SEI Investments Co (SEIC) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the SEI fourth-quarter 2016 earnings call.

(Operator Instructions)

I would now like to turn the conference over to your Chairman and CEO, Al West. Please go ahead.

Thank you, and welcome, everyone. All of our segment leaders are on the call with me, as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller. I will start by recapping the fourth-quarter and full-year 2016. I will then turn it over to Dennis to cover LSV and the Investment in New Business Segment.

After that, each of the business segment leaders will comment on the results of their segments, and then finally, Kathy Heilig will provide you with some important Company-wide statistics. As usual, we will field questions at the end of each report.

Let me start with the fourth-quarter and full-year 2016. Fourth-quarter earnings increased by 9% from a year ago. Diluted earnings per share for the fourth quarter of $0.55 represents a 15% increase from the $0.48 recorded for the fourth quarter of 2015.

For the year 2016, our earnings increased by 1% over 2015 earnings. Diluted earnings per share for the full year of $2.03, is a 4% increase over the $1.96 reported in 2015. We also reported a 10% increase in revenue from fourth quarter 2015 to fourth quarter 2016, and a 5% increase for the full year.

Also during the fourth quarter 2015, our non-cash asset balances under management increased by $0.7 billion, and SEI assets fell by $2.7 billion and LSV's assets grew by $3.4 billion. For the year, AUM grew by $19.8 billion.

Finally, during the fourth quarter of 2016, we repurchased approximately 1.4 million shares of SEI stock at an average price of $44.60 per share. That translates to over $66.8 million of stock repurchases during the quarter. For the entire year, we repurchased approximately 6.6 million shares at an average price of just over $48.66 a share, representing just over $294 million of repurchases. Between our stock buybacks and cash dividends during 2016, we returned approximately $377 million in capital to shareholders.

During the fourth quarter, we capitalized approximately $12.4 million of the SEI Wealth Platform Development and amortized approximately $11.7 million of previously capitalized development. For the full-year, we capitalized approximately $39.8 -- $39.8 -- what is that, million? My goodness -- $39.8 million of the SEI Wealth Platform Development and amortized $45 million of previously capitalized SWP development. Also in the fourth quarter, we capitalized $4.8 million of IMS development, and for the full-year, we capitalized $10.6 million of IMS development.

During the fourth quarter, our sales events, net of [kent] final losses, slowed to $10.6 million, which will generate $5.5 million of recurring revenues. Each of the segment heads will address their fourth-quarter sales activity. For the year, we sold $93.1 million in net new events, of which $74 million were recurring revenue events.

As we have noted throughout the year, we have been increasing the investment we are making in SWP and its conversion and service infrastructure. These investments are primarily aimed at preparing the platform to accept the Wells and Regions operations. It's important that we successfully convert the Regions and Wells Fargo banks businesses.

These installations will signal to the market that the platform can handle large platform-as-a-service client, and even larger software-as-a-service client. Successful conversion in these two bellwether accounts will enhance our opportunities with large and jumbo wealth management firms.

We are also making investments in the migration of our investment advisor clients at SWP. Already the advisor team have migrated a number of larger, more sophisticated advisor clients to SWP. Plus, during this year they are ready in two large tranches of advisors to convert in the second and third quarters.

New investments in the IMS platform are being made to enhance our competitive position and to support the installation of large new clients. These clients are those we recently signed and those who are in late stages of sale. In the Institutional Investor segment, we are investing in the foundation and endowment market segment, defined contribution solutions, as well as other market segment opportunities that buck the downward trend occurring with US Corporate Defined Benefit Plans.

In summary, we are investing in each of our business lines as they face transformable changes in their marketplace. These changes, while challenging in the short run, are full of new opportunities in the intermediate and long term. We look forward to capturing these opportunities.

This concludes my remarks, so I will now ask Dennis to give you an update on LSV and the Investment in New Business segment. I will then turn it over to the other business segments.

Thanks, Al. Good afternoon, everyone. I'll cover the fourth-quarter results and full-year results for the Investments in New Business segment and discuss the results of LSV asset management.

During the quarter, the Investments in New Business Segment incurred a loss of $3.5 million, which compared to a loss of $3.8 million during the third quarter of 2016. Losses in this segment were essentially flat to 2015 full-year results. There has been no material change in this segment.

Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the fourth quarter. LSV contributed $34.1 million in income to SEI during the quarter. This compares to a $32.6 million contribution for the third quarter 2016. Total year contribution was $126.1 million compared to $138.3 million in 2015.

Assets grew approximately $3.4 billion for the quarter. LSV experienced negative cash flow during the quarter, which was offset by market growth. Revenue for the quarter was approximately $107.6 million, of which approximately 3% was performance fee-related.

During the quarter, the Corporation had one significant item of note. Generally, we do not have performance fees on our SEI sponsored investment products. However, we do have them attached to one of our specialty products, which is a product used in our Institutional Investor segment's comprehensive solution.

During the quarter, we realized revenue of $12.3 million related to a performance fee, and a corresponding $6.15 million expense for sub-advisory fees. This was all recorded in the Institutional Investor segment. Paul Klauder will discuss this further when we get to his segment. I will now take any questions.

You are ready for questions at this time?

Yes, ma'am.

(Operator Instructions)

Our first question comes from the line of Chris Shutler with William Blair. Please go ahead.

Hey, Dennis, good afternoon.

Hey, Chris.

First on LSV, can you quantify the net flow? And then you said performance fees were 3%, right? I'm curious what the performance fee outlook looks like going forward, given the really strong performance in the back half of the year for them.

Performance fees are hard to predict. Their performance fees are calculated differently for different relationships.

They are generally over a three -- in some cases, it's a three-year performance number. Some cases, it's a five-year performance number. In other cases, it's a one-year number.

It's hard to predict those based on just the fact that they've had good, strong performance, particularly the second half of 2016. So, I really don't want to get into trying to speculate on that.

2016, as you know, their performance fees in total relative to 2015 were significantly lower. 2015 was a, I'd say, exceptionally large or high performance fee year for them. 2016, I wouldn't say is more normal, but it was lower year relative to other years. I hate to get into predicting that.

On the net flows question, they had net negative flows. They bought in probably just under $1 billion in new money and lost probably about $2 billion between existing clients and some of the clients that went away.

But, generally, it was a -- the good is that they keep adding clients, they get rebalanced, continue to get rebalanced and assets move there. There is no rhyme -- there is no pattern to some of the clients that they might lose. The firm's doing very well, very healthy.

Okay, makes sense. And then just one more to get it out of the way. Just give us the latest and greatest on expense commentary for 2017.

Is the same trajectory you've talked about in the past, roughly $1.1 billion, still the right number? Is it possible that you can -- can you refine that number at all, given that it leaves a lot of room for interpretation? Thanks.

That would be pretty clear if I said exactly that number.

(laughter)

I think -- we were able to -- if you back out this expense associated with this revenue event in the Institutional Business, expenses third to fourth quarter plus the Company were up just under 3%. We were able to -- similar to second to third quarter, keep expenses below that range we had discussed on prior calls -- that 4% to 6% range.

As we go into this year -- we started last -- more normal expense pressures, which we always have. We will get the full quarter impact of expenses that we began to build into the business on the fourth quarter, but I feel pretty comfortable that we will be at a more normalized expense growth rate as the year unwinds.

As Al mentioned, the investment spending is in all the right areas. A lot of that is baked in. Like I said, we will get a full quarter impact this quarter for stuff that ramped up in the fourth quarter.

We all know the timeline. We expect the Regions event is an important one for us to complete some of the work, possibly get some end-of-year back-end benefit from that. I don't want to get pinned down to $1.1 billion number, but I would say that if you modeled it out, it is probably going to come in somewhere in that range.

Okay, but then, the change from Q4 to Q1, should we expect just a relatively normal sequential change in total Company expenses? Or is there still part of this investment that we're going to see another acceleration from Q4 to Q1?

It wouldn't be the acceleration of new things we're adding or new things we're doing in the first quarter. What it's really getting a full-quarter impact of what we did in the fourth quarter.

So if we had a resource during the fourth quarter, on average that -- let's say that resource joined us middle of November. We have 1.5 months of expenses this year with that, so we'd have to -- so that will grow a little bit as a result of just that math. We're all hopeful that we'll have higher sales comp expense in the first quarter.

Which, as you can tell from the sales numbers, that was probably a little muted in the fourth quarter. I'm sure the different businesses will speak to that.

I would say, we will have some expense increase towards the first, but it should be below that. We're not talking about expenses this quarter, because I think that's those higher levels of acceleration are behind us -- quarter-to-quarter accelerations behind us.

Okay. That's helpful. Thanks a lot, Dennis.

(Operator Instructions)

There are no further questions. Please continue.

Thank you, Dennis. I'm going to turn it over to Joe Ujobai to discuss our Private Banking Segment. Joe?

Thanks, Al. I will start with a financial update on the fourth quarter and the review of full-year 2016 for the Private Banking segment. With revenue -- fourth-quarter revenue of $114 million was down $2 million from the third quarter. The decline was due mostly to the timing of professional services fees and a decline in Management Distribution fees.

For the year, revenue grew slightly to $458 million. Growth in investment processing recurring revenue was mitigated by a decline in our Brokerage, Mutual Fund trading and Asset Management businesses.

Regarding profit. Operating profit of $4.7 million was down from the third quarter due to revenue decline and increased investment spending on the SEI wealth platform.

Profit for the full year was down about 20%, again, largely due to increased SWP spending. As we have discussed on the previous calls, increased investment has been triggered by sales to larger firms and will help us grow our business in the large and growing market segments.

Regarding sales. During the quarter, we had net recurring revenue sales events of negative $5 million. About $2.8 million was due to the loss of Trust 3000 clients, and about $2.2 million in negative cash flows in our Asset Management Distribution business.

Trust 3000 client losses have been tied to merger and acquisition activity and extremely competitive pricing at the smallest legacy clients. Negative net cash flow in AMD was driven by the loss of a US Community Bank client, and the repositioning and ultimate relaunch of one of our largest global distributors. During the quarter, we did sign $3.7 million of professional services events, or one-time fees.

Looking to the full-year 2016. Gross recurring investment processing sales events driven by SWP were approximately $25 million. Net recurring investment processing sales events of $16 million were impacted by the loss of approximately $9 million of Trust 3000 recurring revenue.

The lost Trust 3000 revenue is generally 50% due to merger and acquisition and some business wind-down activity at one of our clients, and 50% due to the competitive losses at a handful of small Trust 3000 clients. 2016 nonrecurring investment processing sales were $13.3 million.

In addition to these sales events, we continue to have solid cash flows in the UK from SWP clients. We are entering 2017 with mature sales agendas, both here in the US and in the UK. Our total signed, but not installed, backlog for the SEI Wealth Platform is now $41 million in net new recurring revenue.

We expect to install $20 million by the end of 2017, and the remaining to install in later years. As a reminder on expenses, during the fourth quarter we continue the wrap-up of increased SWP investment, which will drive higher expenses in Q1 as we recognize the full quarter impact.

In conclusion, we are meeting all SWP deliverables and milestones. The conversion of the backlog is proceeding as scheduled. And sales and contracting activity, as always, takes longer than we would like, but is solid and showing momentum. Are there any questions?

(Operator Instructions)

We're going to go to Robert Lee, KBW. Your line is open.

Thanks. Good afternoon, Joe. Two questions.

First one is on the $2.2 million, from -- I'll call it asset management. Was that related to mainly asset depreciation, or were there alphas? Any kind of color around asset flows would be great.

Yes, it really was outflows. As I mentioned, we lost Community Bank. They're a Trust 3000 client. The remain on Trust 3000, but they reprogrammed their execution of their asset management business.

I also mentioned a large global distributor, and they have been a client for very long time. We spent the year really working with them to reposition the program inside the organization. And then we spent a lot of time in the last quarter helping them relaunch. That resulted in some net cash flows throughout the year and the fourth quarter, but we're very positive that that distribution relationship will grow, because we think it's positioned very nicely within -- inside the firm.

Okay. Maybe on the Trust 3000. I know there's been some increase, the competitive pressures from one competitor, in particular.

But any -- how are you thinking about that as we look into 2017? Do you feel like you're going to continue to expect to have a little bit of this grinding, small negatives from Trust 3000 clients chasing price somewhere? How should we think about that over the coming year?

A couple of thoughts. It's hard to predict. We have a solid client base. We have good, loyal relationships.

Some of these smaller firms have been under a lot of pressure in the community bank space. You all that follow banks and financial services recognize that. The level of regulation on those firms has been significant relative to their size. There are certainly firms that are typically not growing their trust businesses very fast, and they there's an opportunity for some expense savings.

I think the good news is for the year -- or say for the quarter, we've recontracted five Trust 3000 clients with a small net up actually of about 3%, representing about $22 million. For the year we recontracted 19. Again, about 3% net up over the year, about $36 million.

So, of the losses related to some competitive pressure on the bottom end, we're following it really closely. I think we are on the wrong side of a couple of them this year. And we have a plan to really shore those things up as best as possible. But there's always going to be some price competition.

We recognize that our competitors haven't invested anywhere near that we have. So one [lever] they have is price. We have certainly some tremendous leverage with what we've built.

Maybe one quick follow-up on SWP and the pipeline, or as you talk to clients. Certainly it feels like maybe bank revenues and earnings with rates and whatnot may be starting to improve some, or poised to improve, at least in some places.

Is that impacting, or that prospect, are you seeing any positive impact in your conversations with banks as they are feeling better about their revenue or earnings outlook? Is that translating at all to your conversations?

I think the bigger cause we are having is that our prospects are following the progress we're making around with the 10 or so banks we've installed and the references we're able to get from them. They're also closely following as we meet the milestones for Regions and Wells Fargo. That, I would say, is one of the things that's driving my positive feelings about the pipeline and sales events for 2017.

I would say, though, that certainly in the fourth quarter, as the reality of the new administration -- or at least the hope of a newer administration around regulation -- changes in regulation, the thought that interest rates are probably going to go up, we are seeing some, I would say some greater interest in the platform because banks are feeling stronger about their future. Some of you send me your other reports, and a lot of you follow banks, have been watching in the last couple of days.

Most of you all feel pretty bullish on the banks, what's happening. But I think that will be positive for us. But ultimately, I think what the biggest positive for us is, as we continue to execute against the strategy and we bring up the clients that we have sold and we convert the back.

Great, thanks for taking my questions.

Thanks.

Our next question from Glenn Greene, Oppenheimer. Your line is open.

Thanks. Hey, Joe. How are you?

Back to the Trust 3000 losses, a couple questions on that. Was this on the course of a normal renewal cycle? Then these were -- they just put out RFPs? How did this come about?

Were finding, again, I think largely due to the regulators and oiOCC coming in, and some of the expectations from banks around outsourcing, and knowing their outsourcers and governing their outsourcers, that we're seeing more RFPs occur during re-contract periods. It wasn't like we lost somebody before a contract was over. There was a recontract period.

And we talked to the client either about renewing on Trust or SWP. In every single case in the process of that RFP or looking at the market, our competitors came in and offered fairly substantial reductions. Again, most of these cases -- these are not firms that are growing substantially.

Okay, and then you suggested you renewed 19, and you obviously lost a few. I think you have 100 Trust 3000 clients. Should we be thinking about 20% of your book comes up for renewal on a given year? Or is there anything we should be thinking about in terms of skewing that pattern of renewals as we go into 2017, 2018?

I think you're right, roughly 20%. There are some bumps because some clients -- some years we have more than less. Obviously, one of our largest contributors to revenue, Wells Fargo Bank, has committed to the platform. I think 20% is probably a good number.

I think we probably were -- had not as strong of a year as we would have typically -- as we have had historically. We also had a decent-size firm decide to basically get out of the institutional trust business that we administered. Some of it was -- some of it was competitive, and then also, as I mentioned, we were on the wrong side of a couple M&A transactions. And then probably, I don't know, 20% of it came out of a firm just getting out of the business.

This was a -- I don't know how to ask this. Is any of it having to do with your messaging, meaning like, at some point you are not going to be supporting Trust 3000? That's sort of suggesting the clients --

Not at all, not at all. We've reassured clients that we would work with them on a successful transition, and I really haven't -- I spend a lot of time with the clients, haven't heard a single client feel that way about Trust 3000. We're going to support it for a while.

And then quickly -- take too much time here. But just an update on the conversion status with both Regions and Wells. How are they tracking?

We've met all the milestones. I've seen both of them personally within the last 20 or 30 days. I think we're in good shape.

They're both big conversions and, certainly, big conversions have their bumps. I'm very pleased with the progress, and I would say our counterparts at the banks are also very pleased.

All right, great. Thanks, Joe.

We have a question from Chris Donat, Sandler O'Neill. Please go ahead.

Good afternoon, Joe.

Hi, Chris.

Just one more on Regions and Wells. With Al's prepared remarks and his comment that the installations will signal to the market that the platform can handle large platform-as-a-service clients and software service clients. I shouldn't interpret that as the statement saying that, basically, Wells and Regions full conversions are prerequisites to you guys adding more clients?

No, not at all. Actually, we wondered that, too. That's a question we wonder. But it's been interesting to see how well our prospects -- or how closely our prospects are tracking.

We've been also very lucky that those two clients have been willing to talk freely with the market, and that isn't what's holding us back. I think what's driving some momentum is the positive feedback that we're getting from the clients, because we are meeting all the milestones, and everybody feels comfortable that we're headed in the right direction.

Okay, that's all I had.

Thanks.

We'll go to Chris Shutler, William Blair. Please go ahead.

Hey, Joe. Good afternoon.

Hi, Chris.

First one, did you say what the net cash flows were in the UK?

I didn't, but they were about $400 million on the quarter. And for the year, it was about $5.5 billion.

Okay, great. Secondly, on the large bank customer in the AMD business, I think you saw you said $2.2 million of negative revenue impact there. Should we just read that as a fee concession?

No, not at all, really. It was really more -- so there were two things that contributed to that, as I mentioned. There was a smaller community bank that changed their execution strategy.

The larger global bank was a situation where the relationship has been going on for more than 10 years, and we actually had a chance to work with them to reposition it within their product line and in their distribution strategy. And so while we were doing that, relationship matters or maybe selling other things, and focused on other solutions, but we really took the year to work closely with the organization.

We've come out of it -- we lost some assets in the process, but we've come out of it very, very strong, and we're already seeing positive reaction to the positioning.

Okay, great. And then just -- not to beat a dead horse here, but on the last question about to what extent banks are waiting to see Regions and Wells get implemented before signing up. How confident do you feel that there will be another decent-size, mid- to large-size bank signing before Regions gets implemented?

I feel very confident. I wish I was announcing a bunch of names today. It's very hard to predict.

But as I said earlier, I feel like the pipe -- or the prospect opportunity is maturing. We've really looked at -- in the past I've talked about two opportunities, new names, like a Regions, that we don't do business with. Converting SWP clients, like Wells Fargo.

I'd add a new category. We are starting to make good progress and having conversations with SWP -- sorry, with Trust 3000 clients, on other books of business.

We've said for a long time that was a really important part of our growth opportunity. And we are beginning to see our clients, not only talk to us about eventual trust conversions, but also bringing more assets outside of the Trust 3000 assets. That gives me -- and that, to a certain extent, sometimes does slow things down a little bit, because they're talking to you about a bigger opportunity.

But long term, I think that's going to be really important for us. So, that's what gives really me the encouragement that we're making good progress.

And the clients that are talking to you about additional books of business are ones that are currently signed up for SWP or your prospects?

Both. In the UK, we're getting opportunity in some of the longer-term firms with additional books that we haven't had a chance to run. In the past, they were run by competitive administration systems or in-house.

And in the US, as we approach our Trust 3000 clients, the concept of moving towards single infrastructure a lot less underlying infrastructures, was one that is beginning to take some momentum in the marketplace, or in our conversations.

Okay, thank you.

Thanks.

Thanks. We'll go next to Tom McCrohan, CLSA. Your line is open.

Hi Joe. How are you?

Hi, Tom. Good.

In your conversations with clients that are waiting -- or not necessarily waiting, but watching the progress at Regions and Wells, are you getting any interesting feedback from your channels in terms of what exactly they are looking at in those implementations? You've talked about cybersecurity as being an important area. What kind of things are you learning from the feedback you are getting as people are watching those two implementations?

I think one is, that they're watching us de liver the functionality to compete and have a viable service in the software-to-service -- more formally known as IXP. As you know, a lot of work we had to do to the platform to do that. So they're watching -- certainly, the development. And as we release the services, how those are working, and do they have scale to them?

Certainly, at the larger end, as you mentioned, the concept around risk is really important. So, we opened the Advanced Discover -- the Advanced Disaster Recovery site at the end of last year in Austin. That was a big milestone for us.

We are working towards ISO oversight on some of the data security issues. I'd say at the larger end, that's certainly of interest. And what we are delivering to Regions, as you all know, is really a integrated front-to-back system. They're watching that, and watching Regions' reaction around that, too.

They're watching not only the development closely, but they're also watching (inaudible) the extended services. And again, we are delivering those things on time with really market-leading solutions. That's very, very positive for us.

Thanks, Joe. And you have mentioned that Regions will go live before Wells. In terms of timing, is it still at the end of the year for Regions, and then start running parallel with Wells in early next year?

At the end of this year, we've said all along, we've said that this year with Regions. And Wells isn't really looking to run parallel. They're looking to move. I think we've said for a while Wells is looking to move a couple of different tranches of their business. And that's really more 2019 activity, starts really more in 2019 than 2018.

Okay. My last question, have you ever confirmed in regards to Wells, are they just moving the trust assets over to SWP? Or are they moving other books of wealth management non-trust assets, as well?

Wells is largely the assets that were administered on Trust 3000, but, again, that's an opportunity for us. There's other assets there that we're close to and we're talking to.

Great. Thank you.

Again, we're also -- one comment, though, we're moving lots of other services that are probably on other -- that are definitely on other third-party systems onto the SWP. So, there is a collapsing of a number of other systems there beyond what we offer with Trust 3000.

We got a question from Patrick O'Shaughnessy, Raymond James. Please, go ahead.

Hey, Joe. You're probably used to answering the question about why is spending growing as fast as it is. But is there a case to be made that given the slowdown in sales, that maybe more spending could actually have a better payoff in terms of hiring more salespeople, accelerating some of the technology developments, et cetera?

Or is it just a matter of some of these things are going to take time, it's going to be proof of concept with Wells and Regions and more spending wouldn't necessarily move the sales needle?

We made a decision last year to actually increase spending because we felt like we successfully acquired a very large software-to-service, and a very large platform-to-service client. And so we accelerated, certainly, spending on the development side to try to bring those firms up sooner rather than later.

We're already executing from a spending standpoint there. And we do continue to redeploy some of our resource into more people on the road, more sales support, more sales people. So, we're executing against that.

I don't think we would try to spend a heck of a lot more than we're spending today. It will go up a little bit in the first quarter because we'll be recognizing the full quarter. But we're spending at a pretty nice clip, and I'm not asking for any more at this point.

I appreciate that. Thank you.

We don't have it [on account].

We have no additional questions at this time.

Thank you, Joe. Our next segment is Investment Advisors, and Wayne Withrow will cover this segment. Wayne?

Thank you, Al. In 2016, we continue to grow our revenue and profits, while simultaneously making big strides in the migration of our business to one supported by the SEI Wealth Platform.

Fourth quarter revenues totalled $87 million, due to revenues of $1.6 million better than our third-quarter revenues. This was all driven by net positive cash flow. Our quarterly revenue improvement of $8.2 million from the fourth quarter of last year was driven in almost equal parts of positive net cash flow and market appreciation.

Expenses were down in the fourth quarter versus last year's fourth quarter, due to a decrease in compensation expense, partially offset by increased direct costs caused by our asset growth, and increased personnel expense, due primarily to our migration to the SEI Wealth Platform. These same factors caused a modest increase in fourth-quarter expenses when compared to the third quarter of this year.

From a profit perspective, most of our revenue growth in the fourth quarter dropped to the bottom line, as our decreases in sales compensation offset increases in other areas. I don't expect this to be the case in 2017, as I expect our sales compensation to normalize, but I will continue to invest in the personnel necessary to support our migration to the SEI wealth platform.

Assets under management were $55.6 billion at December 31, an increase of $450 million for September 30. The increase was due to net positive cash flow of $550 million during the quarter. Year over year, our assets grew by $4.5 billion, and this was driven by both net positive cash flow and market appreciation.

During the quarter, we recruited 138 new advisors, bringing our total for the year to 611. Our pipeline of new advisors remains strong. For 2017, we will concentrate on three main areas.

First, we are focused on the rollout of the SEI Wealth Platform. In 2016, we converted 42,000 accounts and $8.6 billion in assets. We now have about one-third of our AUM migrated onto the platform and expect to continue to accelerate this process. While my original goal was to have the migration complete by the end of 2018, it now looks like some accounts will bleed over into 2019.

Second, we will continue to focus on new advisor recruiting and growing these advisors. Of note, at the beginning of the start of this year, all new advisors are being implemented directly onto the SEI Wealth Platform. This was a big step forward in the transformation of our business. Third, we will continue to improve our net positive cash flow.

In summary, 2016 reflected our continuing financial growth and solid progress in our migration to the SEI Wealth Platform. Our goal in 2017 is to accelerate both of these items. We remain confident in the long-term opportunity in front of us. I will now entertain any questions you have.

Thank you. Our next question comes from the line of Chris Donat, Sandler O'Neill. Please go ahead.

Good afternoon, Wayne.

Good afternoon.

In terms of the complete migration to SWP, can you remind us -- and I know we're talking about 2019 and it's a ways away -- but can you remind us if you expect from eliminating the prior platform and associated software and services, do you expect any cost reductions following that? Or anything that is notable in the financial implications from moving everything onto SWP?

Yes, I think the best way to look at that is, right now we -- our operating environment supports two separate platforms. And we will have to support two platforms until we get fully migrated. It decreases some as the balance shifts. But I would expect once we get completely migrated and we're on a single platform as opposed to two, you will see the expenses go down.

Okay, but you can't really do that, right, until you get everybody off 2019? Or can you phase it in?

It will phase in some, but we have to get it done before you see the big impact.

Okay, got it. Thanks.

Thank you. Our next question comes from the line of Robert Lee, KBW. Please go ahead.

Good afternoon, thanks.

Good afternoon.

Thanks, Wayne. A couple questions. First, could you give us the numbers, as you do each quarter, for the positive cash flows, as well as the number of new advisors that signed up?

For the year?

Just for the quarter.

For the quarter, the net positive cash flow was $550 million, and the new advisors were 138.

All right, great. And then a broader question, are you seeing from any of your new or legacy advisors -- are you seeing any pressure to whether change the fee structure of some of your existing products in response to pressures they're feeling on the other side? Update us on your thoughts about rolling out, or offering -- obviously, you use active managers, but to what extent do you see that there is a competitive need to begin or to think about offering programs that may have more passive elements to them?

Okay. That was [my four] questions, so I'll congratulate you getting them all in there for one. (inaudible) As a reminder, on the passive side, we introduced the purely passive ETS actively managed strategy about two years ago, and we do see cash flow into that product now.

But I think the broader question you're asking is all about what's happening with fees in the industry. And there's no denying that fee compression is a growing trend in the industry. And a lot of that compression is driven by two major factors.

The first is transparency into fees, which is the result of both technology, so more knowledge being out there. And we look at [robo] advisors, that's one of the things that shines the spotlight on the value of management and how much people are willing to pay for that. It's common, that transparency.

There's also the low cost of [pads of] products is bringing fees into focus. We are in a period now where active and passive trade places year to year as to which one outperforms the other. And we are in one of the longest stretches in history of passive outperforming active. That is contributing to the overall fee pressure on active management.

Fortunately, we have insulated from a lot of that by our business model. We don't sell investment products. We're selling a total business solution. We can sell the value of that business solution.

That having been said, as you mentioned, we do have investment projects. They do have fees embedded in it. And we are -- so we're starting -- so we do hear some feedback on that.

As a result of that, right now, we are currently looking at the fee structures and looking at how we go to market. We're saying, how is the best way to respond us?

Number one, just to answer the question. Number two, we're saying, is this an opportunity for us to respond to? How can we get additional growth because of the fee pressure on active managers, given that we are a total business solutions strategy? That's probably more than you wanted to hear, but that's my answer.

No, that's great. Appreciate it.

Thank you. And our next question comes from the line of Glenn Greene, Oppenheimer. Please go ahead.

Thanks. A question -- the comments you made of new advisors are being converted directly onto SWP. To me, that sounds like a big deal, and I think that's the first time you've suggested that.

But where I'm going with this, is this -- is the inference here that you're now positioned the way you've been talking about for a number of years strategically to go after bigger advisors and support non-SEI assets? And really the division that we've been talking about as related to the SWP for your business?

I guess yes and no with both answers. So I'd say yes. And then I would modify that by saying, we are at the beginning of this trend.

And now the most important thing is, we are now converting our business model to one that envisions this concept of what I would call the puritanic [bundled C] product, but also a product which allows a little bit more of an open investment architecture and an unbundling of fees with a platform fee. We are in the very early stages of that.

Now, as we do that, I don't think we're going to find the real big advisors at the first few. But I think we need to get someone to (inaudible) until we can move up the food chain. In a way, yes, but we're in the early innings.

Got it. Good answer. Thank you.

Next question comes from the line of Chris Shutler, William Blair. Please go ahead.

Wayne, one real quick one on the fee rate, following up on that, a little bit more short term here. Why has the free rate over the last few quarters been ticking up?

Did you say -- do you mean the fee realization rate?

Yes, so the 63 basis points or so?

I think it's a combination -- I think there's been a lot of change in the mix as we go forward. We've seen a little recovery in liquidity fees as we go forward, which has helped because we have liquidity pipes in there. I don't see it's any one reason. There's nothing we're doing that's trying to uptick that rate.

Just product mix.

I think it's probably product mix.

Okay, thank you.

There are no further questions in queue.

Thank you, Wayne. Our next segment is the Institutional Investor segment. Paul Klauder will report on this segment. Paul?

Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the fourth quarter of 2016, as well as the entire year.

Fourth quarter revenues of $88.8 million increased 16% compared to third quarter of 2016. Revenue increase was influenced by positive equity market performance, and, as Dennis mentioned, a one-time event of $12.3 million revenue, and $6.2 million profit from a performance incentive fee realized for a specialty investment product.

Currency translations negatively impacted fourth-quarter revenues and profits. Client losses due to acquisitions and corporate Defined Benefit Plan curtailments negatively impacted fourth-quarter net fundings. Net fundings for the quarter were negative $455 million.

Full-year revenues of $313 million increased 5% compared to 2015. Fourth-quarter 2016 operating profits of $44.5 million increased 13% compared to the third quarter of 2016. 2016 full-year profits were $159.5 million, a 5% increase over 2015.

Quarter-end asset balances of $79.5 billion reflect a $1.9 billion decrease compared to the third quarter. This was impacted by the client losses plus the lower active balances of our long-duration fixed income portfolios, which were impacted by higher interest rates.

The unfunded client backlog at quarter-end was $2.1 billion, and was aided by client signings of $1.80 billion in the quarter, which is the largest quarter of signings in 2016. This included two large fiduciary management deals in the UK, a new US healthcare client, and two new US defined medical clients.

Our focus in 2017 will be on new business growth, and this will be in endowments and foundations, defined contribution, healthcare, global [DB] fiduciary management, governments and unions and entering new global markets. Thank you very much, and I'm happy to entertain any questions that you may have.

(Operator Instructions)

There are no questions in queue. Please continue.

We do have someone queue up. Chris Shutler, William Blair. Go ahead.

Hey, Paul.

Hey, Chris.

Can you elaborate on the client losses a bit? What happened there?

Again, a couple-fold. We were unfortunately in a position where some of our midsize clients were acquired by larger clients. These were multi-billion-dollar systems or corporate defined benefit plans that acquired midsized defined benefit plans. And usually in that case, we have a sales process to try to get into the larger concern. But they just absorbed that into their bigger investment process.

And then we had some partial curtailments. So, that would be a Defined Benefit Plan taking some of the liability, either the retirees that term vested, and buying annuities with respect to that. Those are usually with our more well-funded plans.

Most of our plans are not as well-funded. I would say our average funded ratio for our corporate plans is about 80%. These would have been a couple plans that would've been close too 100%.

That was a little bit of an isolated incident. But as interest rates rise and corporate DB plans get more funded, either by putting cash in or through positive market experience, we could see some of this curtailment occur again in the future.

Okay, thank you.

You're welcome.

Thank you. Our next question comes from the line of Chris Donat, Sandler O'Neill. Please go ahead.

Paul, just on the $12.3 million performance fee, is that something that could occur again? Or is extremely unique and we're not likely to see it again? I don't recall seeing anything like it in the past.

It's pretty unique. It's the only product that we have in our suite of alternatives that has a performance-based incentive fee. We opted for a lower management fee with us and a sub-advisor.

It's, again, a specialty product in energy [debt]. It performed extremely well in 2016. The same incentive process and infrastructure is in place in 2017, but it returned in the 40% ratio range. The likelihood of that magnitude is probably pretty low.

But we will look at some of these specialty products in the future, and to the extent that we can share in performance base, and we disclose that to our clients, these are types of products that we will be bringing. And the great news is this was an innovative offering that we brought to the marketplace. Our clients benefited tremendously with the absolute returns that they got from this particular investment instrument.

Okay, and it's something -- if you have other structured like this in the future, it would be something we see in the fourth quarter?

Yes, because of the fact that it's annual -- an annual calculation, we have to have certainty around the revenue. We knew later in the year that we were -- this was occurring, but it could have changed dramatically on us.

If the market went significantly negative in December, that would have evaporated, and that's why we were not reporting any revenue during the course of the year. It would happen solely in the fourth quarter.

Got it, okay. Thanks.

Our next question comes from the line of Glenn Greene, Oppenheimer.

Thanks. Quick question. First of all, congratulations on the signings in the quarter, but what I was really interested in was qualitatively what the pipeline looks like. It sounded like, maybe it's just that you rattled off all these different markets, but have you expanded the definition of the markets that you are going after?

What we have really repositioned a lot of our sales focus around these markets that are going to be around long term. We have a lot of emphasis on endowments and foundations. Endowments and foundations are consuming OCIO.

You read today about Harvard deciding to reduce their investment staff. Now why Harvard there's not an opportunity for OCIO, if a $36 billion organization decides not to have investment staff, then perhaps the $3 billion organization will decide to outsource.

We think the top end of the market is going to increase in endowments and foundations. These organizations also consume alternative investments, which we have a better profitability ratio with regard to that component of the portfolio. A lot of emphasis there. The pipeline is very strong or becoming much stronger our endowments and foundations.

Defined contribution, we talked about a signing that we had last quarter. That pipeline is becoming more robust. Healthcare has always been a good market.

Corporate US DB, we understand that that's going to ebb over time. We did have a couple of signings in the fourth quarter, so they will be selective. But on the UK side, and the Netherlands side, that market is very robust. So, that pipeline is growing.

And then, selectively, in certain states in the US, the municipality market is a good market for us. And then [tan partly so]. We have emphasis in all these markets, I would say.

Where we would see the most growth over time would probably be more in the endowment and foundations, only because they have the most numbers. There's 8,000 endowments and foundations in the US, between $25 million and, say, $3 billion in assets, and they're growing every day. That's a very ripe market for delegation and for outsourcing services.

Okay, thank you.

You're welcome.

No further questions. Please continue.

Thank you, Paul. Our final segment today is Investment Managers. I'm going to turn it over to Steve Meyer to discuss this segment. Steve?

Thanks, Al. Good afternoon, everyone. For the fourth quarter of 2016, revenues for the segment totaled $77.9 million, which was a $2.2 million, or 2.9% higher as compared to our revenue in the third quarter of 2016. This quarter-over-quarter increase in revenue was primarily due to new client fundings.

For the full year of 2016, revenues for the segment totaled $294.4 million, which was $26.4 million, or 9.9% higher, as compared to our revenue for the previous year. Our quarterly profit for the segment of $27.6 million was approximately 1.8% higher than the third quarter of 2016. Our full-year profit for the segment of $103.3 million was approximately $7.4 million, or 7.7% higher than the annual profit of 2015.

Third-party asset balances at the end of the fourth quarter of 2016 were $448.7 billion, approximately $2.5 billion, or 0.6% lower as compared to our asset balances at the end of the third quarter of 2016. The decrease in assets was primarily due to net new client fundings of $2.6 billion, combined with market depreciation of $5.1 billion.

Turning to market activity, during the fourth quarter of 2016, we had a solid sales quarter. Net new business sales events totaled $7.7 million in annualized revenue. These sales were comprised of new name business, including competitive weigh-ins of two private equity outsourcing clients, and a traditional loan-only managers collective fund business.

We also experienced expansion of existing business with current clients across all segments. Our total net new business sales events for the year were approximately $40.5 million, which was a new record for this segment, and continues to validate the market acceptance of our strategy and solutions.

As we look to 2017, we will continue to focus on several key areas. First, we will focus on continuing our sales momentum with new-name sales and growth of existing clients, especially in the larger end of the market. Second, we will focus on implementing the new business we have won, and is in our backlog and look for opportunities to grow with these clients.

Third, we will continue to expand our market segments and opportunity for growth. Private equity, family offices, endowments and foundations all continue to show strong opportunity for us.

Fourth, we will continue to invest in and build out are solutions, including regulatory compliance, middle-office services, front-office services, and enabling technology services. All of these are areas where we continue to see growth.

In summary, in 2016, we were able to continue to grow our business and market share by implementing some of our largest wins to date. We will renew this focus in 2017, while continuing to build our platform for the future.

I remain optimistic and encouraged about our opportunity. That concludes my prepared remarks and I will now turn it over for any questions you may have.

Our first question comes from Robert Lee, KBW. Please go ahead.

Thanks. Good afternoon, Steve. How you doing?

Good. How are you, Rob?

Good, thanks. I guess my first question, my question would be, can you give us a sense -- you highlighted some of the market segments going after next year. But if we think about the strong client winds this past year, maybe break that down for us, how you are seeing that split out between the different segments -- alternative versus traditional or foundations?

And then, I know you've called out private equity and alternatives, but with all -- before we all hear about going alphas from hedge funds and whatnot. How has that -- if at all, been impacting your business? Is that -- clearly you've been working through any headwinds from there.

Will you did what you did to Wayne and combined a bunch of questions in there.

(laughter)

Let me take them. First, a breakdown on the winds this year. The majority were in our alternative business. I would say the majority of them were in private equity.

I would say, probably 80% of our wins this year were alternative. And the majority of them -- we did have some hedge, as well as some firms that are multi-asset class, including hedge and private equity, or what we would call hybrid managers. But clearly, private equity is leading the way, and we still see a good bit in hedge.

On the traditional side, in middle office, outsourcing, collective fund processing, really is where we are seeing the strength in that area. And what I would say is the pipeline is strong there. I think we just did not see them come to fruition as far as adding the sales processing in. But I think there's still opportunity. We still see opportunity in 2017 for that.

As far as hedge fund redemptions, I think that's something that has been plaguing the industry. We certainly have a large base of hedge funds. And we have seen -- and our results and the revenue and growth have been muted by hedge fund redemptions. But where we are standing, I think it's the cycle of hedge funds right now.

I do see that the upper echelon has funds. And the larger managers we have are doing a good job of retaining assets and bringing some new assets in.

But really the smaller, mid-sized firms are the ones that are losing the assets. And we've seen that continue for the past two years. My prediction, if I look forward, is I think we're going to still see it across the industry, as well as our client base this year. But, we're managing through it and continue to view it as part of doing business in that market.

Great. Since I asked multiple questions, I'll leave it at that.

(laughter)

Sorry, you're more than welcome to ask more.

I'll follow up.

Very good.

Our next question comes from Chris Shutler, William Blair. Please go ahead.

Hey, Steve, how's it going?

Good. How are you doing, Chris?

Good, thanks. I wanted to follow up on that last one on the cash flow. I think you said, was it, $2.6 billion in the quarter?

Yes.

That number is weaker than we've seen in a while. Maybe just break down the biggest drivers of that, and quantify the redemptions for us, if you can?

Sure. It actually was a fairly strong funding quarter, with over $13 billion in funding. But then we had headwinds.

And usually with the [hedge industry weathers], we try not to predict the cyclical nature. As the end of the year comes, you will see more redemptions. We had about $5 billion across the business in redemption, and then another $5 billion, and this was not just in hedge. This was across the business in either liquidating funds, closed funds, or funds that moved out.

Okay, got it. Makes sense.

And then the only other thing I had was, could you characterize the mix that you are seeing in the pipeline? Or is it largely -- is it still largely private equity or are there any changes in the mix? Are you mainly taking clients away from banks or other independents? Any color there?

So the pipeline remains strong. I think it still stands at the same percentages or areas of growth. We are seeing, back to my traditional comment, we are seeing more traditional managers with middle office outsourcing opportunities, and we're certainly looking to capitalize on that.

But the strong surge that we're seeing right now still remains in alternatives, and primarily in private equity. I'd say from the market, it's a competitive market. And any takeaways -- I certainly don't want to get into my competitors' airtime -- but what I would say is we're an equal opportunity firm. And we'll take -- we take this away from both bank-sponsored admin competitors, as well as independents.

Great. Then just one last one, Steve. And that's just the question you always get around backlog. Just walk us through that and a timeline on that? Thanks.

Sure. You would have disappointed me if you had not asked that. Our backlog stands right now at around $39 million. We expect the majority of that to fund, hopefully, within 2017.

Some will fund towards the end of Q1, Q2. The rest will find throughout the year. There's always pushes in that, but the good news is, as we've sold this last year, we're starting to see it come on. We're seeing a steady pace of the conversion activity, and we expect that to continue.

Okay, thank you.

Sure.

Thank you. Our next question comes from the line of Glenn Greene, Oppenheimer.

Chris, just asked my backlog question. But the one question I would ask is, the pipeline for other big prospects out there. Obviously, you were successful in 2016. But how's the sales pipeline for other big prospects?

It remains strong.

Any more color, or no?

I already did that once. And I regretted it. So, no. Let me just say, it remains strong.

Thanks.

Sure.

There were no further questions. Please continue.

Thank you, Steve. I would like now to have Kathy Heilig give you a few Company-wide statistics. Kathy?

Thanks, Al. Good afternoon, everyone. I have some additional corporate information regarding this quarter. The fourth-quarter cash flow from operations was $141.7 million, or $0.87 per share, bringing year-to-date cash flow from operations to $425.2 million. Free cash flow for the fourth quarter was $119.8 million, and year-to-date cash flow -- free cash flow $343.6 million.

We did have capital expenditures for the fourth quarter, excluding capitalized software, of $4.7 million. And those capital expenditures year-to-date were $31.4 million.

As noted in the release, the tax rate for the fourth quarter was 33.4%. And we had an annual tax rate for 2016 of 34.4%.

We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks, and that the financial information presented in our release and on this call is unaudited.

Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments.

You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results. Now, please feel free to ask any other questions that you may have.

We have a question from the line of Chris Donat, Sandler O'Neill. Please go ahead.

Hi. Dennis, just wanted to tack one more on here to make sure I'm understanding your comments about where expenses might be in the first quarter. As we think about a sequential increase from the fourth quarter, should we be backing out the $6.1 million of sub-advisory expenses? Or should we think about the GAAP number as the base case for the sequential increase?

No, I would back that out.

Okay, thank you.

You're welcome.

And there are no further questions. Please continue.

Thank you, Kathy. Ladies and gentlemen, while net new sales events slowed during the fourth quarter, gross sales in our pipelines are healthy. In addition, I'm encouraged by the direction each of our business lines is taking and the progress they are making. I believe that the investments we are making will help us benefit from all of the changes taking place in our industry. Have a good day, and thank you for attending our call.

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