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IGM Financial Inc
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Thank you for standing by, the conference is ready to begin. Please be advised that this call is being recorded. Good afternoon and welcome to the IGM Financial Third Quarter 2019 Earnings Results Call for Friday, November 1, 2019. Your host for today will be Mr. Keith Potter. Please go ahead.
Thank you, Patrick, and good afternoon. I'm Keith Potter, Treasurer and Head of Investor Relations, and welcome everyone to IGM Financial's 2019 Third Quarter Earnings Call. Joining me on the call today are Jeff Carney, President and CEO of IG Wealth Management and President and CEO of IGM Financial; Barry McInerney, President and CEO of Mackenzie Investments; Luke Gould, Executive Vice President and CFO of IGM Financial. And we also have a special guest, Rhonda Goldberg, who is Executive Vice President, General Counsel of IGM Financial, who will be sharing our perspective on the client-focused reform final rules today.Before we get started, I would like to draw your attention to our cautions concerning forward-looking statements on Slide 3 of the presentation. Slide 4 summarizes non-IFRS financial measures used in this material. On Slide 5, we have provided a list of documents that are available to the public on our website related to the third quarter results for IGM Financial.And with that, I'll turn it over to Jeff Carney, who will review IGM's 2019 third quarter results starting on Slide 7.
Thank you. We ended September 30, 2019 with record high quarter end total AUM of $162.5 billion, driven by investment returns generated by our clients. We had investment fund net sales of $103 million, reflecting improving high net worth client acquisition at IG Wealth Management and continuing sales strength at Mackenzie Investments. Earnings per share were $0.85 for Q3 2019. I'm pleased with the 2 announcements made in the quarter, which demonstrates our progress and commitment to leverage Tier 1 providers to assist in our transformation.First, on September 20, we announced that CIBC Mellon has been selected to provide fund administration services to enhance operational efficiencies. It made sense for IGM to perform these services in the past. But now industry standard solutions offered by globally scaled service providers creates new opportunities to further improve our cost structure.Second, we recently announced that IGM is adopting Google Cloud to manage data. This relationship will provide IGM with scalable, modern technology solutions to store data and use it to gain insights through advanced analytics. This will support decision-making, provide insights to our advisers for use with clients and overall support of our digital strategy and platforms across IGM.We expect these 2 announcements will deliver benefits to our clients and our shareholders and gives us great confidence in achieving our non-commission expense growth guidance of 4% in 2019 and 3% in 2020. The expected cost savings are notable and provides us with more flexibility and discretion over the coming 12 months as we sequence our other elements of our transformation journey. We look forward to sharing more transformation milestones as we continue to gain traction and accelerate the impact.Lastly, final rules on client focus and reforms were published during the quarter. Overall, there were no surprises, and we're pleased to see that the majority of our advocacy, put forward in our comment letters, was accepted by the CSA. Rhonda Goldberg will speak more to this in a moment, though I will say that the transformational changes we have made across our businesses over the past few years and has positioned us very well from a regulatory reform standpoint.Slide 8 highlights the performance of major equity and fixed income indices. Most markets were up slightly in the quarter. And since December 31 of last year, our clients have earned investment returns of 10%.Turning to Slide 9. The industry advice channel experienced long-term mutual fund net redemptions of $1.3 billion during Q3, representing a small improvement relative to the third quarter of last year.Turning to Slide 10. On our results for the third quarter, average AUM increased to $162.1 billion that was up 1% year-over-year. Investment fund net sales were $103 million during Q3 2019 compared to $137 million last year. IGM's adjusted net earnings were $202 million for the quarter and adjusted earnings per share were $0.85, that's up 4.9% from Q2 2019.Slide 11 contains the breakdown of IGM's quarterly results across our segments. You can see earnings are up in all segments relative to Q2 2019. The main drivers for lower earnings in corporate and other relative to Q3 2018 is a decrease in the proportionate share of associate earnings from Great-West Lifeco of $8 million and the inclusion of Personal Capital losses of $4.3 million.I will now turn the call over to Rhonda, who will cover IGM's perspective on the client-focused reforms.
Thank you, Jeff. As you know, on October 3, the Canadian Securities Administrators, the CSA, published reforms to enhance the client registrar relationship, referred to as the client-focused reform, amending National Instrument 31-103, the registrant regulation enrollment companion policy, which impacts dealer firms and advisers.The amendments are the outcome of a 6-year public consultation process, seeking to better align the interest of registered firms and individuals with the interest of their clients. The CSA expects that the amendments will result in a new higher-standard of conduct across all categories for registered dealers and advisers and their representatives.Among the notable changes, the amendments will require registrants to put clients first when discharging their Know Your Client, Know Your Product and suitability obligation, address material conflicts of interest in the best interest of the client and do more to clarify for clients, what they should expect from their dealers and advisers.Provided all ministerial approvals are obtained from CSA members, the amendments will come into force across Canada on December 31 of this year, and will be phased in during a 2-year transition period.IGM has been engaged throughout the consultation process, and we were pleased to see our advocacy reflected in the final amendment. We believe we are well positioned across the company.Our focus at IG Wealth Management on financial planning and mandating the CFP plan spend, equips our consultants to meet the heightened KYC and suitability obligation.Our National Service Center further allows for servicing smaller accounts, consistent with the CSA's guidance, allowing flexibility to tailor the reforms to the clients' needs and the services provided.An emphasis, both at IG and IPC on managed solutions aligns with the emphasis on portfolio suitability and the breadth of Mackenzie's diversified solutions and competitive pricing and performance supports firms and advisers suitability obligation.It's also important to note that it's permissible under the client-focused reform to have an exclusive or proprietary product shelf with the companion policy providing guidance regarding the CSA's expectations prefer to address and document the resolution of material conflicts of interest.Our recent actions to simplify and align consultant compensation with client outcomes at IG Wealth Management as well as our move to a product shelf of leading sub advisers with ongoing evaluation and monitoring of our product competitiveness aligned with the new KYP and complex expectations.IPC similarly has robust KYC processes. Our move away from DSC and towards fee-based product solutions at IG further supports the direction of the client-focused reform. Overall, the IGM companies were well prepared for these reforms, and we do not foresee any implementation concerns.And with that, I will turn it back to Jeff.
Thank you, Rhonda. Turning to IG Wealth Management's Q3 highlights on Slide 14. AUM reached record quarter end high of $90.8 billion, that's up 9.2% year-to-date, driven by positive investment returns for our clients. Net redemptions were $291 million during the quarter, an improvement from $537 million net redemptions in Q2 2019.These figures exclude net flows into high interest rate savings accounts, which were $69 million during the third quarter. IG Wealth Management's gross sales increased 3.1% year-over-year, driven by continued momentum in the high net worth and mass affluent segments, which experienced a 16.4% increase in sales into our high net worth solutions. The strength in high net worth was partially offset by lower sales in mass market segments, which is expected as we focus on our targeted markets.The other point I'd make on IG sales is that our success in the high net worth space is significantly increasing consultant productivity with a 17.5% increase in gross sales per license professional relative to last year.I'm excited about the progress that we're making on a number of our transformational initiatives at IG Wealth Management. I mentioned previously that we are targeting to have 2,000 teams across Canada and are committed to this.We are seeing that our new recruits will come from both our traditional sources as well as growing volumes of industry recruits. Our centralized screening program is working well to confirm high level of quality recruits.While it will take time to achieve 2,000, I'm pleased with our progress and can advise that at the end of the third quarter, we have our best results in 3 years for volume and quality of recruits.I'm also encouraged to see our existing team showing confidence and hiring new quality team members to scale their practices. This illustrates strong optimism in our network. I'll also speak to another initiative in a moment. The rollout of our IG Living Plan snapshot.Turning to Slide 15, on our high-level operating results. As I mentioned, net redemptions of $291 million in Q2 was an improvement quarter-over-quarter and IG's gross sales are up 3.1% year-over-year.Slide 16 includes some additional perspectives on Q3 gross sales. While total gross sales increased by 3.1%, sales into high net worth solutions reached $1.1 billion, an increase of 16.4% relative to last year.I spoke to the strong momentum we are seeing in the acquisition of high net worth households last quarter. This trend further accelerated during the quarter, with gross sales from acquisition of new households with more than $500,000, increasing 21.6% relative to the same period last year.We're very encouraged by this trend, and it demonstrates that our strategy is working and IG Wealth Management value proposition is resonating with this growing client segment. Offsetting this, we have seen gross sales decline in the mass market segment, which we expected. We've intentionally focused on segments where our value proposition is strongest.As I mentioned on our last call, we launched IG's National Service Center in 2018 that is focused on our mass market clients. As a reminder, the service center is resourced with a team of salaried financial representatives that help ensure we provide consistent level of service to all households. This also helps us free up consultant time to acquire and service high net worth and mass affluent clients.We continue to make progress in delivering better data with our focus on our managed solutions, which now represents 55% of our long-term AUM and 81% of our long-term gross sales.Slide 17 highlights IG Wealth Management's long-term trailing 12-month redemption rate of 10.2%, which remains well below the industry average of 17.4%.Turning to Slide 18. IG Wealth Management has introduced the IG Living Plan snapshot to measure Canadian's financial well-being. The tool is a proprietary online resource that provides Canadians with an indication of their financial well-being on a 0 to 100 scale across 5 dimensions.It brings together IG Wealth Management's expertise and experience in financial planning, digital technology and data science to provide a snapshot at a time of how capable a household is of making their financial aspirations a reality. The snapshot is designed for Canadians who do not have -- yet have a comprehensive plan, or who are already working with an adviser and are looking for a second opinion, creating an opportunity to initiate a conversation with an IG consultant.Existing IG Wealth Management clients can benefit from a more comprehensive plan assessment and actionable next steps using existing details from their personalized financial plans while working with an IG Wealth Management's consultants.This is one example of IG's commitment to offering superior financial planning to Canadians and look forward to other new initiatives being rolled out in the fourth quarter, including the first phase implement of our adviser's digital desktop powered by Salesforce. And on that, I'll end my comments.
Thank you, Jeff. So we can turn to Slide 20 to review Mackenzie's results for Q3. Mackenzie's investment fund AUM reached $62.2 billion at the end of the third quarter of 2019, a new record high level and a 12% increase year-to-date.We continue to gain market share versus our advice channel peers in the quarter with total investment fund net sales of $491 million. Mackenzie's retail investment fund net sales were once again strong at $378 million.This marked our 12th consecutive quarter of positive retail mutual fund net sales and our 14th consecutive quarter of positive retail ETF net creations. Mackenzie's investment performance also remained solid with 48% of our mutual fund AUM and 4 or 5-star rated funds as of September 30.We also received the results from Environics latest Advisor Perception studies. These studies serve thousands of Canadian financial advisers to uncover their views of mutual fund and ETF sponsors.Mackenzie's results show continued progress on our goal to be the #1 overall investment fund manager in Canada. And we're particularly proud of our ongoing increases in sales penetration in both the IIROC and MFDA channels. I'll speak more of these results in the coming slides.Slide 21 highlights Mackenzie's operating results. Q3 mutual fund gross sales of $2.3 billion was an all-time record high third quarter results after adjusting prior period's removed fund allocation changes.Total investment fund net sales were $491 million, and Mackenzie continues to capture market share versus peers in the advice channel. Our long-term investment funds, which includes both ETF and long-term mutual funds had an organic net sales rate of 1.6% during the 12 months ending September 30.Mackenzie experienced net redemptions of $15 million in the institutional sub-advisory and other categories excluding the impact of the previously disclosed $1.2 billion MD Financial Management redemption. The MD-related redemptions were low-fee sub-advisory accounts that have now been internalized. As we mentioned on the last call, the annual revenue impact is low at approximately $1 million.I also spoke on the last call about our strong institutional pipeline, and I'm happy to report that our team continued to add wins to the pipeline during the third quarter. At this time, we have approximately $600 million of unfunded institutional strategic alliance net inflows that are expected to fund over the next 3 to 6 months.Our continued retail sales momentum is presented on Slide 22. As I mentioned earlier, Q3 2019 marked the 12th consecutive quarter of positive retail investment fund net sales. Mutual funds and ETFs are consistently attracting positive net flows. Mackenzie's retail sales captured 7% of advice channel long-term mutual fund gross sales during the third quarter and a line chart at the bottom of the slide, shows the significant progress we've made over the last 3 years.On Slide 23, Mackenzie's ETF AUM reached the $4 billion mark during the third quarter. Our traditional beta, strategic beta and active ETF categories all experienced positive net creations this quarter. Our ETF assets continue to be diversified across strategy and by client type. Retail makes up approximately 50% of Mackenzie's ETF AUM.I'm pleased to share that this past summer, Wealthsimple added Mackenzie's ETFs to their client portfolio construction engine. Connected to this, we're adding new disclosure this quarter by breaking out the institutional component of our ETF business. This reflects instances where known partners have utilized Mackenzie ETFs in their own products or programs. We've included some of the highlights from the latest Environics Advisor Perception studies on Slide 24. Mackenzie remains third in overall perception in the mutual fund report.As I mentioned, our sales penetration improved once again in both the MFDA and IIROC channels. We have traditionally been strong in the MFDA channel. And in recent years, we have built upon our strength in the MFDA, while also executing on a completely organic strategy to elevate our standing in the IIROC channel. We now hold a top 2 rank in both IIROC and MFDA channels. I'm extremely proud of the entire Mackenzie team's accomplishments. The success of the team's efforts and our strategy as evidenced in our net sales results quarter-after-quarter as well as throughout these annual Advisor Perception studies.On Slide 25, Mackenzie's investment performance remains strong. At the end of the quarter, more than 50% of our mutual fund assets were above median in the 1-, 3-, 5- and 10-year periods, and 40% of our AUM is in 4- or 5-star rated funds.Turning to Slide 26. Value-oriented strategies remain out of favor. Mackenzie's growth-oriented boutiques continue to have the majority of their assets rated 4 or 5 stars and are tracking significant net sales in the retail channel. Our global equity and income team and fixed income team are also performing very well.With that, I'll turn it over to Luke to review IGM's financial results.
Great. Thanks, Barry. Good afternoon, everyone. So turning to Page 28, and I don't have any comments on this slide. I'd just say, as you know, financial markets were generally up in the quarter, and our investment fund assets increased by 0.8% and are at record high levels, as Jeff reviewed. I'd also note, we did continue to exceed improvement in financial markets through October, and we will be reporting slightly improved asset levels once again when we release our October results on Monday.Turn to Page 29, you'll see our consolidated IGM EBIT and a margin as a percent of average assets. And you'll see here it was a very clean quarter in terms of financial results. On the right, I'd highlight that the net fee revenue rates are stable at 122 basis points. I'd also highlight in the bottom right, that non-commission Expenses are down slightly as a result of seasonality, timing and expense management.In the chart on the left, I highlighted that the second stack from the top is our net investment income and share of associates’ earnings, and you'll see this has been running at around $46 million each of the last 2 quarters. And I just highlight that our share of earnings in this period from Great-West Lifeco was depressed by a $4 million true-up of prior year results.We always accrued our analysts’ estimates that drop in the following quarter. So if you look at the level of earnings published by Great-West Lifeco on Wednesday, you'll see that this line is actually running closer to $50 million right now as opposed to $46 million actually recorded in the period.Moving to Page 30. A few comments on our consolidated income statement. At the bottom, you'll see that our $0.85 in EPS is down 7.6% from last year, which was our all-time record high quarter, and is up 4.9% from Q2.As you saw on the last slide, net fee rates as a percent of assets were very stable in Q3 relative to Q2, and 0.1% that we've had in that slide highlights that net revenues are up as a result both of higher average assets as well as having 1 more calendar day in the quarter.The second point highlights that while our proportionate share of associates' earnings as stable as Q2, it's down notably from Q3 2018.Part of this, as Jeff mentioned, is the inclusion of Personal Capital, where we started equity accounting for it in Q1, '19. And you can see this was $4 million always. We don't have any slides of Personal Capital in the presentation today, but I would refer you to the supplemental info, and you'll see that growth at Personal Capital continues to be very strong with tracked assets up 5% in the quarter and 23% year-to-date, and we did cross over the CAD 1 trillion threshold in tracked assets during the quarter.I'd also highlight that AUM for Personal Capital is up 7% in the quarter and 40% year-to-date and is now at CAD 14 billion, so lots of strong growth at Personal Capital. The other part of this decline was the point I referenced in the last slide at Great-West Lifeco earnings, which include a $4 million true-up in this quarter's results were down relative last year. And again, you can add back that $4 million to get earnings closer in line to what they reported on Wednesday.And then lastly, point one highlights our non-commission expenses, which are down $5 million in the quarter and up $8 million from last year.As Jeff mentioned, we are maintaining our full year guidance of 4% increase from last year. We're also maintaining our 2020 guidance of a 3% increase in this line at the current time. I note, as Jeff said, we're very excited about the transformation initiatives that we discussed earlier with CIBC Mellon and Google Cloud. These initiatives provide many benefits, including noteworthy cost savings to IGM and its clients. I note that we're still finalizing definitive agreements, but we will be showcasing these and other initiatives as part of our Q4 results release in February. We will be providing any further step guidance for 2020 in February and also be providing guidance beyond 2020 once we finalize our planning process.I turn now Page 31, and I know here you can see IG Wealth Management fee rates and compensation rates. And again, very clean, I highlight that all rates are trending to plan and in line with guidance that we provided earlier. I'd also note that, as Jeff highlighted, we continue to see improvement in high net worth. And the table at the bottom left, you can see that our average assets now has 53% in high net worth series. As the composition of clientele continues to move towards high net worth, there is continued impact on the net management fee rate that you can see above. At the current trend, we're down about 0.5 basis points in the quarter, and we do expect this to continue at a rate of about 2 basis points per year as we do succeed on our high net worth strategy and do continue to see more high net worth as a percent of our average asset balance.Moving to Page 32. On IG's financial results, you can see earnings before interest and taxes of $205.8 million were up 5.6% from last quarter and down slightly from last year. As mentioned on the last slide, the results are very clean with fee rates moving very much as expected. I would note on the second point, that while expenses are down from Q2 as a result of seasonality, we do expect increases more in line with our full year guidance for Q4 as we roll out some key initiatives that Jeff discussed, like our adviser portal Salesforce, we also will be increasing our margin spend as we head into RSP season, and we do expect a good RSP season coming up.Moving to Page 33. You can see the fee rates and the key drivers from Mackenzie's earnings. The only item I'd highlight here is, and you can see in the stacked bar on the left, is the loss of the $1.2 billion sub-advisory mandate to MD early in the quarter. As mentioned by Barry, the fees were very low on this mandate. And as a result, you can see the net revenue rate has increased from 79.6% to 80.1%, excluding the MD loss, the periods were very consistent with last quarter.And moving to Page 34, you can see Mackenzie's earnings before interest and taxes were $46.4 million, up slightly from Q2. We did highlight in point one that we do have a -- we had a slight loss on seed capital pertaining to some declines in emerging markets during the quarter. I would note, on these incubated mandates, we have had gains year-to-date. And moving to Page 35. I conclude my comments by doing the usual highlight of our strategic investments. The key point I'd make is there is about $2.4 billion of value in these investments. We're pleased with the progress, and we're optimistic about the future. And the only noteworthy event in the quarter is China AMC was impacted by the strength in Canadian dollar versus yuan. But again, a lot of value here, and again, a lot of optimism. So with that, Patrick, I'll turn it over to you for questions.
[Operator Instructions] The first question is from Gary Ho from Desjardins Capital Markets.
Just first question on the 5-year transformation and specifically the 2 initiatives that you guys just talked about, the CIBC Mellon and Google Cloud this quarter. Can you maybe elaborate a little bit more on it? And how operationally and financially, how this could benefit the firm over the next near-term and over the medium term?
Yes, I can take it on and maybe Luke can jump in as well. We're modernizing our company and looking at the best providers globally. And so the Google relationship came out of a trip that we did and all of our senior management and -- spent some time with all of the fintechs that are driving the world these days. And there's so much opportunity to take advantage of their scale and their investments and everything that they've built. And so from there, we're launching our Salesforce, obviously, for our field but we've also found other opportunities as well. And so we've got some projects that we're building together and working on together with the fintech world. And so that's one theme.Second is on CIBC Mellon. The world's changing and scale is getting bigger and bigger. And so when we saw this opportunity to find a new provider with CIBC Mellon and the scale that they have compared to what we have, it became very obvious that this was the right decision and the economics from it is very powerful for us, and so because there's a lot of competition there. And so that's going to enable us to take those resources and invest them into our future.
Okay. Great. Maybe just for Luke. You're maintaining your non-commission expense guidance, 4%. I think that would suggest $273 million for Q4 or a 7.5% growth versus your Q3 number. I guess, given that we're, I guess, 1/3 through Q4 ready, can you talk about the components that could make up that 7.5% increase in Q4? Or are you baking in some level of conservatism by maintaining the 4 -- plus 4% guidance this quarter?
I'd say -- so 3 key components. So number one is the rollout of our adviser portal. So that's our launch of Salesforce, our CRM tool at IG Wealth Management. And so we do have a number of costs with implementing in the quarter. There are some change costs expected as well as other implementation costs. So that's one clear thing that will be coming through in Q4. We do have increased marketing spend, as I mentioned, as we ramp up in advance of RSP season, and we do have some spend on other initiatives happening, including the migration of all of our clients to our omni platform as we start implementing Series U for all and a bundle pricing. So those are 3 key elements. I would give clear guidance, we're going to meet or exceed our -- meet or be better than the 4%, say, growth, but we are keeping that guidance in place. I'd also elaborate on Jeff's comments on the outsourcing of our fund and administration custody to CIBC Mellon as well as Google. And would say, as mentioned, as you're querying about, there are meaningful cost savings. And so by meaningful, just on those 2 initiatives, it's about $20 million a year is what our expectation is. We are finalizing definitive agreements right now, but it does provide us a lot of flexibilities in where we spend our money. And as you know, we're working to, a, strengthen our offering to our clients and our advisers and make sure that we're really doing everything we can to capitalize on our opportunity as well investing in transformation initiatives that are going to bring our cost down over the long term.And that transformation journey we're about halfway through right now and planting flags, but we do have more spend associated with bringing future opportunities to life. So that's kind of a summary of where we're spending our money and the nature of some of the benefits we're going to be realizing early on.
Great. Luke, and you said $20 million, is that how much you guys are spending on that? Is that -- or is that the savings?
Savings. That's the actual savings from those 2 initiatives that we expect. And that's the savings to the corporation. We also add benefits to our clientele as part of the fund services and custody outsourcing.
Great. And then just lastly, just on the use of the capital, Luke, I think you mentioned $10 million investments in Wealthsimple in the quarter. I think your payout is in the mid-60% range, probably lower if you include the Great-West true-up. Just wanted to get an update on how you guys are thinking about excess capital, if you look out 12, 24 months? Are there opportunities to further invest in Personal Capital or China AMC, dividend growth or perhaps share buybacks?
We have a lot of flexibility right now on those choices. But we're obviously big fans of Personal Capital, and we're excited about their model, but we have other options as well. And so we'll share with you as we go.
Yes. And I think, Gary, we gave it some guidance in the past, and we've been consistent on that. Dividends are very important to us. We're here to grow our dividends, and we're here to grow our earnings. And so you can expect as cash -- as the dividend payout as a percent of cash earnings gets closer to 65%, we would be considering an increase. And as Jeff said, the investments in fintech is something that we're excited about as well as any other opportunities that come around to help us grow our business.
The next question is from Geoff Kwan from RBC Capital Markets.
Jeff, just had some questions for you on the net sales performance at IG. I think you had the slide where you were pointing to increasing the gross sales within the high net worth, but at the same time, for the non-high worth part that has been coming down because you're not emphasizing growing that part of your business. And so if that's the case, if I'm reading it right, then as you would need to really ramp up the high net worth gross sales to offset the lower or declining non high net worth to help drive getting back to the black on net sales for IG. Am I reading it right that way?
I let Luke start, and then I can comment.
Yes, I'd say that's -- what you see, Geoff, is right. We're starting to see that execution on the high net worth strategy is clearly working. Q3 was a standout quarter, but we are having to offset a reduction in emphasis in acquiring clientele who have less complicated needs. And you can see that happening. I'd say, overtaking the loss of the non-high net worth client with high net worth is not a high hurdle for us to overcome. And so when we get the momentum in high net worth, it's going to be quite easy to exceed that slight reduction that we're seeing in the non-high net worth client acquisition. Does that make sense?
It does.
But then the dregs go away.
Yes, we've got a short-term blip where we stopped acquiring a certain segment of clients. But we are starting to see the high net worth come through and that will easily overcome.
Are you willing to say kind of with your crystal ball, like you think that's something you can accomplish in 2020?
I'd say this management team is focused on that. That's the momentum we're seeing right now in high net worth. And as we move to RSP season that's what we're focused on.
And it's accelerating.
Okay. And then second question was on Slide 17. Talking about the redemption trends at again at IG. It seems like historically it didn't always really follow the industry trend that closely, but it's been ticking up for the last little bit also with the industry. But just wondering like what's the reasons that we've -- that this has been happening and kind of what your expectation as to how this trend plays out over the next 12, 24 months.
Yes. I mean we're basically following the industry. It's lumping along a little bit. But we're really optimistic about our sales. We think we're going to have an amazing RSP season. We just had an event with 1,200 of our consultants, and they're fired up. So stay tuned. But we're feeling really optimistic right now. And the field is very excited about our value proposition and the new tools that we're giving them.
Okay. And if I can ask one last question. Just on the overall -- on the net redemptions. Obviously, it's been a very challenging industry environment. Do you think if the environment were to stay as it is right now over the next year, do you think that you could be -- you would be in a position to have positive net sales for 2020? Or is the industry environment going to have a, at the very least, a meaningful say as to how you guys perform next year at IG?
We absolutely believe we're going to get to net flows and positive gross sales and significant gross sales.
The next question is from Tom MacKinnon from BMO Capital.
I was just looking at the -- as you kind of work to revamp your consultant network. Jeff, I think -- to more of a team base. You seem to be working with a smaller pool of consultants. They're down like about -- over 10% year-over-year. What is your -- what are your plans in terms of revamping your consultants to a team approach, sort of in light of the fact that the number of consultants has been declining and, in particular, new consultants with less than 4 years' experience is declining.So maybe you can talk around that, please.
That's a great question. In U.S. there's a different model they call the Registered Investment Advisors and Schwab and Fidelity are big supporters of them through technology and everything else. And these are, there's -- they can have $10 billion, and they build a value proposition, and they grow and they use all of these incredible scale capabilities from these incredible companies. And so we're sort of trying to model that same thing and have a big leader of the team and then diverse skills and have 10 to 12 to maybe 15 people on each of the teams.And it's -- when you have that, then you have diversity, skills, you have specialist capabilities within the team and you're confident. And so we're going to do everything we can to see who gets there the fastest, but there's a really good opportunity for us to do that. And when you have people and the team, and you're working with them there's just more fun at work and there's more energy at work. And when you're with 2 people or 1 person or -- it's a lot harder. So we're really encouraging the teaming and investing. And what's great is we're seeing that happening right now, like there are people who are hiring more people into their practices right now. And that's a great sign of -- that they're optimistic about staying with us in our future, but also the scale that we can bring to our company.
When you say you're hiring more people. And I mean, the number of new consultants continues to decline. So I'm trying to figure out where -- how -- should we be measuring a number of consultants? Or should we be measuring the size of the people in these RIAs, if you will.
You should -- the number of teams, right? Or as I said, we're targeting 2,000 teams, that's the measure you should look for.
Okay. So maybe -- and when do you think you'd be in a position to start disclosing the teams? And maybe -- should we be looking at sales by teams and things like that?
Actually, Tom, if you're looking at the supplement and the details we provided on the Consultant network. So the Consultant practices is the number of teams, which is 1,859. You'll see another line called associates and you can see 1,009 people there. Those are all employees within those practices. So the number of teams that we have is each 1,859. And as Jeff's saying, those practices are very scalable, a, through adding more associates underneath them. And b, you can do the -- you can see the size, the average consultant practice is $40 million right now, and we believe we have a lot of capacity to grow those practices, the productivity of those practices as we move to high net worth and as we capitalize, not just on our new tools, but also on our national desk for servicing clients with less complicated needs.
Okay. And then just a question on -- you were buying back stock at one point, and you haven't been buying back. Is there any reason for that? And it seems like you've got even increased flexibility as a result of the Google and CIBC Mellon arrangements as well. So is there any kind of strategy for the use of this in increasing free cash flow?
Good question. We did do, as you mentioned, some discrete share buybacks during the second quarter, and that was part of our participation in our sister company's substantive issuer bid. Meaning, we tendered proportionately to their bid to support them and we disclosed to you in the market we're going to use the proceeds to do some share buybacks, given that we had some flexibility, and we certainly believe it was a good opportunity. That said, our focus is on maintaining financial flexibility and making sure that we have the resources internally to focus on investment opportunities that we believe are going to be in front of us in the coming quarters.
The next question is from Paul Holden from CIBC.
It's Paul Holden here. I want to follow up on a few themes that have come up in here in the conference call. I'm trying to get a little more specific here. And I guess, continuing the conversation on the number of consultant teams to begin with. When should we look for an inflection point in the growth rate there? Is that a 2020 story? Is it more further out? When does that NIM number stabilize and start to grow again?
Yes. I mean it should be starting now, like we've had a lot of the investments we've made that -- it's allowing us to be more confident going forward in our investments. And we had compensation changes. We've had a lot of things that have gone through our company. And I think the 1,200 people that were in that room now have all of the facts of what our model is and how do we work within it, and they're really excited about their future. And so I think that's where -- basically what's happened. And there are pieces that we've been building along the way to get to here. A number of investments that we have made, including Salesforce coming shortly. And so it's allowing us to be a modern company and be efficient and also deliver incredible outcomes for our clients.
Okay. And Paul, I think you've seen -- and you were focused primarily on proficiency and the productivity in these practices. And so right now, when you look at the numbers, you can see we're at record all-time gross sales in Q3 of this year. So we're tied with our all-time record high in 2017. And we do have fewer people. The productivity improvement of the practices themselves has nearly doubled for those of more than 4 years. And what we're going to look to provide more disclosure on is the productivity improvements we're seeing with new recruits. Our new recruit productivity is up 600% from 2016 when we tightened the standards. So you can see the number of people has gone down, and we do think we're at or close to an inflection point as we make sure the teams we have are at the right standard. But the focus really has been for us on productivity, and we've got a lot of scalability with this current force of financial planners.
So is it fair to characterize then the decline in the number of consultant practices being a function of maybe teams or individuals that didn't fit with the new business model? Is that fair?
Yes, that's fair.
Okay. Okay. Good. Then I want to talk about the transition to unbundled fees at IG. So that's been picking up a little bit slower than I would have expected. But you're planning in 2020 to kind of move the majority of assets, if not all the assets, to unbundled. When does the pace of change start to accelerate? And is there a particular catalyst we should look for that will lead to that increased rate of change?
This -- 2 big milestones coming out right now, Paul. So Q4 is the launch of Series U for all, and will start being made available to some of our households with less than $500,000 where they've previously been available to only high net worth. The other big one is the continued migration of accounts to our -- on an omni platform. So over the last 2 -- few months, we've had great progress. We've now got a majority of our accounts transferred. So you can think of there now being 800,000 accounts and hundreds of thousands being transferred over in the summer in Q3. That migration will be complete by Q2 of next year. And so by midway through next year, you could think of us selling substantively only unbundled products and having all of our clientele migrated over to them. But there is a lot of work to it to migrate that clientele to an omni-named platform, and we're more than halfway there right now.
We're also excited to see that our strategy of going up market is playing out, and you can see those in the numbers as well.
Okay. So if I'm hearing that right, then really the inflection point should come sort of maybe a little bit Q4 but more so Q1 next year?
Yes. That's right. And you can -- that rhythm of that 7 months from December towards June, really going from where we're at now to going at having substantively all of our assets and sales in unbundled.
Okay. Got it. That's helpful. And then maybe just kind of a couple of smaller questions. The penetration rate in the Environics study that you pointed out I find interesting but not quite sure how to read what the penetration rate is. Is that like number of IIROC advisers that have a relationship with Mackenzie? Or is there a different way to read it?
That -- so penetration rate, that's the percentage of advisers actively selling Mackenzie products.
Got it. Okay. That's helpful.
Active in both IIROC and FDA. That's a really big milestone and...
Yes. And it's a good question. It's also -- it's good sample size, too. I mean several thousand advisers are surveyed every year. I think it's over a 20-year track record now, the survey, Luke? So very robust methodology to their surveying. And we're very [indiscernible], obviously. And it has shown over 20 years to be a very strong correlation to high rankings in those surveys to future sales. So yes, so very pleased. Thank you.
Yes. So I that's a very high number in terms of the percentage of planners or advisers that would be selling Mackenzie product. Any idea what the gap is to #1, like how much further you could possibly go there?
We've got an exact idea of how far we are as #1. We're very -- we're tracking that way, that's our goal.
Yes. In both channels, it's a similar gap to them. And so there's about, call it, 8 to 10 points that we need to close there, and that would obviously be a profound acceleration in net sales at Mackenzie is the -- that's close. And it really -- and it really ties in nicely with our multichannel approach too because we've got a lot of products on -- in ETFs. We -- the needs of those channels are starting to diverge a bit in terms of what MFDA adviser might need versus IIROC versus obviously Robo and others. So we're really honing in, being more specific as to the -- what we're delivering per channel. I think it's resonating as well because they feel like we're listening to them and we're their business partners for their advocates. Clearly, obviously, we want them to use our funds, investment funds. But also we offer other services, technology and advice and regulatory advice from Rhonda's team, free technology. So it's really -- on a really nice roll. So -- but we take the survey very seriously because it's, by far, the best way for us to understand how engaged or not the advisers are across the country to us. And so we -- and there's many, many categories that comprise that survey that we just offered up a couple of categories for you.
Got it. That's helpful. One final one for me. We're seeing a lot of momentum across the industry. And fixed income sales. Mackenzie has seen its share of that piece of the market slip a little bit in the last year. It's still positive net sales, but say, the share has probably slipped a bit. Have also seen you've internalized a couple of fixed income mandates. So maybe if you have some comments on kind of what's happened there and how you view market share going forward?
Yes, sure. So flows for the entire 2019 in the industry have been very pronounced in the fixed income. In fact, we've seen the same in the U.S. So our fixed income's sales have actually been very strong year-over-year, except for 1 exception, and it's not -- nothing to do with performance, is we had an exceptional year last year 2018 with our floating rate offering. And that was a decision by a lot of advisers from a tactical [ cash flow ] perspective, [ signification ] at that point, [indiscernible] rising to get into floating rate. And then obviously, that slipped on everyone's expectation. Now the other way of -- Central Bank is pulling back on interest rates. So if you parse out the -- by strategy, our fixed income sales are pretty good, actually, they're holding year-over-year. But that floating rate is significantly down, which really powered a lot of our numbers last year. So we're multi-asset and we're multi-boutique. We have one fixed income team. They manage nearly $50 billion. They're very, very good. Home mortgage rates and floating rate to high-yield to EMD, you have. So we feel that we're well positioned competitively to compete against -- there's 1 or 2 very strong fixed income competitors in Canada, and we stack up well against them. But as well, probably, as we all know, [indiscernible] and there's probably a little, what we'll try and call the rebalancing of portfolios this year towards the more fixed income to diversify a little bit or become perhaps an overweight in equities. So probably going forward, you'll see more balanced flows across assets, and we think we're well positioned between equities and fixed income and multi-asset and alternatives. So -- but I just want to point a clarification on fixed income. I'm glad you caught -- you picked up because it's not on one of the charts to show that. It looked like we were down, and we are overall, simply because of a mass allocation call it lobby advisers to pull back on floating rate.
The next question is from Graham Ryding from TD Securities.
Maybe I could start at IG and just follow on from that consultants theme, but just maybe go at it a little bit differently. At the beginning of the year, you sort of said 2,000 advisers with 4-year experience, the sort of desired optimal level. I presume, at that time, you had some visibility on how many teams were going to move into that 4-year cohort. Yet, that number has declined, I think, by 6% year-to-date. So it suggests that the attrition has been higher than what you expected. What's your view, I guess, what's been driving that year-to-date? And why are you confident that you feel like there's an inflection point here and that number should start to grow?
We've made a number of changes and are modernizing our experiences for our consultants. And so I think there's more appetite to join our company. And then our recruiting, it's just been -- and the team that does it, it's professionalized. And so they've built a brand in the marketplace, and people want to join us. And so we've been more structural about recruiting. We've done more screening with our recruiting so that our quality stays really high. And we're holding to that standard. And so it's just -- I think that we're a place that people want to work. We've got a great culture in our company that is palpable. We've got growth in our company. We've got a shareholder with a power above us and a family with us and so it's a really good place for consultants to work and to have the resources that they need to do -- be successful and build their practices and run their businesses. And we've had a cultural transformation, and it's harder to measure, but that's what's happened. And so everybody's coming into work every day, feeling -- either the operators or the consultants feeling energized. And so that drives growth. And then I'll let Luke comment.
Yes. Graham, I'd add, that 2,000 target, that wasn't a 1 year target. That's the target saying, this is what we need to accomplish the goals we set for ourselves for the next 5 years. It just seems like the first part of your question was to suggest that we had a near-term target, 2,000. Where our focus on 2,000 was saying, we got a lot of product opportunity and a lot of capacity, 2,000 teams. And to reach our goals, we can do with 2,000 teams. And we're working to build up the number of team members, but 2,000 is our target here.
Okay. I thought you're basically suggesting that the attrition had stopped and that the -- that 4-year plus group should sort of stabilize at that level.
You're always going to have attrition just because of human behavior, right?
Okay. And then just at Mackenzie, there was some ETF fee adjustments in August and September. What percentage of your ETF -- I guess AUM's going to be impacted by those fee adjustments? And then what -- is there an expected sort of overall impact on that Mackenzie management fee rate?
Yes. The most recent fee adjustments for our traditional beta are passive ETFs. And I think it shows up on the one of the two graphs here. The revenue impact was quite de minimis actually on -- with my sales up, side up for ETFs right, it's quite developed. But which slide on ETF? Yes. So on Slide 23, you can see on the left, the breakdown of our roughly $4 billion in AUM. And so traditional beta is 1 point -- you're seeing 1 point -- around $1.4 billion. So yes, so that's the -- it's the AUM is impacted by it.
Yes. It's all in traditional beta. And yes, the impact, it was trivial. It was under $100,000.
Okay. And the TOBAM fees, that's not going to have a big impact either?
No, no, no. We're always monitoring, continues to make sure we're competitive, not price leaders, but we want to be competitive. So we scanned it and made some adjustments. And it's -- I think we're well sized, and we're very pleased with the ETFs. It's so far, so good. So more to come, more launches to come. I think we're moving up the rankings, which is critical. It's -- scale is important in that business. But more importantly, again, it's just building blocks with our mutual funds to build effective portfolios for advisers.
Okay. Great. And then my last question would just be liquid alts? Is it -- how is the adviser reception, is that length of the sales cycle there proving to be longer than when you launch other products? And is there any plan to make the liquid alt product available at the IG level?
So I'll take the Mackenzie side. The -- so first of all, again this remains a really important strategic asset class for us. We're really excited by it. Sales cycles are longer, absolutely. It's -- this is an educational sales to advisers to let them understand all the functionalities of the [indiscernible] strategies, leveraging and shorting and long short, full macro market neutral. To a number of them, it's new. And -- but they're really effective, just diversifies the portfolio. So sales are coming in, sales cycles, yes, are longer. You probably can see one of the statistics or chart showing our market share with that kind of being year-over-year, that's simply because the denominator got so much bigger because effective January 1 of this year, as you know, you're permitted by regulators now in ETF commission on formats to have these hedge fund-like strategies. So a lot more competitors came in, some competitors might have had prior experience also with offering an entire year's [indiscernible] memorandum OM fund vehicle. So some advisers are familiar with these types of strategies. I would say probably a majority are not familiar with them. So long sales cycle, flows coming in. A lot of you actually are estimating, which we agree with, by the way, that this could be $100 billion pool of assets, billion pool of assets in short order. We're all working hard to get market share. We'll be launching more going forward. And again, just -- if I could just be repetitive from last call, we view them as 2 categories. One is the new types, hedge funds, asset return strategies were permitted beginning just this year leveraging shorting. But there's also the liquid alternative asset classes like our Mackenzie diversified alternative fund, which has been around for 4 years, and that's about $700 million already in size, and other competitors have those, too. So it's a really good asset class for portfolios and probably particularly going forward and expect the volatility might increase in the marketplace. So thanks for asking.
And at IG, is there any plans to make that product available at Investors Group?
We are working on that as we speak.
Maybe on IG. We've got some experience in alts and in liquid alts. We've got a real property fund for over 20 years as well as mortgage fund than others, and we haven't done a great job promoting to this constituency these capabilities that we have had for a long, long time.
[Operator Instructions] The next question is from Scott Chan from Canaccord Genuity.
Yes. I really appreciate the disclosure on the $20 million of annual cost savings, the collaborations. You mentioned that with the cost flexibility next year, it's kind of focused on 2 items, strengthening offering and, I guess, finishing the back half of your transformation initiatives. And I was wondering if you could just elaborate on those 2 points a little bit for us.
Sorry, Scott, can you repeat the first part?
Earlier in the call, you talked about kind of you're seeing redeploying that capital to strengthen your product offering, and then number two is to finish the back half of your transformation initiatives. And I was just wondering if you could elaborate on both those issues a little bit into 2020.
Yes, absolutely. So a lot of it -- because we said, we've got discretion, a lot of where money is being allocated is on things that support business growth and client experience as well as the continuation of the transformation program itself. So a lot of the transformation that was laid out by Mike Dibden, it does take investment. And so some of the proceeds from flags that we've planted on these early initiatives will be used to really make traction on others. And the themes that we're focused on are much similar to the ones you've seen with CIBC and Google, involving that outsourcing and automation. So that's kind of chief areas for the transformation program. And the ones that we're focused on from a -- I'll call it a client and adviser engagement include the Advisor portal, which is coming live later this year and it was discussed earlier as well as other, call it, business development initiatives underway. I would think, Keith is going to kick me but we actually are going to be hosting an Investor Day in the first half of next year. We're just finalizing the date, and we are going to be using that as the moment to showcase in much more detail all of these initiatives we're bringing to life.
Is that going to be in Toronto, again?
Will be in Toronto.
Just to highlight a couple of the transformations. Digitizing our processes is one, the Salesforce I've already mentioned. And then we've got a number of potential other outsourcing opportunities that we're looking at right now. So we'll be looking for every opportunity to find more efficiencies and work with great partners.
Okay. Great. And Jeff, just on the Investors Group side. You've had a good success growing the high net worth platform. And I'm assuming you're capturing a lot of that from banks who are also focusing on that clientele segment. Where do you attribute kind of the success or the early success of your traction there relative to the banks?
It's -- I mean we're so early in this. It's ridiculous, but we've got a long runway ahead of us. When I got to the company and saw the CFPs' beliefs and in the energy of the field, I knew that if we empower them with the tools to be able to do their job, including in products and everything else that this company can do amazing things. And we have a great culture, which is the most important thing in any company and then we have everybody on the same path. And we've got a lot of great conversations with our Board, and they've supported us with a lot of capital to invest into our proposition. And so I think it's momentum, and the momentum creates confidence and confidence creates new clients. And hopefully, our share price going up, but that will happen if we deliver the value proposition. And so -- and then on the high net worth, we've got so much upside. We have not very large share as you know. And to see it coming so fast is really exciting. And the pace after that and the pace of that going forward is only going to accelerate because we've got more capabilities coming as well. And this is just the early days, and we don't -- we haven't even launched Salesforce.
Right. Okay. Great. And then just last question. Just on IPC. For the longest time covering this company it used to be always in positive net sales and this year or the last few years have seen it in net redemptions. What's changed? Is it market conditions? Or is there something changed that has changed the trajectory on the flows there?
They had a little like few fixes of priorities that happened. I think it was about 6 or 7 months ago, and that's kind of stabilized. So I know that Chris and his team are out there recruiting as we're speaking. And it's just a blip, and they'll look through it.
Does that -- does like a bolt-on acquisition kind of maybe makes sense on that platform? Or is it more kind of organic initiatives to higher recruitments?
It's just focusing on recruiting and making sure that they're getting the right recruits. I mean I know they have a good standard on that and they want to make sure that they bring in the right ones. And so we're not tacking it at all on what's going on, on IPC, and you'll see it growing again soon.
[Operator Instructions] There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Potter.
Thank you, Patrick, and thanks for those attending the call today. I hope you all have a great weekend. And with that, we'll end the call.
Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.