景順投信 (IVZ) 2016 Q3 法說會逐字稿

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, geopolitical events and their potential impact on the Company, acquisitions and divestitures, debt our ability to obtain additional financing or make payments, regulatory developments, demand foreign pricing of our products and other aspects of our business for general economic conditions.

In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future conditional verbs such as will, may, could, should, and would, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations.

We caution investors not to rely unduly on any forward-looking statements, and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent forms 10-Q, filed with the SEC. You may obtain these reports from the SEC's website at www.SEC.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Welcome to Invesco's third-quarter results conference call. All participants will be in a listen-only mode until the question-and-answer session.

(Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I'd like to turn the call over to your speakers for today, Marty Flanagan, President and CEO of Invesco; and Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much, and thank you for joining us on our third-quarter call. As is our practice, I will review the business results for the third quarter and then Loren will go into greater details about the financials, and then we will open up to Q&A after that.

So, let me begin by highlighting the firm's operating results for the quarter and you'll find this on slide 4, if you happen to be following the presentation, which is available on our website. Long-term investment performance remained, continued to be very strong. 68% and 79% of actively managed assets were ahead of peers on a three and five-year basis, respectively.

Our continued focus on leveraging our broad investment capabilities provide meaningful solutions to clients contributed to solid operating results during the quarter, and what I think all of us would describe as a difficult business environment for money managers. Strong investment forms helped drive robust long-term net flows of $1.2 billion during the quarter, reflecting solid retail institutional demand across both active and passive capabilities, and total flows during the quarter were just over $19 billion.

Adjusted operating margin was 39.7%, an improvement over the prior quarter that reflects our continued focus on running a disciplined business. We also returned $176 million to shareholders through dividends and stock buybacks during the quarter. Access under management were $820 billion at the end of the quarter, up from $779 billion in the second quarter.

Adjusted operating income was $339 billion in the quarter, up from $330 million in the prior quarter. Adjusted diluted EPS was $0.60 this quarter versus $0.56 in the prior quarter, and as noted earlier in the year, we raised our quarterly dividend to $0.28 per share, which is up nearly 4% from the prior year. We also continued our stock program during the quarter.

Before Loren goes into detail on the financials, let me take a moment and review the investment performance and flows for the quarter. Turning to slide 7, now, our commitment to invest in excellence and our work to build and maintain strong, a strong investment culture helps us deliver solid long-term investment performance across the enterprise during the quarter. Looking at the firm as a whole, 68% of assets were in the top half on a three-year basis, 79% were in the top half on a five-year basis.

On page 8, you'll see the quarterly long-term flows of $12.2 billion were quite strong across both active and passive capabilities. Flows from the passive capabilities were driven by strong demand for Invesco PowerShares capability, which has an all-weather lineup that is well positioned to meet client demand in any type of market.

This was the second best quarter for Invesco PowerShares in its history, with roughly $4 billion in net flows, and strong flows are helping us continue to gain ETF market share. As we noted during our recent Investor Day, strong passive flows reflected our longevity in the ETF market, our deep experience, our comprehensive range of factor and smart beta capabilities, and our significant track record of innovation.

Results on the active side were equally as impressive, with solid demand in multi-asset. Based on income capability, fixed income, and other capabilities, such as real estate.

A focus on delivering strong investment performance and bringing our broad range of capabilities to clients contribute to continued positive results in Asia-Pacific, with strengths across both retail and institutional channels. Globally, we saw institutional flows during the quarter, which continues a series of positive institutional flows, going back more than two years now.

Buying demand trends remain consistent, with particular interest in fixed income, multi-asset, and real estate, and are won but not funded, and qualified opportunities are at an all-time high. Retail flows were also were strong as gross sales rebounded nicely and redemptions moderated during the quarter. This includes the $6.5 billion Rhode Island 529 mandate.

Before I hand the call over to Loren, let me say a few words about how Invesco's position against the changes being brought by the DOL fiduciary rule. We are actively engaged with clients as they work to align their platforms to the demands of the fiduciary rule. As we've made clear since the rule's approval, the key decisions reside with the distribution platforms, but we are actively supporting them. The market has gotten an early steer from Edward Jones, Merrill Lynch and last night's Morgan Stanley, but I believe we are still in a very dynamic period, with regard to how it will play out.

It's clear each distributor has a different business mix, and will implement the rule in a manner that will meet its clients' needs. Based on the discussions we are having with clients, we continue to believe that our comprehensive range of capabilities, our distribution expertise, our market leadership, all positions us extremely well to help our clients readjust their business to provisions of the DOL rule.

If the shift is towards passive, as some believe, our decade of ETF experience, our comprehensive range of factors from our beta capabilities, our scale, our significant track record of innovation, all put us in a very competitive position. As we mentioned during the Investor Day, there are low barriers to entry, but very high hurdles to success in the ETF business that will make it difficult for late comers to do well.

Now, I'll turn the call over to Loren, and he will review the financials.

Thank you very much, Marty. Quarter over quarter, our total assets under management increased $40.6 billion, or 5.2%. This was driven by other than market returns of $23.6 billion.

We also saw long-term net inflows of $12.2 billion, which included, as you know, $6.5 billion related to Invesco's Rhode Island 529 plan win. We also saw inflows from money market and QQQs of $5.9 billion and $1.1 billion, respectively. These were offset by negative FX translation, which amounted to $2.2 billion.

Our average AUM for the third quarter was $814.1 billion. That was up 3.8% versus the second quarter. Our annualized long-term growth rate in Q3 was 7.1%, and that was up from 2.6% in the second quarter. This measure represents our long-term flows in the quarter divided by the beginning of period long-term AUM, which excludes the institutional money market assets and the QQQ assets.

The net revenue yield came in at 42 basis points, which was 1.7 basis points lower than the prior quarter. Change in mix, largely driven by currency, reduced the yield by 1.1 basis points. This was primarily a result of the declining pound sterling rate, which was 8.4% lower on average during the third quarter, compared to the second quarter.

Also, we saw a decrease in other revenues, which reduced the yield by 0.7 basis points, and lower performance fees in the quarter further depressed the yield by 0.3 basis points. These factors were offset by one more day in their period, which increased the yield by 0.4 basis points. A little bit of guidance here, looking forward to the fourth quarter, we would expect our net revenue yield to be roughly in line with the third-quarter levels at 42 basis points, assuming consistent markets and FX levels in line with today.

Moving on to slide 12, as we have done before, we provide the US GAAP operating results for the quarter. My comments today, however, will focus exclusively on the variances related to our non-GAAP adjusted measures, which can be found on slide 13. Moving on down the slide, you'll see net revenues decreased by $1.9 million, or 22% quarter over quarter to $854.7 million, which includes a negative FX rate impact of $18.5 million.

Within the net revenue number, you'll see that adjusted investor management fees increased by $19.8 million, or 2.1% to $982.7 million. This reflects higher average AUM for the quarter, partially offset by the impact of currency on our AUM mix.

FX decreased adjusted investor management fees by $23 million. Adjusted service and distribution revenues increased by $10 million, or 4.9%, reflecting higher average AUM for retail products. FX decreased adjusted service and distribution revenues by $0.1 million.

Adjusted performance fees came in at $3.8 million in Q3 and were earned from a variety of different investment capabilities, including $2.3 million from bank loan products. Foreign exchange decreased these fees by $0.1 million. Again, some guidance here in Q4, we would expect performance fees to be in line with our historical guidance at $5 million in the quarter.

Adjusted other revenues in the third quarter were $19.3 million, and that was a decrease of $12.4 million from the prior quarter, primarily due to a decrease of $7.3 million in transaction fees from real estate and a $2 million decrease in transactional sales charges from our UIT products.

Foreign exchange decreased these revenues by $0.1 million. And guidance here, looking forward to Q4, we would expect to see this number increase into the range of $23 million to $25 million. Third-party distribution services and advisory expense, which we net against gross revenues increased by $13.8 million, or 3.9%, and this movement was in line with higher revenues derived from our retail asset management. FX decreased these expenses by $4.8 million.

Moving on down the slide, you will see that adjusted operating expenses at $515.4 million decreased by $10.8 million or 2.1%, relative to the second quarter. Foreign exchange reduced adjusted operating expenses by a $8.2 million during the quarter.

Our adjusted employee compensation came in at $339.1 million, a drop of a $8.8 million, or 2.5%, and this was due to lower variable compensation on performance fees. Foreign exchange decreased adjusted compensation by $5.1 million. Adjusted marketing expenses fell by $2.2 million, or 7.6%, $26.8 million reflecting fewer client events held in the quarter. FX decreased adjusted marketing expenses by $0.3 million in the quarter.

Our adjusted property office and tech expenses were $82.1 million in the quarter, a decrease of $0.7 million over the second quarter, and FX decreased these expenses by $1.2 million. And then, adjusted G&A expenses at $67.4 million increased $0.9 million, or 1.4%, and this was driven by costs associated with several new product introductions. Foreign exchange decreased adjusted G&A by $1.6 million.

Again, some guidance for Q4, we would expect to see these expense line items roughly flat with the third quarter. Other than marketing, we expect marketing spend to increase in the range of $32 million to $35 million, which is easily consistent with prior years.

Continuing on down the page, you'll see that our adjusted non-operating income increased $9 million compared to the second quarter. This was primarily driven by a $4.9 million gain realized on our pound sterling, US dollar hedge, as well as due to a mark to market gains on our seed money investments in the third quarter.

Firm's effective tax rate on pretax adjusted net income in Q3 came in at 26.5% consistent with the prior quarter. Guidance here, we're looking forward to the fourth quarter, we believe our tax rate will increase slightly to 27%, largely due to the currency impact on the mix of our earnings.

And this brings us to our adjusted EPS of $0.60 and adjusted net operating margin of 39.7%. I would say, just generally, as you probably would expect, that foreign exchange has had a real impact on our operating results as reported in US dollars.

Just to quantify that for you, when we look at our Q3 versus Q2 results, EPS, our operating EPS, was resulted $0.018 lower as a result of foreign exchange, as well as our margin being impacted by 0.3%. Looking at year over year, Q3 to Q3, the numbers are larger, obviously. EPS is down $0.034 due to currency, and our margin is down 0.7%, as a result of FX only.

With that, before I turn it over to Marty, I would also like to provide a quick update on the business optimization work that we have implemented in Q4 of last year. We have made very good progress on our optimization efforts and have generated approximately $14 million in annual run rate savings by the end of the third quarter.

Some of the bigger opportunities are ahead of us, however. But we are confident that we will be will to achieve the targeted run rate savings number as we discussed, of $30 million to $45 million in 2017.

And with that, I would like to turn it back to Marty.

Thank you, operator. Could you open it up for questions, please?

(Operator Instructions)

Robert Lee, KBW.

Thank you, and thanks for taking my questions, guys. Marty, can you maybe break down and give us a little bit more color on kind of the retail flow trend? I know you've -- I think you mentioned Asia Pac, but kind of give us some sense of what you're seeing, Asia, US, versus EMEA, and then maybe are you getting a sense that ahead of DOL implementation it's starting to, at this point, starting to change kind of investor behavior or activity levels in the US?

Good questions. I will make some comments and ask Marty to come in on some of the more specifics. So, Asia Pacific, in particular, is having a tremendous year, both retail and institutional, and it's also very broad-based there.

EMEA continues to be strong for us, and we have had that, you know, with the Brexit and some of the challenges on the continent just generally. And it is slower than what we had seen previously, but the UK with -- has really come back from that sort of the Brexit lull, but again, not robust [as inflows] as we saw a year ago. But again, I think we feel we are on track. In the states, with regard to DOL rule, it's hard to, link to the behavior, with anything to do with the DOL, while I think it is still more the active passive debate that is really probably driving behavior more than anything right now.

It is, will it change going forward? It will definitely put an awful lot of money in motion in the US retail channel, there's no question in my mind, as people make the changes from brokerage to advisory and as brokers narrow the platform of money managers. And so, with that said, (technical difficulty) there will definitely be winners and losers, and again, I think those firms with the breadth of capabilities, and their both active and passive capabilities are going to be the ones that do well out of it. Loren, you want to add --(multiple speakers)?

Just a little bit more color, I mean, in Asia Pac, we are seeing significant flows coming in, $2 million to Japan, Shinko REIT has been a big winner there. We are also seeing China mutual fund flows in our joint venture providing good lift, and that has been pretty consistent.

In Continental Europe, net flows continue to really be a little bit mixed, but our GTR product, in particular, just every quarter continues to grow, both in the UK and in Continental Europe. So that is a continued trend and we are very excited about some of the new product introductions, FYI, in terms of the income-oriented product that is similar to the GTR product.

In the US, it has been sort of a mix of things. We are seeing very strong take-on on products like our diversified dividend product, our Core Bond Plus Fund is doing very well, and then certainly ETFs, very strong flows into our senior loan products and other fixed income products.

I think we are the third most successful ETF provider in fixed income, year to date in the US -- so, that is a trend. And then some of that in the US, though, has been some outflows and some of the other products that are more value oriented that have seen a performance tick down a little bit. Hopefully that gives you some good color.

Yes. Thank you. And then maybe just a quick followup, and sticking with the DOL theme. Obviously, there has been all this focus on what does this do to the mutual fund business and brokerage versus advisory.

I would expect that if more money moves to advisory as I think broadly expected, that benefits the SMA business. So, can you maybe update us on how you feel about your positioning in the SMA business, is that a part of the business that you, how big is that for you, and do you feel like you have the right offerings there or need to invest in that, in those strategies?

That's a good question. So, we have an [estimated] capability for a long, long time, like many people. So again it's not limited to -- at all a limitation for us, so we would look at it as just another vehicle offering to deliver our investment capabilities, and again, that would be, I agree with you. It's a need that firms are going to have if they do not have it.

Thank you. Thank you for taking my questions.

Thank you. Craig Siegenthaler, Credit Suisse.

Thank you. Good morning. I have a [file] from the DOL rule, and I am assuming I probably won't be the last one on this call either.

But I am just wondering, are you actually seeing brokerage shrink the numbers of partners they work with just yet? And I'm also wondering, what key components of Invesco's platform do you think the Firm will -- do you think will help the Firm remain large at the main US brokers, and in some cases do you think you'll be actually be able to increase your share?

So, again, I am, I don't want to get ahead of what announcements have been made and not been made, because I'm not sure what is public and what is not. It does seem, and it's going to be different firm by firm, so I think that is the first point. I think so often when we have these conversations, we think it's going to be a generic outcome and it's not.

And as I said, if you just look at where Merrill Lynch is going, where Edward Jones seems to be going, and where now Morgan Stanley seems to be going, with all the public information, you can see they are taking different approaches to it. That said, the firms that are going to do well, which we have been suspecting, and again it seems that we are getting early confirmation, are, you have those firms with broad ranges of capabilities that are strongly performing. They are going, they will do fine in this, we would put ourselves in that category.

Those firms that actually have ETFs, a long track record of ETFs, they will also do well. Those are capabilities that are in need. And I'd put a third element into it, where again, it's different firm by firm, but those firms that can take the capabilities, whether it be a mutual fund or an ETF vehicle and help rate solutions for clients, and this is even at the broker level, are going to do well.

The other element that people are talking about, I think, and I think we have to all get in the right context, the price sensitivity. It is real. The way that the financial advisor is going to meet that need is really a combination of active and passive capabilities that will drive down the overall effective fee rate for their clients, which is a good thing.

And again, I think specifically vehicle by vehicle, you need to be competitively priced. If you are selling at a -- if you are at a premium price, and if you have very strong performance, you probably, hopefully, can keep it there. But there is going to be real pressure there.

If you are at a premium price and you're not performing well, you're in a lot of trouble. So, and we do believe that the platforms, they will be narrowed, and they will be, again, each firm will be different, and we look at ourselves as being on the right side of those outcomes.

All right. Thank you for taking my questions.

Bill Katz, Citigroup.

Okay. Thanks very much.

I cannot help myself either. On DOL, can you give us a sense of what percentage, if you have it, I know it's tough given the omnibus relationships that you have with your distributors. What generally do you have, what percentage of your retail's [bucket] into brokerage-oriented qualified accounts versus advisory?

Yes, Bill, I don't have that right now, but again, I would still come back to -- the point that you're probably making is, if you are in brokerage, it's going to go away and it's all going to [the advisor] and you are going to be a loser. I do not think you can make that, draw that conclusion from what we are seeing. Again, just look at the, Morgan Stanley in an announcement today, they're going to keep advisory and brokerage both open.

And again, I think it does not really matter how our capability is there, whether it's in the brokerage channel or the advisory channel, you have good capability you are going to continue to be there. So again, I know I'm not getting to the specific number you are talking about, but I just do not have handy so --

I appreciate that. Stepping back, there seems to be a bit of a pickup of M&A discussion.

You've seen it in some of your markets with Janus and Henderson, with a no-premium merger of equals. What is your sense of how the industry deals with this conundrum of excess capacity, muted active flows and some of the regulatory changes? Would you anticipate a big wave of consolidation, and what kind of [shape or form] you think it takes, and what is Invesco's role in that?

Good question. Look, you have been around the industry a long time, and so have I now, there has been this declaration of massive consolidation for a couple of decades. I would say the reality is, the environment we are in now would support that notion more than ever before.

And I would say much of it is being driven by the regulatory environment principally and just the ever-increasing cost. You then add things like cyber, securities -- areas where we all spend a lot of money where we never did before, and then the extended period of the active passive movement, which again, I would also say, when you read about it in the paper every day, it has probably gone too far. It's not going back to where it was, but it will moderate, and I do believe there will be a very strong place for active capabilities, too.

And again, we are in a position of we think the answer is active and passive, so we are well placed, regardless. So, I think what you're going to have happen on the M&A front is, if you are a firm without scale, I think that you're going to need to do something. And so, I think you are going to see the likelihood of combinations of undersized firms as probably higher than it has ever been before.

And the other point, though, is somebody has to be a willing buyer, and not everybody is going to be a willing buyer at some of those firms. So, I think what you'll see is organic growth coming from firms that really are not well positioned in this environment.

Okay. Thanks for all your insights.

Michael Carrier, Bank of America Merrill Lynch.

Thank you, guys.

Loren, maybe just a couple for you on some of the guidance that you gave. One is just on the other revenues, like the rate or the level that you gave is a little bit lower than where our expectations have been, so is that just fourth quarter or heading into 2017? I know it is lumpy and hard to predict, but just wanted to gauge kind of what's driving that.

And then heading on the expense side, you gave a lot of color on FX in terms of how that is impacting the revenues, the expenses, and then the hedge, and the non-op, and I know you have got the efficiency program in place to lower the run rate. But if we were continue to be in this environment, is there any other levers that you can pull on the expense side or how much can be offset by FX pulling that down just to try to manage through this volatile FX backdrop.

So, good questions. On the other revenues, that was specifically just for Q4 guidance. We do not think it is really a trend.

Obviously, it moves around, it's hard to predict. And we have seen that line can be somewhat volatile based on timing, just in terms of transactions happening, they can lump up in a particular quarter or be a little bit absent in a quarter. And then certainly when there is more volatility and uncertainty in the markets, you can see that number either speed up or slow down.

There is a component of our UIT sales that have slowed down just in line of -- or in respect to the DOL. Uncertainties, and so I think that is something that should -- hopefully begin to be more clear as to whether that is the true run rate or whether it can come back. But I think for right now we are looking quarter to quarter on that line item, so that is it.

In terms of expenses, is there more to be done? I mean, there is always more that can be done. We are continuing to look beyond some of the things that we identified in the optimization to see if there are other larger opportunities that can be realized into 2017.

As we all know, when we get into our looking out three years and understanding the need for our incremental margins to be where we want them to be, we have to continue to look and find ways to organize ourselves in a way that would provide those -- that outcome. So, I would say there is more to come on that to the extent that we can identify them. But certainly in the near term, in terms of the optimization, we are eagerly going after those.

Okay. And then, Marty, maybe just as a followup on the question on M&A in the industry. I guess, has anything changed for you guys?

Meaning it seems like you have done things in the past that have kind of created the business mix that you have, you have been more focused on either launching products, you know, small things on the side, and then capital management, whether it's the dividend or the buybacks. So, just, is there anything that you see shifting in the industry that would cause a firm like you, like that has scale, to think that you need to become bigger or do something that is maybe not, that has not been, the default over the past couple of years?

So, I would say, like always, we continue to pay attention to what is available in the marketplace. And the way that we look at it, it really has not changed. Is it filling skill gap for us or reach in the those types of obvious things we will continue to do that.

There are fewer gaps now than we have ever had. I mean, and it gets back to the comment, to Bill's question, [others like] DOL. We think we have put the Firm in a position where client demand is, right?

Whether it be alternatives, passive capabilities through factor investing, ETFs, et cetera. The institutional business continues to be a huge opportunity for us and the like. That said, we will continue to pay attention to what is going on out there.

I think it is, again just my opinion, those firms that are narrowly focused are going to be dramatically more challenged than those firms that have, that are global in the retail market, the institutional market, and have a broad range of high conviction fundamental factor-based capabilities. So, then again, we will continue to pay attention.

Michael, maybe one more point, because I know your question was legitimate, but I think we're spending more time, honestly, thinking about ways that we are going to grow revenues as opposed to, you know, we are going to be in a position where we're having to cut, cut, cut costs. So we'll continue to invest around new product introductions, continue to strengthen our capabilities, as Marty has mentioned, we think we're well-positioned to actually succeed in this environment.

And so, that has really been our focus and being able to grow organically in that 3% to 5% range, I think, should provide us with the ability to continue to expand margins going forward, and we are not looking defensively to protect ourselves. We are, I think, thinking about the opportunities to grow in this market.

Let me stay on that, because I think this is what is different today than prior challenging times when there is a pull back. I mean, the traditional play book was market pullback, focused on cutting expenses where we can do that with an eye to making sure that you don't disadvantage the Firm.

That was really more an environment, we thought it was competitive five years ago, and 10 years ago, but it's nothing like today. And not just competitive but the market shift. So, we feel again, we are uniquely placed with the capabilities we have that it would be stupid of us not to continue to invest and grow the ETF business or the institutional business or the solutions business.

And I think to your point earlier, the most dangerous thing you can be doing if you are a narrowly-focused firm, challenged right now, is to be not investing in the future. And I think that is what a lot of firms are finding themselves having to do, and I think that is, you are confirming of that outcome, as far as I am concerned.

But you have to be disciplined, right, and that is why we are very, very disciplined. We are always looking to be more efficient, more effective, and all at the same time, invest for the future.

Okay. Thanks for the color.

Yes.

Dan Fannon, Jefferies.

Thank you. I guess, Loren, you talked about a flat fee rate for the fourth quarter. I guess, if we think about the ins and outs with regards to products from kind of a flows in your backlog and what you guys are seeing strengthen, can you talk about the direction of the fee rate based on that X, markets and in currencies.

It's just all positive, so we continue to see the institutional pipeline at a much higher revenue yield coming in than what is coming out in terms of the mix generally of the products on the retail side. Asia, China, very positive, relative to the overall fee rate for the Firm. So that, which would make you think the fee rate must be going up has been offset, obviously due to the FX impacts because obviously the pound has declined even further from where we were in the third quarter.

And that is why it's in this flattish kind of range. But again, the trends that have been there for a long time are still there. In terms of the types of products that we are offering, more alternatives, things that do support a higher fee rate are absolutely still there.

And so we feel that it's not necessarily a situation at all where we are going to see the mix being anything but a positive for us. Other than the FX, which we cannot control, and certainly in our operating results you're seeing that, and so people should not read too much into the US dollar numbers.

All right. And then I guess, Marty, the comments around each of the brokers or the wire houses coming up with different solutions, I guess just from a servicing perspective and how you guys are dealing with that. It seems like that is a burden on the industry to now have to deal with all the various different platforms in a -- not in a uniform way.

And so that seems like costs, that seems like more investment on your guys' side. I guess, is that the right way to interpret that or --?

So, it's a good question. So, here's my view on it. So, there's one level there is no change, from the standpoint of those firms have always had brokerage business and advisory business, and the movement to advisory has been a trend and a desire of the broker [deal the] distributors for a number of years.

So, the industry is already set up to serve that way. Now again, I would come back to in this environment, what it is, there is an awful lot of work to comply with the DOL. So it's firms like us that have the depth of capability through wholesalers and Invesco consulting that can help make the move, because they are real moves that with the client base, so again, we have the resources, we have the capabilities, and we can help them make those changes.

I think the biggest concern that I think everybody has heard over more recently was a real concern that there was going to be a large proliferation of share classes, because each distributor wanting to serve their clients in a different way. I know this is no great insight, but it seems to be the industry is coalescing probably on a couple of share classes, which would be -- there is some cost associated with it, but that is very doable. I think it's much better outcome for ultimately the end client.

So, again, I think what I would do is go back to the firms that have resources and capabilities to support their clients through this change are going to be in a better position than those that do not. Again, this gets back to the prior questions about scale and M&A. If you cannot support your clients beyond just an investment capability, you are at a disadvantage.

Makes sense. Thank you.

Brennan Hawken, UBS.

Thank you. Good morning. Thanks for taking the question. Sorry to add to the extensive row of tequila shots that are the DOL questions, but I got a couple of more for you -- sorry.

Not asking for attribution here, but, you know, thinking broadly in the dialogues that you have had with your partners, and obviously, they are at a greater depth than we are seeing out in the press and such. Can you give us a broad sense or even a range of how much you expect that the wealth management product shelf could end up shrinking for commission accounts?

It is hard to answer that question. I would say what is a truism across the board, you would get the feedback that the pace to advisory account will pick up at a material rate, driven by the DOL. But again, I think that is consistent with the direction of travel that has been in place -- but again, you see cross-currents in that, so Morgan Stanley has, I think they are going to support both channels.

But that said, their advisory business has been growing quite dramatically and it will continue to, so it's hard to size, but I think if you look back five years from now, the predominance of assets will be in advisory. I think that is a fair conclusion to draw.

Okay. That is fair. Good enough.

And then thinking about maybe down the line where this might lead to potential cost-cutting opportunities, and of course, understanding that this is not a near-term thing, because you just highlighted earlier how you are going to need to be there to support your partners as they go through this transition. But ultimately, beyond near term, this is probably going to lead to some pretty substantial differences in distribution dynamics.

You guys do tend to have a pretty large wholesaler team, and so when you think about how those, the selling dynamics into this channel might change, what kind of expense-cut opportunity could that lead to if we end up seeing a channel that is more focused on home office and less on the field? Can you help us try to frame what kind of opportunity ultimately that might lead to from an expense-cutting perspective?

Yes. So, interesting perspective. I think the answer is more along this line.

I do not think the demand for support is going to go down. It will probably only go up. But it will be different.

You will end up, so if you go back, if you think -- 10 years ago, if the role of a wholesaler was to -- here is a great fund and here is why you should put it in your portfolio, it's a great long-term track record, isn't that great? The nature of the support is going to be very different.

And the field support, if you want to call it that, will be much more of a individual's focus on solutions and how to -- is there work working on their [asset] allocation? How do you help them build a portfolio range of different investment capabilities, a range of different vehicles that would meet their needs? So, it will be a very different type of support.

So, what you cannot size right now is -- does it stay the same but just different skill sets? Or is there a size issue that you're talking about? And I would say it's too early to conclude whether or not there are cost savings there.

My instincts would be the demand for the support is going to be there, but it's going to be different, so the cost savings opportunity might not necessarily be there. Which then gets you back to the prior questions that, again, if you are not a firm with resources and capabilities to support the client, you are extremely disadvantaged in this environment going forward.

Okay. Great. A lot of uncertainty, but thanks for the color and helping us walk through that.

Thank you. Alex Blostein, Goldman Sachs.

Thank you. Just sticking with the theme. So, Marty, in one of your earlier comments you mentioned -- re-focus on management fees obviously [isn't] one of the pretty critical criteria as the shelf space shrinks, I think people kind of rethink who stays in or who stays off. Can we drill down a little more into that?

We obviously haven't seen any aggressive fee cut reductions from the active community yet. Do you anticipate that is coming, and I guess, more importantly, thinking through Invesco's product lineup, which products could be more susceptible to fee cuts? And I guess do you anticipate yourself making any reductions to secure shelf space?

So again, it is, in the light of the environment from a macro view, I think that is a good question. I think the reality is, if you look at the larger firms right now, their fees are already very, very competitive, because they have scale to have lower fees. So, I do not sense that there is going to be a massive -- within those firms, I do not think you are going to see much of a change.

I think the firms that are disadvantaged are, again, back to if you do not have scale and your asset levels, your fees are almost by definition higher and you are disadvantaged, and you have got to solve that one way or another, and there is no pleasant way to solve that. So again, more specifically, and again, we do like everybody else, so we do [RPs] all the time, we know they are very competitive. We also have the added benefit too of having the factor-based capabilities, so we can actually help also drive down the blended fee rate within these -- [for] financial advisor, and we also have solutions capability that we can help them build that portfolio, too.

Okay, thanks. Just the second question, I guess, about the robust solution offering that you guys bought a couple of quarters ago.

Can you talk a little bit about the opportunity, I guess, to leverage that as the distribution dynamics involved? I'm not sure there is a way to expend that a more B-to-B concept, or is this [all] going to be largely targeted on directly working with the client?

No. Early days. We are thrilled with Jemstep. And it is focused on [deporting] our business partners.

And again, I would put this in the context again of firms need more and more tools to help clients meet their needs, and it's definitely going to help us with that. We see that already with the interest in it, and frankly, additional tool that will help clients with things like onboarding in a more efficient and effective way with their asset allocation.

It is open platform, so again, it's very supportive of what they are doing. And we think it was an important development for us.

Okay. Thank you very much.

Yes. Glenn Schorr, Evercore ISI.

Hello, there. A quick followup on a lot of this. I'm curious, in terms of the factor base in ETF world specifically, as the business evolves, you gave us some good stats on the importance of first-mover advantage.

But when you talk about, quote, supporting your distribution partners, how important is the established three- to five-year track record in terms of not just being on shelf, but actually getting the flows? Because what we are all seeing is a huge proliferation of product being put out by everyone and their mother these days, but given your presence, how much is that three- or five-year track record advantage?

It's huge. Look, I think, again, go to the macro point that we have all talked about. Don't extrapolate your knowledge on mutual fund development with ETF development, right? So, there is a limit to how many ETFs there can be within, if you want to call it a certain segment.

And it's typically three that are successful. [Entrance] that to a ticket -- a US Equity Income Fund, I do not know how many there are in the category, it's probably, I don't know, 400 or something. Though there is an inherent limitation right there.

And the other thing is you're looking at real track records with these factor-based ETFs that [have long] track -- as opposed to extrapolating, back testing type experiences, and no one needs to take that risk when you have a broad range of capabilities. The other element that, again, we have talked about and others have talked about, it's the total cost of ownership of those ETFs, and it's just not the fee.

It's the liquidity and those firms that have a presence, they are going to get the backing to create the liquidity, which is going to drive down the total cost of ownership, also. So, we have found it to be a realism that the breadth of product, first-mover advantage, but by the way, the long track records really matter a lot. I think as we said before, the barriers to entry are very low, but the barriers to success are very high.

Yes. I appreciate that. Just one followup.

You mentioned in your comments on Japan, the success in selling some REIT product there as they look for yield. Can you talk about just real estate demand in general, you have got a big real estate business, but I didn't hear too much of it in the puts or takes in terms of the current environment.

No. It continues to be, as we look forward in that sort of institutional pipeline and qualify, it is in high demand globally. So again, I think they're, I think it's one of the best teams in the business, and they continue to be doing very, very well, and we do not expected to end anytime soon.

Okay. Thank you. Appreciate it.

Michael Cyprys, Morgan Stanley.

Good morning. Thanks for taking the question. Marty, if I could just follow up on your point earlier on that price sensitivity is real.

Just curious how Invesco is planning to deal with that over the next few years, particularly as DOL goes into effect. It just seems like there's more money is shifting into passive and lower fee products.

Just how you think competitively pricing active management and elasticity of demand? And just the second point there is, just given your scale, how do you think about the opportunity to be more aggressive?

Yes. Look. Again, those are broad questions, had to answer a broad question like that, because it gets very specific. So, how I would answer it is, we look at where we are priced, our prices are very competitive.

And they tend to be very competitive with -- again, those firms that have a certain size, they have very competitively-priced products. And with solid [reasonably] good performance, you are going to continue pretty well. I don't know how answer it other than that.

I think what you could see probably in the future is I do think that the stronger only can get stronger. More money is going to go towards those firms. With more money, more breakpoints, these will drop.

But again, that would be a continuation of what we have had in the past. Again, I just think it's the smaller firms that are under a lot of pressure.

The bigger impact was probably going to be the share class that it gets introduced as we are seeing low cost share classes that are stripped down, do not have transfer agency cost, sub TA, all these things. That is going be the biggest sort of near-term impact, but obviously the management fee is going to get looked at as well.

Yes. Actually, Loren does bring up a very good point. I do not know how much attention has been paid on it.

But part of it in this low-return environment, this active-passive movement that we have talked about and have seen dramatically, active managers and package products have been at a real disadvantage just because of the expense ratio, where, frankly, it's a pass through for a lot of expenses.

Whether they be 12b-1, sub TA, and you're probably, on average, at a disadvantage at an average fund of, I am going to, probably, about 45 basis points every year. And as these pure share classes come out, that is going to be a benefit for active management also, and the competitive returns, vis-a-vis asset funds.

Okay. Great. Just last followup here.

DOL, you have mentioned more money moving from brokerage to advisory. Can you talk about how you're positioned to capture those flows? And maybe you could elaborate a bit more in terms of marketing and sales efforts there that you are putting in place to capture that and also vehicle delivery changes.

Yes. So, I mean, it's vehicle, but again, everybody is going to solve that. I don't think that is going to be much of a competitive advantage one way or the other, if you are going to respond to your partner's need.

Again, I think the thing that is going to be differentiating is those firms that can help their partners make the shift from where they need to, from brokerage to advisory. Again, it gets to firms like ourselves that have things like Invesco consulting, broad field support, thought leadership to help them work through those changes, and again, a broad range of capabilities. So, we think we are positioned very well for that, and with the money -- we like the money in motion, that's going to be a good thing. We think we are going to be a net beneficiary of it by the time we get through the other side.

Okay. Thank you.

Okay. Well, thank you, everybody, very much, and we will talk to you next quarter. Have a good rest of the day.

Thank you. That concludes today's conference. Thank you for participating, you may now disconnect.