. On Slide 4 summarizes non-IFRS financial measures used in this material. On Slide 5, we provide a list of documents that are available to the public on our website related to third quarter results for IGM Financial. And with that, I’ll turn it over to James.
Well, thank you, Keith, and good morning, everyone. Let me begin by acknowledging the trying times that we continue to navigate, and sincerely thank our employees, consultants and advisers for their ongoing efforts to stay focused on our clients while taking proper care of themselves and their families.
We had an opportunity to update our Board of Directors yesterday on wellness, broadly, and they enthusiastically support ongoing initiatives to be supportive in these times. I’d also like to acknowledge Jeff Carney and thank him for his leadership over these past several years. His greatest contribution, in my opinion, is the executive management team that he assembled.
I’m impressed by the mix of long tenured at IGM and new to IGM. It’s a purposeful mix of industry experience and geographic experience. I’m looking forward to working with them as we execute our strategy and continue to build momentum in our businesses. Now I’m excited to be here for several reasons.
First on the list is the core purpose of this organization, helping Canadians achieve security in their financial lives. This purpose is motivating and animates all that we do. And second, it’s the high quality and scale of this organization and its affiliation with Power Corp. and the quality of people throughout.
As we indicated on September 14, our overarching message is one of continuity and building on momentum. There will be no hard shifts, left or right. IGM has articulated a clear strategy over the past 3 years, and we will continue to execute against it. IG Wealth is well positioned for success.
Canadians want financial advice, need financial advice and will pay a fair price for financial advice. I believe that a strong client-adviser relationship, grounded in a dynamic living financial plan, supported by strong managed solutions, is a winning formula. IG Wealth will continue to serve more Canadians, particularly in the mass affluent and high-net-worth segments of the marketplace.
Mackenzie Investments is knocking on the door of $200 billion of assets under management. It enjoys scale and strong investment performance. I’m particularly excited about its growth prospects in China, in ETFs, alternatives and socially responsible investing. Combined with new distribution opportunities, particularly in the retirement space, it is very well positioned for growth.
And IPC, with almost $30 billion of assets, will be a leader in new emerging industry models as adviser practices transition. Overall, we’re excited as a team to be here. Our focus areas will be net flows, net sales and discipline and expense growth. With these, we will grow earnings for our shareholders. Turning to Slide 7. Overall, I would describe this as a strong quarter with more potential upside as our businesses work towards their full stride.
We achieved record AUM&A in the quarter of $196.4 billion, reflecting strong net sales and client investment returns. Investment fund net sales of $610 million are up significantly from $103 million last year, and overall total net flows were $408 million, including record-high flows at Mackenzie.
IGM’s Q3 earnings per share were $0.80, and adjusted earnings per share were $0.90, up 17% from Q2, and I’d like to point out the second highest quarterly adjusted EPS in company history. EPS includes a non-IFRS adjustment consisting of restructuring and other charges resulting from our ongoing multiyear initiatives to modernize our technology platform, costs relating to the GLC acquisition and personnel changes.
This was partially offset by a gain on sale from Personal Capital. We continue to make great progress on our strategic transformation, and I will speak more to this in just a moment.
It’s been a very busy quarter in the new strategic investment and other segment, with the acquisition of an interest in Northleaf Capital Partners, closing of the Personal Capital sale, increase in fair value of our Wealthsimple state to $550 million, and the continued strong earnings growth of China AMC relative to Q3 of last year.
We discussed the GLC transaction on the Q2 call, and Barry will provide highlights on Northleaf Capital Partners later in this call. Turning to Slide 8 on investment returns. Q3 saw solid equity market increases across most major market indices with lower volatility continuing, while fixed income markets remained flat.
Overall, IGM’s average client investment return of 4.2% was strong during the quarter. October saw a mixed performance in capital markets, resulting in an average client return of negative 1.9%, all of which has more than reversed so far in November. Turning to Slide 9. Q3 long-term mutual fund net sales were $5.8 billion for the total industry and $0.6 billion for the advice channel.
This result is roughly in line with the 10-year average for the third quarter and is an improvement relative to 2018 and 2019. Slide 10 is a quick reminder from our October 7 press release and October 8 webcast, where we have defined our 3 new reportable segments.
We’ve made these changes to help stakeholders better understand our business lines and assess components of value across wealth management, asset management and strategic investments and other. Turning to Slide 11 on our results for the third quarter. Average AUM&A of $194.9 billion increased 5.5% year-over-year. IGM’s Q3 2020 adjusted earnings per share of $0.90 was up 17% from Q2 and 6% from last year.
You can see on Slide 12 that the quarter-over-quarter increase in adjusted EBIT was driven by the strong earnings growth across the wealth management and asset management segments. Relative to the prior year, asset management earnings increased 16.7%, China AMC’s contribution to IGM’s EBIT increased 36.4% year-over-year, and Great-West Lifeco’s earnings also improved over this time period.
Slide 13 outlines the strong improvements in net flows for Q3 and year-to-date across all segments. Consolidated net inflows of $408 million during Q3 2020 were up $1.5 billion year-over-year, a solid result. Turning to Slide 14. Wealthsimple has demonstrated a strong track record of growth and shown an ability to attract capital, and they’ve built a strong challenger culture.
AUA has nearly doubled year-over-year, reaching $8.3 billion as of September 30, 2020. The October equity fundraising reflects the substantial increase in Wealthsimple’s valuation, now at $1.5 billion. As a result, we’ve marked up the fair value of our investment to $550 million. IGM remains the largest shareholder with a 36% pro forma fully diluted ownership and the Power Group’s collective ownership is 62%.
Turning to Slide 15 for an update on our very important transformation initiatives. At Investor Day in 2017, we announced a 5-year plan to modernize our technology and operations. The initiatives listed on this slide are split by our 2 main objectives: to enhance back-office efficiency; and elevate the client and adviser experience.
Our transformation program is on track. We introduced important initiatives in the second half of 2019, and we’re now implementing a series of new back-office initiatives, including accelerating end-to-end automation of some business processes, partnering with Capco.
Outsourcing end user services, partnering with Soroc Technology and outsourcing our mainframe hosting to IBM. Overall, the back-office transformation remains focused on leveraging the scale and expertise of leading providers, automating business processes and improving efficiencies.
We’re proud of the significant milestones we’ve achieved so far, and look forward to building upon this solid foundation as we move forward. With that, I’ll now turn it over to Damon Murchison.
Thank you. Thank you, James, and good morning, everyone. Before I get started on the quarterly results, I’d like to share some early perspectives. Just so you have context, my background in financial services lies in banking, insurance, independent and integrated.
So, I have a deep knowledge of the various models in the country. I enter my role with a strong knowledge base of IG Wealth Management and its culture, having worked with them in different capacities over the past 18 years. First off, I strongly believe that IG Wealth has a unique value proposition for mass affluent and high-net-worth Canadians that gives us a strong foundation to compete.
We are well positioned based on our ability to create a unique client experience that’s personalized throughout the client’s lifetime. At the heart of this is what we call gamma, our commitment to deliver a dynamic living plan that connects the client’s short term with their long term; a plan that’s constructed by an adviser that has expertise, the ability to deliver on the plan and the willingness to work with that client for life.
All this is backed by a comprehensive suite of well-constructed managed solutions that are competitively priced and levered some of the largest investment managers globally. A key competitive advantage for us that will allow us to win is our distribution strength. We have the benefit of scale with over 3,300 consultants across the country that are located in communities where their clients are located.
We have a central focus on the client and delivering high-quality living plans through accredited financial planners who have access to expert support and industry-leading tools and training. We also have advisers who are driven by entrepreneurship with strong ties for their communities and a desire to work with their clients for life.
Finally, we are transforming our operation in digitalizing and automating workflow to increase the productivity of our adviser network and elevate the client experience, something that smaller competitors may not be able to do. Our key opportunity now is to leverage the investments to create a needed to create needed capacity within our adviser network.
We have gone through a period of significant transformational change. And although we still have initiatives in flight, we have the necessary platforms today and tools and technology to free up capacity within our network and leverage those new capabilities to increase our share of wallet and acquire new clients in our key target segments.
Finally, we are well positioned for the future of advice. The advice channel is dominant in Canada. We don’t expect this to change in a meaningful way. IG Wealth is — has market share of anywhere between 2% to 5% in our key target segments, depending on what segment you’re talking about. So, there’s lots of room to increase our share. It only takes a small amount of share gains to achieve significant growth.
We feel that gamma, which is our focus to dynamic, customized financial advice, will be one of the models that show significant growth in the years to come, which matches well with our vision to be the financial planning company of choice in our goal to increase our market share of discretionary wealth assets.
So, now let’s turn to Slide 17 and go through IG Wealth Management’s Q3 2020 highlights. AUA at the end of September was $97.5 billion, up 3.9% during the quarter. IG’s year-to-date net flows reached $310 million at the end of September, and we saw inflows improved to negative $9 million in the quarter, up from negative $233 million last year.
The most interesting part of our Q3 results is our month-to-month trend in gross inflows. While COVID caused a little bit of a slowdown in new household acquisition between March and July, this year, we saw a significant shift in momentum starting in August, continued in September and also continued in October. Momentum in the fourth quarter is off to a great start with October growth inflows back in our history.
We’ll also speak to the growth of our consultant network in a moment. Turning to Slide 18, client flows and AUA. When you take a look at the metrics, you can remember that includes client in-kind transfers into our platform from competing firms. We also we earn advisory fees on most of these assets.
The net activity of these in-kind transfers is primarily reflected in our third-party funds and securities role of the net flows table located in the middle of the slide. Relative to last year, net flows for the quarter improved by $224 million, and an annual AUA redemption rate for the third quarter, down noticeably from 2019, reflecting strong client and asset retention. Turning to Slide 19.
While gross sales were flat relative to last year for the quarter overall, the chart on the right demonstrates the improvement in gross sales momentum that I talked about that took place partway through the third quarter.
As we look at October, the gross sales momentum accelerated was a key driver of $111 million in positive net inflows during the month, which was our second-best October in the past decade. At this pace, we are on track to reach an all-time record high in gross sales and a respectable net flows for the year despite the pandemic.
Moving to Slide 20 and our consultant network. Our consultant network grew during the third quarter, driven by the strongest recruiting we experienced since Q4 2017. The processes, which reflect advisers with four years’ experience, four years or more experience, increased to 1,856 in the quarter, reflecting strong recruitment of experienced advisers and the successful graduation of advisers less than 4 years to the 4 years-plus range.
In addition, we also have grown our new recruits and associates during the period. We’re optimistic for the continued success going forward for a number of reasons. Firstly, we continue to have a strong pipeline of high-quality recruits as the investments we’ve made over the past 2 years have built confidence in our team and is being noticed by industry professionals.
Secondly, we also find that COVID has created uncertainty with segments within our industry peers, but we’re able to attract advisers that have seen the evolution of our business.
The decisions we have made to stand behind and support our advisers, their clients and our communities throughout this difficult period has further differentiated our organization as a great place for like-minded financial planners to come to IG to help build their business and service their clients.
From a productivity standpoint, our teams continue to have success expanding their business and attracting client relationships. With that, I’ll turn it over to Barry McInerney.
Thank you very much, Damon, and good morning everyone. I’ll begin my comments on Q3 2020 results on Page 22. Mackenzie’s total AUM of $147.3 billion was up 4.5% for the quarter. Q3 2020 saw record-high investment fund net sales of $946 million with positive contributions from both mutual funds and ETFs, and we’ve now achieved 16 consecutive quarters of positive retail mutual fund net sales and 18 quarters for retail ETF net sales.
I fully expect this momentum to continue into the future with Mackenzie’s strong relative investment performance and our top 2 ranking in the Environics Advisor Perception Studies for both mutual funds and ETFs. And finally, we discussed the acquisition of GLC Asset Management on our last call.
And today, as James mentioned, I’ll share details of our exciting strategic partnership with Northleaf Capital Partners, including a 56% economic interest in the company. Slide 23 highlights Mackenzie’s operating results. Total mutual fund gross sales of $2.9 billion saw year-over-year increases from both retail and institutional.
Strong retail investment fund net sales of $840 million were up $491 million relative to Q3 of last year, and Mackenzie’s total investment fund net sales rate has risen to 2.9%. Mackenzie has 61% of AUM rated 4 or 5 stars by Morningstar, which is the highest in over a decade.
The charts on the left side of Slide 24 highlight the strength of Mackenzie’s growth and net flows for Q3 year-to-date and the month of October relative to past years. Last month, October, was a record-breaking month with investment fund net flows of $238 million, the best October results on record for Mackenzie. And on the right, you can see the strong net flows momentum on a trailing 12-month basis.
The latest Environics Advisor Perception Studies have been published, and Mackenzie’s results are summarized on Slide 25. Mackenzie improved to second in the overall mutual fund perception ranking from third last year. Our sales penetration was strong in both the MFDA and IIROC channels. And the overall quality of our sales organization improved to first from second.
And on the ETF side, our overall perception rank increased to second from fifth last year, which we are very proud of. While we are encouraged by the success we have had over the past 16 quarters of positive retail net sales, we are equally encouraged about our future opportunities.
Slide 26 highlights 5 areas of emphasis for future growth, which we believe Mackenzie has strength to capitalize on. We have dedicated leadership and teams to execute on each of these themes that most recent developments in SRI alternatives and retirements.
Some of our most successful fund flows are coming from these areas, such as Mackenzie’s Global Environmental Equity Fund, Mackenzie’s Retirement Monthly Income and Strategic Income Offerings and Mackenzie All China Equity Fund. We are in the early days of these emerging opportunities and look forward to discussing them more in the future.
And finally, Slide 27 provides an overview of the Northleaf Capital Partners partnership and equity interest we announced on September 17. For those not familiar with Northleaf, they are an independent, mid-market private equity, private credit and infrastructure investment firm with global capabilities.
This is a strategic transaction to provide benefits from Mackenzie, IGM’s wealth managers, Great-West Lifeco, Northleaf and ultimately all of our clients. We are very excited about the immediate and long-term potential of the transaction and have already started to execute on a variety of these initiatives.
For example, at Mackenzie, we have a dedicated team focused on alternative investments. We intend to continue to build out our liquid alternative product suite in the near term. And at the same time, we expect to introduce our first private market alternative products, starting with Northleaf private credit in the coming months.
At IG Wealth, commitments to Northleaf’s private credit strategies have already been made within their high-profile, high-net-worth managed asset solutions. This offering will complement IG’s long-standing history of offering real estate and mortgage credit products to their clients.
Also, as discussed in the press release, our sister company, Great-West Lifeco, has made commitments to invest in Northleaf solutions for its balance sheet and will pursue future opportunities to strengthen access to private market solutions across its businesses globally.
We believe that now is the time to democratize product market alternative investments for retail Canadians and see this as one of our key growth catalysts. I’ll now turn it over to Luke.
Great, thanks Greg. Good morning, everybody. So while it’s been a very busy quarter for us, indeed. So on Page 28, I’ll first start by just highlighting a few items. Number one is a reminder of the closure enhancements that James reminded us out earlier. And I would point out, there’s a reconciliation to the previous disclosures within our MD&A.
And we will make sure that we’re giving you what you need to reconcile to past disclosures this quarter and the coming quarters. Second, I’d highlight we have that, as mentioned by James and Barry, a number of corporate investments announced or closed in the quarter. This included the acquisition of GLC, which was announced and is on track to close at the end of the year, and Northleaf, which we announced in September and closed last week.
We also had the close of the sale of Personal Capital, which brought us a pretax gain of $37 million on an accounting basis and $44 million on an economic basis, and that was included within our Q2 results. Just a bit of guidance on the acquisitions that have closed or are closing in the coming weeks.
First, we will have 2 months of Northleaf results in the fourth quarter. And we do expect in the first year with Northleaf, we’ll have about EBITDA of $12 million per year.
I’d also highlight with GLC, we’ll start incorporating the incremental earnings from that in Q1, and we will expect to have incremental EBITDA of about $20 million per year in the first year from the acquisition of GLC, and this will be partially offset from $5 million of lower fees from the sale of Quadrus Group of Funds to Canada Life.
Lastly, as James mentioned, as a result of a number of technology transformation initiatives launched during the quarter as well as the acquisition of GLC and other investment management changes, we do have a pretax restructuring amount of around $75 million pretax in our results.
I know the largest part of this amount relates to restructuring and downsizing and transition costs from outsourcing our technology infrastructure and automating processes. I’d highlight this involves transitioning off of our current platform as well as downsizing the environment. As James mentioned, this provides ongoing cost savings of $20 million per year, while also allowing us to leverage the scale and expertise of leading providers.
And the other key element of the — this expense amount relates to restructuring costs associated with the GLC acquisition and the transfer of the Quadrus Group of Funds to Canada Life as well as other investment management change at Mackenzie. While the transaction hasn’t closed yet, the restructuring costs are recorded now as we are actively executing and delivering the plan with our sister company at this time.
We’ve notified all the people who are coming on. And we are actually executing on transferring fund contracts. So it’s unusual to record a charge before close. But given that it’s their sister company and given the notification we give to all parties, this is the right moment to record it. Moving to Page 29, you can see our consolidated assets under management and advisement.
We closed the quarter with $196 billion, an increase of 4.3%. And average assets were up 7% from Q2, which led to very strong sequential growth in earnings. I’d also note that if you look at the chart on the left, you can see the decline in assets at the end of October. And I would highlight that this is obviously more than fully recovered so far in November, where we’re sitting, and we’re at about $200 billion today.
So, it’s looking like a very good Q4 so far. On Page 30, I’d highlight on the left their consolidated EBIT was $300.4 million in the quarter. This was up 16% from Q2. As highlighted by James, this was our second highest adjusted EPS in the company’s history.
Here, you can see in the chart on the left, the second stack from the top, we had our share of associate’s earnings quite strong, once again, at $45.7 million and near the same level as Q2. At the bottom on the same chart, you’ll see operations and support expenses were down from Q2 and in line with Q3 2019.
On the right, you can see the operating leverage that this has resulted in the business. Our net revenue rate was relatively stable at 89 basis points, while our operations and support expenses declined from 41 basis points to 37 basis points. As a result, our EBIT margin improved nicely from 46 basis points to 52 basis points.
On Page 31, you can see our consolidated income statement, and I just have 2 remarks on this slide. First, as indicated earlier at the bottom, you can see the growth relative to last quarter and relative to last year. Second, a few comments on the expense line. First, you can see our operations and support expenses were $181.9 million, down from Q2 and in line with last year.
In spite of this, what we used to call our noncommission expenses are a little bit higher than where we guided. I’d remind, like last quarter, part of this is the growth that we experienced in the business relative to where we set our guidance, which has resulted in a higher cost like sub-advisory fees as well as higher compensation expense for salespeople as Mackenzie had another consecutive quarter of $1 billion in net sales, driven primarily by retail.
We also have had some unexpected COVID-related expenses as well as some delays in transformation benefits from the initiatives that we brought to light this quarter. For Q4, I guide you that you should expect our expenses to be at or very slightly higher than Q3’s level. Full year, what this implies is that we’ll be relatively close to 2019’s level of $1.04 billion.
And I’ll remind you, that’s $30 million below our original guidance for the full year of 2019, and we do remain very focused on improving cost management.
We won’t be giving definitive guidance for 2021 at this time as we’re still finalizing our plans but I would reinforce our guidance that we wouldn’t expect operation and support expenses to increase by more than 3% next year, year-over-year, and that excludes, obviously, GLC coming on, which will give us incremental expenses.
We’ll also give guidance on how we expect advisory and business development expenses to behave, and we would also expect that those expenses not driven by AUM and sales levels would not grow more than 3%. Moving to Page 32, you can see our fee rates and expense rates for those lines driven by AUM or AUA on the right for IG Wealth.
I’d remind that advisory fees, which you can see at 105.9 basis points, are charged as a percent of assets under advisement, and they vary based upon the composition of our clientele. Products and program fees of 86.2 basis points are charged on assets under management, and they don’t vary based on who the client is, they vary based upon the underlying composition of products and asset classes.
Moving to Page 33. This is a slide that you’re familiar with, and we did review on October 8 when we announced the new closures. I just want to reinforce, as Damon highlighted, IG’s value proposition of better gamma, better beta and better alpha. Importantly, gamma is the value of working with a financial adviser and we charge advisory fees on assets under advisement for these services.
As you can see here, gamma is not just 60% of the client outcome. It’s also 60% of the fees we charge. I want to use this moment to remind that as a wealth manager, we will be emphasizing AUA and net client contributions to their accounts, meaning net flows, as our key performance indicators, as opposed to assets under management and the net sales to our AUM.
I would remind, as Damon highlighted, as we build new client relationships, assets transferred to our firm in kind and would only be moved to our own solutions if, as and when suitable for our clients. As a result, in some periods, there will tend to be a lag between net contributions to our AUA versus net sales to AUM Moving to Page 34.
You can see IG’s income statement. You can see in point 1, other financial planning revenues were up noticeably from Q2. This is due to depressed mortgage income in Q2. You can also see that operations and support expenses were up a little bit in Q3. This is as a result of some unanticipated COVID-related expenses as well as a delay in some of the technology benefits from the initiatives that we brought to life.
And that’s meaning we expected those initiatives to be launched earlier than they were. You can also see that this was offset by reduced other business development costs in the quarter, which were down $4 million from last quarter. On Page 35, you can see the composition of Mackenzie’s AUM on the left.
And you can further see within that chart, we’ve further split that third-party AUM of $73.7 billion into its component pieces to help you understand the change in fee rates over time as the mix evolves between retail and institutional. The net fee rate, you’ll see on the right was 71 basis points during the quarter on third-party assets.
And I’d just highlight the basis point decline in the period for the change was higher sales commission expense, which is included in that net revenue item and that relates to higher sales levels. I’d also highlight we onboarded a lot of institutional business late in the second quarter and that did, I would say, annualize it quarterized during the period as we had a full 3 months of that business in the period.
Turning to Page 36. We’re very pleased to see the significant growth in Mackenzie’s earnings of 17% from last year and 29% from last quarter as a result of the growth in the business as well as operating leverage. When you adjust to remove the new sub-advisory receipts from IG that we’re now including in Mackenzie’s results, this is Mackenzie’s highest quarterly earnings in over 5 years.
I’d just make one comment on the operations and support costs, which are down from last quarter and down from last year and were $69.7 million. This cost result is a result of the expense management efforts we announced after our first quarter.
I would also note there were some extraordinary severance amounts in the prior period, but we do expect this is a normal one for Mackenzie and we will give guidance over time as we evolve our business and build our business. On Page 37, you can see the strategic investments in other segments.
We’ve highlighted in the bullet here, and we highlighted on our call on October 8, the segment has a fair value of over $2.9 billion at September 30. I first call out the first circle item, which is Wealthsimple. As reviewed by James and as we highlighted a few weeks ago, Wealthsimple did complete a funding round that value the firm at $1.5 billion post money.
We’ve adjusted the fair value of our stake in Wealthsimple by $300 million as a result to reflect this valuation, and we are now carrying Wealthsimple and Portag at $598 million. I’d remind that we equity account for our investment in China asset management, and we do intend to do a deep dive on China every 2 quarters.
I’ll remind that our share of their earnings is up from $7.6 million last year to $10.5 million this year, which is an increase of 36%, which is a little bit higher increase than we had year-over-year last quarter. The book value, you can see, is $713 million. And I would remind the firm’s earnings have risen noticeably since our investment in 2017 and we have no reason to believe that multiples have contracted.
So, we believe the book value is actually a very conservative measure of the fair value of this investment. I’d also note in the second column from the right, we have $580 million in unallocated capital. $193 million was earmarked for the acquisition of Northleaf and $145 million is earmarked for the acquisition of GLC, leaving $242 million of excess capital.
That concludes my comments. I’ll turn it over to questions, Ariel.
[Operator Instructions] Our first question comes from Geoff Kwan of RBC Capital Markets.
My question was for James and Damon. Just with your new roles, are there things that you plan to do differently versus the strategic direction that was already in place when you assumed your positions?
Sure. I’ll start, Jeff its James. No, the short answer is no. Out — my overall message, and I believe Damon’s overall message, is really one of continuity and maintaining momentum. I’ve followed this company, Jeff, from a distance for several years.
I’ve been very impressed with this company for a long time, including, in particular, their 2017 Investor Day, where they laid out this strategy. So, Damon and I are committed to executing the strategy. And as I said in my remarks, there will be 3 external markers that we will be quite focused on.
They’re not new, but they’re worth pointing out. We’re going to be very focused on net flows, net sales and discipline and expenses. And that, we believe, will lead to a clear path for earnings growth, and we’re committed to achieving that.
Yes. So, thanks James. In terms of IG Wealth, it’s exactly what James talked about. Jeff Carney and the leadership team have done a great job in putting together a winning strategy, the right strategy, and setting a course for transformation. And we are now in execution mode.
We want to build off of the investments that were made, and we’re looking very, very clearly at 3 verticals, share of wallet, new client acquisition and recruitment. And that’s where we’re focused. We believe that we are in a position now to really capitalize on our strategy and all the investments that’s made in the firm and to drive results.
Okay. And just my other question was on the IG Wealth side. When I look at the gross sales performance, it suggests that you’ve been able to successfully pivot to target more affluent investors, but the net flows have been, I guess, hurt due to the higher redemptions than what would have been seen prior to that sort of strategic change.
And I’m just wondering if it’s due to perhaps higher than what was anticipated redemptions from moving mass-market clients to the national service center? And just trying to get a sense of when you think the gross redemptions dissipate such that you can consistently generate positive net sales on a monthly basis?
Yes. And obviously, I mean, you answered part of your own question there with just the tremendous amount of change that we’ve had at the organization. But we believe in executing the strategy is going to result in accelerated growth in both AUA and AUM. There’s just a lag, as you would know, and Luke talked a little bit about that.
Our going upmarket is big for us in a sense that a few things happen. Number one, you’re bringing on third-party assets. You’re not bringing on AUM. You bringing on AUA. And then recruitment, you’re bringing on AUA as well. So when you’re bringing it out at the portfolio level, the other is you’re bringing at the book level.
And as you bring that on and you go upmarket, you’re dealing with less registered assets and more nonregistered assets. Nonregistered assets, as we know, have taxable implications, you just can’t move money right away.
We always want to make sure that we’re doing what’s in the best interest of the client. That’s what we’re focused on. But so AUA as a leading indicator to AUM. We really believe that we have a great suite of well-constructed managed solutions. And over time, AUA will feed AUM.
And actually, I’ll add to that, just one comment, Geoff, on Page 19, you can see the net flows over time. And you can see the positive $111 million in October, as Damon mentioned, that’s continuing into November. But I would comment, when you compare AUA to AUM, I know to the extent that money leaves our AUM and goes to high-interest savings accounts, for example, or other solutions within our suite, that’s going to affect our AUM number but not our AUA number.
So, we’re going to try and give disclosure to understand how product flows are happening within our client relationships, but there is going to be a divergence at times between the net flows being contributed to client accounts, which you can see on Page 19. First is the net sales into our own investment solutions.
Our next question comes from Gary Ho of Desjardin Capital Markets.
James, maybe I want to ask kind of Geoff’s questioning another way. Maybe just high level, where have you been spending most of your time since joining the firm? Is it M&A, strategic investments, is it IG Wealth, Mackenzie?
Or is it the transformation program? And you mentioned there’s no hard shifts but any tweaks to the strategy that you would make or anything you would like to accelerate?
Yes, thanks Gary. So, it’s been about 7 weeks, and I would say I have spent those 7 weeks, frankly, listening and learning right across the organization, not unlike others on this call, I’m sure. It’s 10 hours a day of Teams meetings, and I am digesting a business that has been, I think, well built and that is headed in a very clear and right direction.
I do think, over time, there will be differences perhaps in emphasis. But I very much meant what I said. You should not expect any kind of hard shifts kind of left or right here. This business and I think this quarter is a very good example of it. I mean, this really was a strong quarter. And as we’re saying internally as a management team, it was a strong quarter, but there’s still lots of upside.
These businesses have not hit their full stride yet. And yet, it was a strong quarter for clients. It was a strong quarter for shareholders. And I hope what you’re seeing is real evidence of momentum now right across the businesses.
So, disrupting that would be foolish. So that is not going to happen. The strategy will be executed. It will be executed well. And as I said in my remarks, keep an eye on net flows, net sales and expense growth. Those are markers that we, as a team, are very focused on. And if we watch them and manage them well, we will be delivering to you, our shareholders, earnings growth.
Okay, perfect. Next question maybe for Luke. Just a few questions on the restructuring charge. There’s a piece related to the GLC acquisition. Can you clarify if that would change the $20 million EBIT you expect from GLC, what they would contribute?
And then second, just overall, how should we expect the related savings related to that charge and/or amount that’s reinvested for other initiatives, assuming that you’re baking some of that into your noncommission expense growth.
And also, going through the numbers again, if you can, the $1.04 billion under the old disclosure, I think you said there’s no more than 3% next year. I think what will be helpful is if you can give some guidance to how that might look under the new disclosure line items.
Yes. Thanks for that, great questions. So, I’ll take it in order of how they’re out. So first, on the charge, yes, the largest piece of that is technology but your question was on GLC. So on the GLC, that’s restructuring costs related to: a, acquiring the team and changes to the team; b, transferring the Quadrus Group of Funds over to Canada Life.
And I’d say, on this restructuring event, it doesn’t change our guidance of the net revenues coming on to us from the acquisition. On technology, right now, the charge relates to us really leaving an in-house platform that we share with our sister company.
And so the theme you could think of is we used to leverage the skill of the power group on technology and that will be moving to leverage the scale of the leaders in technology, the Googles, the IBMs and many others. And so it’s really we’re quite fortunate and blessed that we’ve got a business that allows us to really partner with best-of-breed providers.
And so that’s what the largest piece of this charge is, is actually getting off of our current platform and the restructuring downsizing that comes with this pivot to outsourcing. On the expense guidance, that 3% constraint, we, again, as mentioned, we’re finalizing our plans over the coming weeks.
We will give more definitive guidance in our February call on where we’re going to be in 2021. That 3% constraint, whether it’s on the previous definition of noncommission expenses or whether it’s on the new reporting of operations and support costs and the, I’ll call it, discretionary elements or the piece of business development cost that isn’t driven directly by AUM and sales.
Both of those you should look to that 3% number as well that we’re viewing as a ceiling. And obviously, sub-advisory fees are going to travel with the assets, and we’re always looking to manage them to the best of our ability. And when we bring further guidance in, it will be inclusive of the benefits from our transformation program.
Okay. And then the 3%, I should think about that including the GLC acquisition bringing it on, right?
No. Well, we’re bringing on a bunch of people. The numbers that I quoted in terms of the incremental earnings, that’s incremental earnings after the expenses that’ll be brought on. So we will be delineating what are the incremental expenses from that acquisition when we bring it.
So, that 3% growth number would exclude the incremental expenses coming on with that acquisition. And so we try to give guidance on this is the net earnings that will be contributed from the GLC acquisition. And that net pretax number is about $20 million in year 1.
Got it, okay. And then just last question, if I can, for Damon. The increase in the IG consulting count that was notable in the quarter, how should we think about this? Is this split? How should we think about it looking out? Is it going to be a gradual increase?
And can you elaborate on the quality of consultants you’re bringing on? Are these experienced advisers or people that’s kind of new to the industry?
Yes. I think what you want to do is you want to look at this, is this is something that we are clearly focused on. And we believe that we’re going to continue to grow our ranks by bringing on quality advisers, both new, that have a natural market and want to be associates for our existing teams and experienced advisers. So a nice mix of both the experienced advisers.
We want quality. We want those that want to be in a financial planning culture. That is IG Wealth Management. We believe that the growth that we’ll see here is will be sustainable. We’ve made a lot of investments into our platform, into our tools, into our product line.
And there’s a lot of advisers out there right now that realize that things are changing in the industry. And they’re getting to know the new IG Wealth Management. And the story is compelling. We have a very strong pipeline, and we look forward to continue to grow our ranks, but do so at a measured pace that is making sure that we bring on the right advisers.
And our next question comes from Tom MacKinnon of BMO Capital Markets.
Just a question with respect to IG Wealth and in terms of sort of a go upmarket strategy. How has COVID impacted that? Like as you try to go more upmarket in this environment, do you need to have — can you do this in a — how successful is — has this been in a working-from-home environment?
And or does it need to have kind of more face-to-face in order to sort of steal more of these high-net-worth clients, if you will? It seems to have worked. You seem to be able to recruit despite that, but are you able to recruit new prospective high-net-worth clients in trying to go upmarket in this current environment?
Or do we need to — or do we expect more of an acceleration of that once we get through COVID?
Yes. Well, it’s as you would think, it’s a process. And when COVID first hit, we were all in the adjustment phase, everyone on this line as well as our consultants and all of our clients and potential clients. Just making sure we’re home, making sure everyone’s safe. In that type of environment, it’s very tough to bring on new clients.
But now that we’re in the post-adjustment phase of COVID and what that means is for our consultant network, for our advisers, they have the tools, they have everything that they need to be able to continue that work digitally. And then for the Canadian or the average Canadian, the average Canadian household is digitalized now.
So, the mass affluent, the high-net-worth clients are used to doing business at home in some way, shape or form, and talking to their friends, talking to their advisers, talking to their peers through digital means. So, now that we’re in a post phase, we find it’s much easier to conduct business. Obviously, it’s a process.
So, you’re dealing first with your existing clients and share of wallet because we have a lot of a lot of Canadians diversify their advisers and have more than 1 adviser. So, your first natural market is share of wallet, and then we go to new client acquisition. It does get tougher as you get to new client acquisition.
But as I said, the further along we get into this COVID world, the easier it is for Canadians to digest building a relationship with someone digitally versus face-to-face.
Our next question comes from Graham Ryding of TD Securities.
On that same theme, when we think about the $20 million of savings that you’re guiding towards from recent transformational initiatives, is there anything either baked in there or incremental perhaps as we come through this COVID period where you see an opportunity to structurally change your expense base based on how you see the business operating post COVID in a more digital manner?
I think we’ve seen part of that right now, Graham, just in the way we’ve given this due guidance for the full year 2020. And as Damon highlighted, and as we highlighted for our calls, we’re so proud of — proud and fortunate in the way we are able to conduct business remotely across the board with our financial planners, with our employees, with the whole team.
And it is a result of a lot of the investment we’ve made over the past years to be able to do things remote in digital. As we look forward, we haven’t made any calls on things like facilities at this point. We obviously it’s very early in the pandemic, but I would say the way that we work and the way that we engage our clients is changing and evolving and we’ll embrace every opportunity to do things effectively.
But the one thing that we’re going to care about the most is the client experience and making sure that we’re doing everything to make sure we’re serving clients how they expect to be served and the right way to really grow our business.
Okay. Are your expenses. I’m thinking more at I can the asset management side but perhaps overall, are expenses lower right now because you’re doing less entertainment, less marketing, less conferences, things like that? Is that what we’re seeing in the numbers at all?
Interesting, right. Mackenzie, in particular, travel has done a little bit. Obviously, that is part of the $50 million, now $30 million that we took out of our expense guidance this year. Also, what you’re seeing in Mackenzie’s results, is one of the transformation programs we brought to life last year, which was our outsourcing of fund services to CIBC Mellon.
So, as we telegraphed last year, that gave us very sizable benefits and we did it in a way that didn’t require much restructuring. So, we’ve got, I’d characterize Mackenzie’s current expenses as more or less steady state. We will obviously be investing growth over time.
But right now, there’s nothing really unusual there. And we are very fortunate to have the benefits from the CIBC Mellon outsourcing last year.
Understood. And then just to be clear, the $20 million in savings that you’re targeting from the recent transformational changes, is that baked into your guidance of expense growth being no more than 3% next year?
It will be, Graham. When we come back in February and get more definitive in 2021, it will also be inclusive of those savings.
Okay, understood. Damon, if I can jump to you with one last question. Just at IG, do you track historically when you have assets that transition into AUA, either new assets or existing assets, the sort of penetration of that transitioning back into AUM? Do you have is that something you’d monitor or you can speak to at all?
That’s something that we are monitoring. The key here is that it’s still early days. Our ability to focus on bringing on experienced advisers just started a little over a year ago. And we were predominantly focused on the mass market for a very long time and really just focusing on selling proprietary product.
So, this change in strategy means that, obviously, we will grow our AUA at accelerated rates. So we will track that. But it’s still early days. So, the data is, I would say to you, it’s not where it needs to be in terms of the length of time that we have it.
[Operator Instructions] Our next question comes from Scott Chan of Canaccord Genuity.
Just on Slide 26, Barry, I really appreciate the 5 areas of products. And we kind of talked extensively about 4 of them, but I’m just curious about the SRA — SRI kind of theme at Mackenzie and maybe a bit of a background there, and I know you cited $1 billion, but is this an opportunity in both the retail and institutional channel right now as, obviously, SRI is in pretty big demand right now?
Yes. That’s a great question. And I’m glad you asked it because, again, we put in place the other 4, the alt, CTS, retirements and China, as you’re well aware of. The SRI, we’re working hard on this because it is a significant growth opportunity, as you pointed out, both retail and institutional. It’s been in the institutional world for many years, if not decades.
Probably in Europe, in some respects, the large pension plans in Canada. And we all expect it to come to the retail segments in North America, including Canada. And it took a little time to come here and now it’s here. And by the way, the demand for SRI products in the retail segment is not necessarily just millennials.
There is a strong demand from millennials. But it’s all demographics. And we’ve surveyed this and we monitor it. We’ve been studying this for a couple of years now. So we want to be thoughtful in terms of us starting to launch some SRI products we have last couple of years. They’re doing very well. As we mentioned, we’re already over $1 billion in AUM.
And these are mutual funds, active, strong fees, the global environmental equity fund, for instance, which we was supervised by Greenchip, which is a terrific SRI specialist firm based in Toronto. That is now garnering $1 million or $2 million a day in influence because, a, the promise is exceedingly good.
But also everyone is embracing the fact that not only this is a way for Canadians to match up their personal beliefs with their investment dollars, it’s also a very strong investment thesis stand-alone because this, for instance, one example, this particular fund invests in global-listed companies that are focused on the new energy, right, wind, water, solar.
And we all know that with a lot of the countries over the next 30, 40 years transitioning off of fossil fuels into these sources of energy, that’s going to grow very fast. So we’re working very hard with this. You’ll see more launches come shortly in this area. We want to provide advisers and Canadians with choice so that they can, again, understand.
We hope by the way sustainable responsible impact investing as opposed to social responsible investing. A lot of names out there. We’re helping with education as well, which we always do. So that’s the business of SRI, which you’ll see a lot more from us going forward.
We’re already top 5 SRI manager actually in Canada. In fact, we’re well regarded in this space in Canada already because I think it’s because we’ve got a strong corporate culture that people realize we’re community focused and very corporately responsible, being part of IGM and being part of Power. But we’re also as you know, we’re signatories of the United Nations Principles for Responsible Investing.
And so we have integrated into all of our asset management across our boutiques ESG factors to ensure that we can comply with that signatory responsibility. So, it’s really 2 phases that we’re working on. I’m glad you asked it. You’ll hear more from us going forward. It’s a very fast-growing area. This is growing 30%, 40% a year now last 2, 3 years, this segment in Canada and more to come. Thank you.
And just a follow-up, Barry. Are most of your assets on that SRI platform proprietary right now? And where is the growth coming from? Is it going to be both proprietary and on the supervisory side?
Thank you. It’s going to be both. Now we started out by hiring some advisers. We launched also, by the way, a global women’s leadership mutual fund and ETF. We wanted to hire sub-advisers from the onset because we thought from a — we want to be authentic, of course. And so, we want to ensure we hired the SRI specialists, beginning with the sub-advisers of Mackenzie, mutual funds and ETFs.
So, that’s what we did from the onset. Then of course, you know that we Mackenzie manufacturers for Wealthsimple there to SRI ETFs that they launched a few months ago, which is — which are already up to $0.5 billion in AUM by the way. What you’ll see from us going forward, though, we’re never shy by using sub-advisers, and we feel it’s a good fit for advisers, investors’ needs as to us doing that.
But you’ll see more from us launching SRI products with us Mackenzie manufacturing because we feel good now where we are from an ESG integration perspective. We feel good about going outside and using our own and distributing these new products that are coming the next 12 to 18 months manufactured by us. So therefore, we can capture the full economics.
And just last — sorry, go ahead.
Sorry, I was just going to add to Barry’s point. Obviously, those sub-advisers are exclusive to us in Canadian retail. So, I’m just trying on years to the word proprietary. Those are exclusive sub-advisers.
Thank you, Luke. Good point.
And just lastly, James, coming from the bank culture for — in your experience there, your long experience there, what have you found so far coming into an independent company? And how is your — and how do you think your bank experience can kind of translate into kind of strategy you’re thinking on within IGM?
Well, it’s I mean, this is an industry that I know well from my bank days, Scott, and over 29 years at Scotiabank, I can tell you that the wealth management and the asset management businesses were, in some respects, my favorite businesses because close to markets, but more importantly, I really love the people that are drawn to these businesses.
So, I clearly bring a body of knowledge as a result of my 29 years in banking that’s directly connected to wealth management and asset management. But I’ll tell you, one of my early observations is what I love about IGM is that it’s both got scale and is able to be nimble. And I think that’s actually a really kind of neat intersection.
And I think that’s one of the — that’s going to prove to be one of the strengths of this business. It’s a big business to be sure, but it’s not so big that we can’t move quickly. And so I’m looking forward to working with the management team on that as we respond to macro wins that are blowing in this industry. It’s going to create opportunities for us, and you should expect us to be nimble and responsive to them.
Our next question is a follow-up from Tom MacKinnon of BMO Capital.
I just wanted to revisit Slide 32 here on IG Wealth Management key profitability drivers. And you may have mentioned this, but you’re really just looking at, in terms of revenue, advisory fees coming down and asset-based comp fees going up.
Like, how is that supposed to essentially change? Is — and how is that — I mean, that’s not necessarily a great trend that we’re seeing right there. And what’s going to drive that change in order to or is this just is this just a function of moving AUA to AUM?
Great question, Tom. So, I’ll start with asset-based comp, and I’ll just remind when you look at that increase in Q1 over Q4, if you go back to our disclosures at our analyst presentation from Q1, you’ll see a discussion in there which is a reminder that we’ve been over a few years since we discontinued to defer selling commissions.
We’ve been transitioning the composition of our compensation for our consultant network. And so what we’ve seen, and we’ve got 1 more year of it coming, is we’ve seen that sales-based compensation reducing and that being offset with increased asset-based compensation.
So, when you look at that increase from Q1 to Q4, that was a step that was offset by commission rates coming down. And all of that is disclosed in our supplemental info. And so you can think of compensation being unchanged. It’s just the component pieces that changed. And we do have that happening once again in 2021 and that it will be more steady state.
On the advisory fees, what you see here is the composition of the clientele changing. And so we’ve tried to give guidance to the best that we can of how the advisory fees will evolve as we execute our plan. And it is going to be basically a function of how successful or unsuccessful we are in our high-net-worth strategy.
The more successful we are, you’ll see this rate come down to a greater extent because we’re bringing on high net worth clientele. And of course, we’ve got our AUA increasing rapidly in that scenario and our revenue increasing rapidly.
If we’re less successful in executing on our high-net-worth strategy, you’ll see this line be more stable. But that’s the biggest driver of that line. It is the composition of our clientele, and there is a clear relationship between our net flows and our AUA growth and this rate.
But does that mean the advisory fees are essentially just higher as a percentage of AUA as you move up scale? That seems to be a bit contradictory.
No. It’s the opposite. So, we’re saying the revenue is higher as we move up scale because we’ve got the client relationship. But yes, the rate goes down, our higher-net-worth clients pay lower advisory fees. And if you look at our past disclosures, you’ll see in Q4 2018, we announced that we actually set a competitive and differentiated pricing across all the key client segments.
And we actually have got what we believe is a very competitive pricing for households with over $1 million. So the more successful we are there, the rate will come down at a greater level.
Our next question is a follow-up from Gary Ho of Desjardin Capital Markets.
Perfect, just one more question. Barry, just on the private alts with Northleaf that you’re planning, the product that you’re planning to launch next month, can you tell us how that’s structured? Any liquidity or redemption limitations, kind of what’s been the market intel for a product like that in the retail marketplace?
Yes, thank you, yes. So, we’ll be launching again just to lay out the game plan, we’ll be launching, as I mentioned, a private credit fund, first off, end of this year. Might go into January, but December or January.
And then also we’re going to launch next an infrastructure fund and a private equity fund, both in 2021. So it will be offset by third or fourth quarter of 2021 with all 3 mid-market global-orientated strategy that Northleaf manages. There’ll be OMs offering memorandum wrappers, I’m not familiar with those, but — so that would be the vehicle.
And we’re working on, we think, a pretty unique design in partnership with Northleaf to ensure that the — we can balance within that construct within that vehicle, both obviously direct access to their direct private vaults in those 3 asset classes individually by fund as well as having a proper liquidity embedded.
Because as you know, we have a full right now of liquid alternatives that matches up with those three asset classes.
So, that’s how it will work in broad strokes. So, when we launch it, we’ll we’d love to give everybody a little more background on how that will be balanced between the again, getting taking the advantage of the long-term illiquid orientation and return opportunities of these private strategies, but ensuring there’s proper liquidity embedded in the vehicle through liquid alts.
I would like to say also that we’re our sales team is all educated and ready to go with Northleaf. Just terrific partnership. We’re so excited to just wonderful cultural alignment.
And but we do know that what we have done in the past that we there’s certain element of education with the advisers that we certainly will take on that responsibility to ensure that not just they understand how these vehicles are constructed to ensure that they have that combination of liquid and illiquid investments in the fund, but also how this should be structured in their overall portfolio.
Because, again, as we know, liquidity, and this probably more on Damon’s side, liquidity can be provided in other parts of your portfolio so that you can focus more on, again, garnering the return potential of these direct investments with a longer-term orientation. But more to come on that.
We don’t want to give away all the secret sauce yet, but very excited by our first launch, which will be either next month or January.
This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Potter for any closing remarks.
Thank you, Ariel. And thank you to everyone who joined us on the call today. We hope you have a great Friday and as it moves into the weekend. And with that, I will end the call.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.