IGM Financial Inc

TSX:IGM

Earnings Call Transcript 2017-Q4

[Operator]

Please be advised that this conference call is being recorded. Good afternoon, and welcome to the IGM Financial Fourth Quarter 2017 Earnings Results Call for Friday, February 9, 2018. Your host for today will be Mr. Keith Potter. Please go ahead, Mr. Potter.

[Keith Potter]

Thank you, Patrick. Good afternoon. I'm Keith Potter, Treasurer and Head of Investor Relations, and welcome, everyone, to IGM Financial's 2017 Fourth Quarter Earnings Call. Joining me today on the call are Jeff Carney, President and CEO of Investors Group and President and CEO of IGM Financial; Barry McInerney, President and CEO of Mackenzie Investments; and Luke Gould, Executive Vice President and CFO of IGM Financial. Before we get started, I would like to draw your attention to our cautions related to forward-looking statements on Page 3 of the presentation. Non-IFRS financial measures that we have used in the material are summarized for your reference on Page 4. And finally, on Page 5, we provide a list of documents that are available to the public on our website related to fourth quarter results for IGM Financial.And with that, I'll turn over to Jeff Carney, who will discuss results for 2017 and for the quarter.

[Jeffrey Robert Carney, President, CEO & Director]

Thank you, Keith, and welcome. Before we jump in, I'd like to introduce Luke Gould, who I appointed as CFO in his role effective January 1. Luke is familiar to [ most through ] of all of you, and his appointment was announced prior to Investor Day. Luke has been with IGM for over 20 years, most recently as CFO for each of Investors Group and Mackenzie, with Pan, IGM responsibility for much of our finance organization during his time. Prior to this, he led IGM's treasury and corporate finance activities. I'm very pleased to welcome Luke to his new role.Slide 7 highlights results for the full year of 2017. As a result of hard work and important changes made over the last few years at IGM and Mackenzie, we recorded all-time record high net sales of $4.8 billion during the year, with both organizations experiencing significant momentum and market share gains. This led to record high level of assets under management of $156.5 billion, which was up 10% due to strong net sales and investment returns. As highlighted at Investor Day, we are focused on operational effectiveness and are pleased to have managed non-commission expenses growth to be at 6.2% year-over-year, ahead of our guidance of 7%. We were pleased to see this momentum in our business reflected in our share price performance during the period, with a total return to shareholders of 22%. Turning to Slide 8 on the quarter. We ended the year with continued momentum with our best Q4 net sales in a decade and expense management in the fourth quarter below previous guidance. During the quarter, we executed a number of initiatives to enhance client outcomes and drive operational effectiveness, which we shared with you at Investors Day on November 28. It was a busy fourth quarter, and I'm very pleased with our management team's execution of these initiatives and the strong results they delivered.Turning to Slide 9 on our financial results for the fourth quarter. Q4 earnings per share of $0.21 reflects the onetime charges of $126.8 million relating to the transformational changes and $14 million relating to our proportionate share of Great-West Life's Q4 charges. Adjusted earnings per share were $0.79. Excluding fair value adjustments of $0.06 after tax within the mortgage business, earnings per share were up 2.4% year-over-year.We had another strong quarter of continued momentum with record high AUM and total net sales of $1.8 billion, which is up by more than $3 billion from Q4 2016. These strong results are broad-based across Investors Group and Mackenzie's mutual funds and ETFs in the retail channel. Furthermore, Mackenzie's institutional business contributed just over $1 billion to inflows during the fourth quarter.We're off to a solid start as we enter the 2018 RSP season with IGM investment fund net sales of $216 million in January, up $80 million from January of 2017.On Slide 10, we show the segmented results. A slight decline in Investors Group's EBIT was due to the negative fair value adjustments that I just mentioned. Luke will expand on this during his financial review. Also of note is the higher EBIT and the Corporate and Other segment, which included a full quarter share of China asset management's earnings.Turning to Investors Group's quarterly highlights on Slide 12. Investors Group ended the year with record high AUM of $88 billion, which was driven by strong net sales of $332 million and investment returns of 2.8% for the quarter. I'm very optimistic we will experience continued advanced sales growth given the success we are having, attracting new high net worth clients and gaining wallet share of existing clients within the segment. At the same time, we continue to focus on improving consultant productivity by building teams around the consultant practices and increasing their proficiency with mandatory CFP requirements. We are well positioned with our new client-centric strategy that we shared with you at Investor Day, including intentions to increase focus on segmentation within that high net worth space we talked about, expand high net worth product solutions, continue to enhance the quality of the consultant advice, enhance technology solutions to improve client and consultant experience and continue to drive efficiencies and manage our cost.Turning to Slide 13 on operating results. Investors Group had record gross sales for the quarter, while the redemption rate on long-term funds remained at a low level of 8.3%, which is unchanged from Q4 2016. The combination of the strong gross sales and the low redemption rate led to a 27% increase in net sales versus Q4 2016. Investors Group has been capturing market share versus device channel peers versus with a 2.2% net sales rate that is well above the advice channel. And as I mentioned, with respect to the RSP season, Investors Group is off to a strong start in 2018. We experienced all-time record high gross sales for the month of January totaling $895 million and net sales of $150 million, down $54 million, which was the best January since 2007.On Slide 14, you can see big contributors to our success has been the sales high net worth solutions. Gross sales in this segment of $1 billion is up to 40% versus Q4 2016 and represented 46% of total sales for the period versus just 36% in Q4 2016. We continue to demonstrate the value we offer our clients with 70% of our high net worth sales going into the unbundled fee structure, where the client pays the advice fee directly. We now have $20 billion in unbundled fee structures, which is up $12.4 billion from just 1 year ago. As announced at Investor Day, we expect to have unbundled pricing available for new accounts at all asset levels in the second half of 2018.You can see on Slide 15, with a focus on better beta and asset allocation, our consultants remained focused on offering managed solutions with over 70% of gross sales invested in these offerings.Slide 16 highlights consultant composition productivity of our -- composition and productivity of our consultant practices. As Mark Kinzel, Executive Vice President, Distribution, discussed at Investor Day, we are focusing on having our consultant practices build teams as one of the strategies to help drive productivity improvements. We had a strong recruiting during the fourth quarter and are excited about the caliber of the people we've been able to attract. As we look at productivity of our consultant practices, gross sales for practice has increased 37% year-over-year. We expect to have another strong year relative to the industry. Slide 17 highlights some of the key Investors Group's strategic takeaways from our Q4 Investor Day. I've touched on a number of these themes, and I am very optimistic about our opportunity to continue to strengthen our business going forward. I'll stop here and turn it over to Barry McInerney to take us through Mackenzie, and we look forward to a conversation a little later on.

[Barry Sean McInerney, President & CEO]

Thank you, Jeff, and good afternoon, everyone. Turn to Slide 19. Mackenzie experienced another very strong quarter as we continue to execute on our differentiated strategy. Total AUM increased 12.1% to $64.6 billion. Both total AUM and investment fund AUM reached all-time record quarter-end highs. Momentum continued to cross all facets of our business with mutual fund, ETFs and institutional seeing strong net sales. Of note, our institutional business delivered 2 meaningful wins during the fourth quarter. Mackenzie was also recognized for strong performance, winning 8 Fundata FundGrade A+ Awards, and we're seeing a broad range of products performing and selling well with highly relevant solutions in key product categories. We also announced in December the appointment of Arup Datta to form a Boston-based Global Quantitative Equity investment boutique. Mr. Datta strengthens Mackenzie's capabilities in global and emerging market equities at a time of unprecedented opportunity in the global emerging market space. Finally, we continue an emphasis on product innovation continued throughout the fourth quarter and into January of 2018 with our mutual fund and ETF offerings.Slide 20 highlights Mackenzie's operating results for the fourth quarter of 2017. Mutual fund gross sales of over $2 billion were up 6.6% year-over-year. Investment fund net sales of nearly $0.5 billion during the quarter were up from $19 million last year. Mackenzie captured market share versus peers during the last 12 months. Long-term mutual fund net sales rate of 2.1% was well above the advice channel average. If you include both ETFs and long-term mutual funds, Mackenzie generated organic net sales rate of 3.5%. And as Jeff mentioned, Mackenzie is off to a good start this year. Mackenzie experienced record high mutual fund gross sales of $883 million, up 26% from January 2017, and investment fund net sales of $273 million, which includes $215 million for Investors Group mutual funds. We're very pleased to see our retail mutual fund sales were up meaningfully year-over-year. This is a key internal gauge of Mackenzie's strength in the all-important RSP season.Slide 21 provides an overview of sales by asset class and product type. As I mentioned, Mackenzie experienced strong Q4 results across many facets of this business with total net sales of $1.6 billion. Mackenzie long-term mutual fund gross sales increased 8.3% from the prior year. Long-term mutual fund net sales increased by $189 million, fueled by highly relevant products across a range of categories, including the very important balanced fund category.ETF net creations were $367 million, which includes $27 million from Mackenzie mutual funds and $107 million from Investors Group mutual funds.Mackenzie's institutional sales team delivered 2 important wins during the fourth quarter, the first being a large Canadian equity sub-advisory mandate for National Bank mutual funds and the second being a new relationship with a U.S. public pension plan. On Slide 22, over the last 4 months, Mackenzie has introduced new products to the market addressing a range of client needs. As discussed on the prior call, Mackenzie launched 2 mutual funds focused on the growing client and adviser demand for sustainable, responsible and impact investments, SRI. We launched one of these products in ETF form later in the quarter.In addition, 3 other active ETFs were launched during the fourth quarter: Ivy Global Equity ETF brings the Ivy team's unique expertise to the ETF space for the first time; Mackenzie Portfolio Completion ETF, which invests in a diversified portfolio of alternative asset class ETFs and currencies; and Mackenzie's Canadian Short Term Fixed Income ETF delivers on client needs for income generation and retirement.Finally, during January, Mackenzie launched Mackenzie ETF portfolios, a series of innovative mutual fund portfolio solutions that provide access to a full spectrum of Mackenzie's active, strategic beta and new traditional index ETFs.Turning to Slide 23. The ETF product category had a record year in Canada with strong net creations and new all-time high AUM levels. Mackenzie is well positioned to participate in ETF growth with our product-agnostic approach to delivering our investment management expertise in the marketplace. As previously mentioned, Mackenzie's organic ETF business growth continues to be amongst the top in the industry, ranking third during Q4 and third for the full year of 2017 based on net creations and active and smart beta strategies. And during January, we exceeded $1.5 billion in ETF AUM.On Slide 24, Mackenzie's long-term investment performance remained solid with 71% of mutual fund assets in the first or second quartile over the 10-year period and 32% of AUM in 4- or 5-star rated funds. Slide 25 highlights the balanced fund category that continues to be important to Canadian advisers and clients. Within advice channel, almost half of long-term mutual fund assets and gross sales are in this category. We address this category in 2 differentiated ways: core balanced funds and our Symmetry managed solutions. Focusing on the core balanced funds, we have a wide range of products with exceptional performance that are resonating with the advisers and their clients. Many of these funds are rated 5 stars in F class.Slide 26. We continue to benefit from strong investment performance and net sales across a range of asset classes, investment styles and teams. On the equity side, the growth teams and global equity and income team are delivering strong performance and selling very well. Strength here has offset a Q4 slowdown of Ivy and continued net redemptions in the other [ favor ] value-oriented strategies. The market environment we observed during the early February remind advisers and clients why they invested with Ivy in the first place, as it is proven to preserve capital through market volatility in the past. The fixed income team and related solutions continue to perform well and attracts significant net inflows. And finally, our managed solutions run by the asset allocation team continues to successfully address client and adviser needs and attracts strong close. These results demonstrate the benefit of our segmented approach to Canadian retail, our exceptional wholesaling teams and our investment boutique structure.I'd now like to turn over to Luke Gould to walk through the detailed financial results.

[Luke Gould, Executive VP of Finance & CFO]

Thanks, Barry. Good afternoon, everybody. I'll turn to Page 28, and on this slide, just highlight on the left are assets under management, which closed at $156.5 billion, up 10% this year, and you can see in the table on the right that this was driven by $4.8 billion in net sales, which was a record high for IGM Financial, as well as 6% in investment returns generated for our clients.On Page 29, turning to Investors Group's results. You can see on the left that our weighted average management and administration fee rate was 203.8 basis points, down just a little bit from Q3 as a result of having a greater share of our assets and high net worth solutions as a result of the group sales that were put on this category, as reviewed by Jeff earlier. And moving to Page 30. I don't have a lot of comments on the income statement that you see in front of you. As a result, we're very intuitive, with the exception of a few items that I'll point out, the first being net investment income and other, which you can see has a big 3 beside it, and this is the impact of $20 million of negative fair value adjustments on awards business, as Jeff mentioned earlier, and I'll review this in greater detail on the next slide. I'd also highlight non-commission expenses, which were $138.8 million and are highlighted with a number 4 beside it. And you can see that our non-commission expenses were actually in line with last year but were noticeably ahead of the guidance we provided earlier, where we were actually at $7 million below what's expected, and a lot of that did come from the investment management consolidation that [ exercised ] during the fourth quarter, and we're very pleased with that. Moving to Page 31. I want to share a bit more of the technical detail behind our net investment income line and, in particular, the fair value adjustments. So here, you can see, in the last 2 quarters, the $12.7 million in Q3 and the $19.6 million in Q4. This was survey adjustments relating to warehouse loans that we hold pending sale securitization. And the nature of these fair value adjustments is that when lending rates increase by a greater rate than funding rates, we actually have to write down the loans and market-to-[indiscernible] market. And I note that much of this is timing of earnings recognition, where the intended margin is going to be recorded into earnings over the life of loans. However, we do take these fair value adjustments as there are these rate change differentials.Interestingly, in this period, this coincided with adoption of IFRS 9 Financial Instruments on January 1 of this year. And going forward, we are not going to be classifying these loans as fair value through P&L. Instead, there will be loans and receivable. And what that means for us is it's going to be what we believe is much more useful information to [ view ] our statements as we're going to be recording net interest income over time as opposed to marking the loans to market. And so this volatility that we've experienced in a few of the last 8 or 10 quarters is going to be going away. Importantly, with these changes on adoption, we increased our retained earnings by $50 million January 1. And of that $50 million, $26 million is actually a reversal of all these fair value adjustments. As had we adopted IFRS 9 2 quarters earlier, they indeed wouldn't have been recognized at all. The rest of that IFRS 9 adjustment is a change in the treatment of issue costs where we will be capitalizing and amortizing those going forward as opposed to expensing as incurred. And so this also did increase retained earnings on adoption of IFRS 9, and we're going to be amortizing those issue costs going forward. Moving to Page 32 is another change that was made effective January 1, and this is one where we introduced some slight amendments to consultant network compensation where we introduced something that we believe is quite special. So we've aligned asset-based compensation to be the same rate across asset classes and across vintage types, meaning, if somebody recommends an equity product, they get paid the same as if they recommended a fixed income and vice versa. We also -- you can see in the second bullet that we made some slight tweaks to compensation to include rare components driven by net flows and also by client satisfaction.So those are important changes we made. There is an accounting nuance that's depicted below. The all-in cash compensation that we're going to be paying is the same, but as we implemented these changes, we made a slight difference in the share of compensation that's asset-based and is expensed [indiscernible] in period versus the share that's sales-based and is capitalized and amortized. The result of this is really an acceleration of expense recognition where, again, the all-in cash that we're going to be paying is unchanged. And this is going to normalize, over time, roughly over 7 years. So you can see in the bottom bullet, we anticipate the impact in Q1 to be above $7 million and increase the asset-based compensation. And the impact is going to about $25 million over the full year. And I know what you see -- one thing that people might think is, do you have less sales-based compensation? And is this going to affect behavior? And I just like to highlight, this $25 million is very, very small in the context of $650 million in commissions paid to our field. So they're still very, very motivated to build their practice and very motivated to serve their clients and very motivated to have satisfied clients.Moving to Page 33. With the consolidation of investment teams at Mackenzie, with the joining of all the Investors Group personnel, we have made a change in the definition of the Mackenzie segment for IGM Financial's reporting. So I'm going to walk you through on the left. You can see our AUM at each of Investors Group and Mackenzie at September 30, and I'd highlight that shaded rectangle on top of $8.3 billion. And what that was is sub-advisory mandates that Mackenzie had to Investors Group funds and that were included in Mackenzie's reporting and that we eliminated on consolidation of IGM's results to avoid double counting. And in that old reporting, Mackenzie would have earned sub-advisory fees that would have been part of Mackenzie's revenue and Investors Group would have had those advisory fees as part of its expenses. And again, that all eliminates in consolidation. Going forward, you can see on December 31, instead of advising on $8.3 billion, the Mackenzie team now advises on $69 billion of Investors Group mutual funds. And we've amended the definition of the Mackenzie segment to only reflect Mackenzie's product shelf and Mackenzie's adviser, Mackenzie's business to its own distribution channels, excluding Investors Group. So as a result, we've retroactively restated all Mackenzie's AUM inflows backwards, and you can see Mackenzie's new definition is to have assets under management of $64.6 billion, which, again, is all third-party business and excludes advisory mandates to IG. On the P&L, what's going to be reflected now is that IG will reflect its proportionate share of the investment team's costs, as will Mackenzie. Moving to Mackenzie on Page 34. You can see that the weighted average net management fee rate was 80.9 basis points, which is up very slightly from 80.3 last period, and it's just a reflection of the changes in business between retail and institutional and is relatively unchanged. And then on Page 35, I'd just make 1 quick comment on Mackenzie's income statement, where you can see we had earnings before interest and tax of $50 million. And I'd just highlight, in green, we have shown the impact of that change in the definition of the segment. As you can see, we've highlighted the sub-advisory revenue that would have been earned by Mackenzie in prior periods and is no longer being earned in the current period. And we would guide you to make period partly[indiscernible] comparable to actually net that revenue off of Mackenzie's reported non-commission expenses in those prior periods. So in other words, just reclassify that revenue to be a [ contra ] to expense, and it makes everything quite comparable to each other.I would also highlight, non-commission expense for Mackenzie were up 14% from last year, but for the full year, we are ahead of the guidance that -- we're actually right in line with guidance that we provided to the investment community.And then lastly, on Page 36. I'd just highlight, once again, as Jeff mentioned at the start, we are quite pleased to come in $7 million below our guidance and having a year-over-year increase in noninterest expenses of 6% for IGM Financial. And I would just reaffirm that our guidance for 2018 is 5% increase for IGM Financial, and we are targeting 3% year-over-year increase beyond.So that concludes my comments. I'll turn over to Patrick for questions.

[Operator]

[Operator Instructions] The first question is from Gary Ho from Desjardins Capital Markets.

[Gary Ho, Analyst]

First, let me start off with an update on the RSP season. I know you guys talked about January, but obviously, volatile markets out there. Just wondering what your frontline consultants or wholesalers are seeing. Has this impacted sentiment? And how are flows trending so far with -- in Q1?

[Jeffrey Robert Carney, President, CEO & Director]

I can go first. It's Jeff Carney. And we haven't really seen anything since January's trend to February so far. So we haven't seen a significant decline at this point.

[Gary Ho, Analyst]

Okay. And then anything to note on -- there?

[Jeffrey Robert Carney, President, CEO & Director]

Same with Mackenzie. Barry just count me in[indiscernible].

[Barry Sean McInerney, President & CEO]

Yes. [indiscernible].

[Gary Ho, Analyst]

Okay. And then the next question, just going back to the plus 5% non-commission expense guidance. I'm just wondering, is there a variable component to that? Or is this predominantly fixed? Obviously, just going back to the market volatility, I want to see if there's leeway on how that number may shake out if we see volatility persist throughout the year.

[Jeffrey Robert Carney, President, CEO & Director]

Yes. I think what you're asking is, how can we manage through different cycles of the market and economic issues that will come our way? So we have a lot of flexibility in our model. And so when I think about this, you have advertising budgets that are pretty flexible, and you can decide to pull that back and maybe it would -- won't be as productive because people aren't investing. It's probably not a good use of your time to continue to spend a ton of money on advertising. So that's an opportunity. You have discretionary technology budgets, generally, in most P&Ls where you're investing in the future, and you can decide to slow those things down as well. And then you just -- you ask each of your departments to look at how they can reduce expenses over time, and we would look at all of those things as well. But we're certainly not panicking with what's going on right now. This is an uplift. But there are lots of tools we have if we wanted to reduce cost. And if sales start to slow down, obviously, our sales cost would go down as well.

[Gary Ho, Analyst]

And how...

[Luke Gould, Executive VP of Finance & CFO]

I'd also add. But we provided some guidance last quarter with respect to Mackenzie. But I'd remind, I think part of your question was, what's straight variable with assets? And you can think of between 5% and 10% is some advisory fees and other elements that's either very directly with assets or directly with sales. So there is some of that variability.

[Gary Ho, Analyst]

So that's not just 10% that's of the non-commission expense?

[Luke Gould, Executive VP of Finance & CFO]

Yes.

[Gary Ho, Analyst]

Got it. Okay. That's helpful. And then just last question, it's more of a numbers question. There was a pretty big jump in management fees within the Corporate segment, I think it's from $14 million in Q3 to $20 million in Q4, and similar jump in non-commission expense. It was noticeably higher as well. Just wondering what that was related to and how sustainable is that.

[Jeffrey Robert Carney, President, CEO & Director]

Luke, do you want to...

[Luke Gould, Executive VP of Finance & CFO]

Yes, I'm just pulling that up in front of me.

[Gary Ho, Analyst]

Yes. Was that IPC-related?

[Luke Gould, Executive VP of Finance & CFO]

That's an interesting question. That was actually the change in the segment disclosure that I mentioned earlier. And we used to actually have the elimination of the sub-advisory fees paid from Mackenzie to -- from Inventors to Mackenzie included in that line. And similarly, it was an expense from IG to Mackenzie. So that's what you're seeing, is that $5 million that I had on the earlier slide, it's actually being added to trade back because we are no longer having to eliminate those amounts. It's now just a net with [ new ] expenses. Does that make sense?

[Gary Ho, Analyst]

And it's the same thing on the expenses, too, like I'm seeing that -- there's a pretty big jump on the non-commission expense?

[Luke Gould, Executive VP of Finance & CFO]

You can imagine that Mackenzie used to have $5 million -- just over $5 million of revenue coming from Investors Group, and we eliminated within the Corporate and Other segment line so that we weren't double counting in IGM's results. And the exact same thing with Investors Group had those same expenses, the sub-advisory fee being paid to Mackenzie. And so it was a net 0 on this Corporate and Other segment, but it did, indeed, impact those 2-line items.

[Operator]

The next question is from Geoff Kwan from RBC Capital Markets.

[Geoffrey Kwan, Analyst]

The first question was for Barry. When I look at the slide for Cundill, you've had a lot of improvements in the performance over the past year in a bit just relative to what it had been in prior years, and the net redemptions are improving. I was just wondering, I mean, do you see a path to getting back to positive net sales at some point this year?

[Barry Sean McInerney, President & CEO]

I'm not sure about this year, but absolutely, a path back to[indiscernible] net sales. So the new team are just doing really well. It would add[indiscernible] 18 months now, and their performance is nice in the first quartile. As you know, sometimes, value comes in and out of favor, so you might see a little performance pop up one quarter to the next. But they hold true to their style, they're performing very well. Redemptions have come down. They've normalized. But to your point, the reason you still have the net outpost is because redemptions are fine, it's just that, now, we're starting to pursue gross sales. Conversations are being had. They're being well received once the [indiscernible] advisers across Canada. But it's probably that magical -- sometimes magical trigger numbers where everyone feels more comfortable with the new team to start to buy back into it. We actually expect it will happen before the trigger mark. We think that's probably a good solid 2, 2.5 years performance, under 6 to 12 months. And we'll start to see the close come back in on the gross sales that would over -- offset just the natural redemp -- but just the natural normal redemption rate that you get from Cundill. Very [indiscernible]. Good question.

[Geoffrey Kwan, Analyst]

Okay. And then just the other question I had for Luke. Just going back to the change for the tweak in consultant compensation at IG. So if I understand this right, if I'm thinking about it over a longer period of time, all else equal, like with the change, the 2 will perfectly offset each other? Or would it result in perhaps like maybe a slight increase in compensation realized on the income statement?

[Luke Gould, Executive VP of Finance & CFO]

Yes, over time, it's going to be the same. So it's just a reallocation from sales based to asset base. So we're just talking about the timing of expense recognition, not the absolute amount of it.

[Geoffrey Kwan, Analyst]

Okay. So -- but, I mean, if you have maybe a difference in performance of growth in the assets versus growth on the sales trajectory, that could throw that offside one way or another? Is that fair?

[Luke Gould, Executive VP of Finance & CFO]

Yes, that is fair. Yes, other things being equal, everything is the same. But to the extent that we have sales rising at a greater rate, then there could be [ machination ] there and different possibilities. That's very[indiscernible].

[Operator]

The next question is from Paul Holden from CIBC.

[Paul David Holden]

Maybe just continuing on that topic. As we think about how commission expense or compensation at IG may change over time, will you be eventually moving to purely an asset-based commission model?

[Luke Gould, Executive VP of Finance & CFO]

Right now, that's the only thing we've announced, and I'm not seeing it and just not seeing it. We could -- I think net profit's growth is a very, very important driver, something that our field appreciates and enjoys. And also, metric is tied to client service and client satisfaction and client outcomes. That would be our direction. So if they see something that was purely based on assets, it's not something that's in our current plan.

[Paul David Holden]

Okay. And the reason I ask is because at your Investor Day, you had mentioned about going to a fee-based model at some point in 2020 or a little bit beyond. So just trying to envision how a fee-based model would work with IG paying for sale. It seems to me like there's a little bit of a mismatch between revenue coming in from the client and commission being paid to advisers. So I don't know if you can help me sort that out.

[Luke Gould, Executive VP of Finance & CFO]

I think you're at a really important point, Paul. It's just unique and [ some ] Investors Group being vertically integrated. And the relationship between what a client pays and the structure of what a client pays and how we compensate our consultant network, those 2 things are separate and distinct, which is a bit unique to us. So when we're referring to fee-based, that's a reflection of how the clients are paying for us and whether it's embedded in a mutual fund structure or whether it's paying directly to the dealer for advice. That's a relation between us and our client, and it's very much separate from how we compensate our field for serving and acquiring those and retaining those clients.

[Paul David Holden]

Okay. And then another kind of big picture-type question. There's been some media articles, I guess, over the last month or so talking about a long-term decline in the use of RSP savings. So wondering, a, is that a real trend for the industry? And if it is, sort of how do you think about strategies in terms of trying to grab where savings are going outside of RSP accounts?

[Jeffrey Robert Carney, President, CEO & Director]

Yes. I mean, one of the things -- we talk a lot about gamut in our strategy, and we make sure that our advisers are well trained and that they understand that there's a huge that benefit to contribute into your RSP every year because of the tax incentive. And that's what the government is trying to do, is to incent Canadians to save. And so we've had a lot of conversations in the last month to make sure that all of our regional directors are having these conversations with their advisers and their teams to make sure that we're talking to the clients about this. So I'd be disappointed as a leader that we're not out there talking about it and we're not -- because if they're not doing that, they're not doing their job. Obviously, the government is trying to solve the problem and they're trying to incent our community, the corporate Canada here, to solve it, and that's our talk and we've got to keep it going.

[Operator]

The next question is from Graham Ryding from TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

First of all, just on your expense guidance. 2018, 5%; 2020 target is 3%. Would you be leaning one way or the other for 2019? Or is it reasonable to think that's sort of in between those goal posts? Is that a reasonable target of 4% for 2019?

[Luke Gould, Executive VP of Finance & CFO]

Yes, that's reasonable. We'd like to give specific guidance to 2019 that, over the year, we'll firm it up. But right now, it's reasonable to think this could be somewhere between 3% and 5%.

[Graham Ryding, Research Analyst of Financial Services]

Okay. The launch at Mackenzie of some passive ETFs, I'm just wondering the strategy there. How do you balance that with your historical, I guess, position as an active manager in your lineup of active ETFs?

[Barry Sean McInerney, President & CEO]

Yes, it's a good question. So we launched the passive ETFs really as building blocks. We're a solution provider. We're an active solution provider. So we've got the mutual funds and we've got the ETFs. ETFs, we've got active, more to come. We got smart beta, more to come. And we launched 13 index. And that's why we -- at the same time, we launched ETF portfolios because we want to show to the marketplace that as a solution provider, here's how you put it all together. So the ETF portfolios, actually, which are funded ETFs, are active and active, in the sense of active asset allocation, active currency. And they're using all of the component parts now with the ETF lineup, all 28 ETFs we have now at Mackenzie, active, smart beta and balances. So we're not [ too shocked ]. But again, these are just building blocks that we use in combination, and we built -- we've been building portfolios for years, balanced Symmetry, and we've -- these are active balance, these are active Symmetry, but they also have used in the past, active and smart beta, some quantity[indiscernible] and some little bit of passive here and there, where the PMs think that they can get more efficient exposure to the marketplace.

[Graham Ryding, Research Analyst of Financial Services]

Okay. I could look this up, but I'm going to be a little bit lazy. Can you just let me know the fees for the portfolio of ETFs? Is that similar to your active ETF fees?

[Barry Sean McInerney, President & CEO]

The -- of the new ETF portfolios?

[Graham Ryding, Research Analyst of Financial Services]

Yes.

[Barry Sean McInerney, President & CEO]

Yes. So there are 5 risk buckets, and so -- from conservative, all the way to modern growth and strong growth. So 4 to 5 are 60 basis range. I believe the more conservative one which is mostly fixed income is in the 40 range, I think.

[Luke Gould, Executive VP of Finance & CFO]

Yes, [indiscernible].

[Barry Sean McInerney, President & CEO]

So call it mostly 60 basis points, all in.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Helpful. And then just lastly, institutional inflows were quite strong in the quarter. Any color on the pipeline?

[Barry Sean McInerney, President & CEO]

Pipeline is pretty good. It's nice to -- again, we've got retail channels, we've got institutional channels. That's always a good thing. They -- sometimes, they ebb and flow differently. So it's nice diversification for us from a revenue source and the AUM source. But we've been working. The retail segment is obviously so strong for us. It's, by far, the largest. We've been working hard the last 3 or 4 years to really sharpen up institutional poly [indiscernible] on a number of strategies that we think would be of interest to institutional investors focused on Canada, doing a little bit of select selling in the U.S. It was select selling in Europe. As you see, we have some wind there. So pipeline is growing, yes. And our -- another example of a little tuck-in we had, the new Boston-based team, the [ Kwan ] team, they have predominantly managed institutional monies in the past. So we'll be going out with them and shortly to start to sell back into institutional marketplace. And so they've done that successfully in the past. That could be a nice segue into us introducing our other institutional quality[indiscernible] strategy. So it's very targeted, very select, but it's a nice pipeline. A lot of active searches going on, a lot of finalist[indiscernible] presentations coming up.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Great. That Boston-based team is -- how big is that team? Is that a material investment? Or is it more about just trying to grow it?

[Barry Sean McInerney, President & CEO]

Yes, it's, call it, all in, the last 7 people in Boston. So they're -- team is intact, as they have in the prior quarter. And as [ Kwan's ] come on board, they're building up their models, and that's almost done. So it will probably be in the marketplace in Q2. But -- so not a big investment, but an important investment because we think we can -- they've demonstrated really strong performance, mostly emerging markets. Also, they also have run global equity on the components to it. And -- so we're pretty keen to get up there and sell them, and we think it will be very successful. So it was an investment buyout[indiscernible] but not significant investment from an IGM perspective.

[Operator]

The next question is from Tom MacKinnon from BMO Capital.

[Tom MacKinnon, Managing Director]

Question with respect to -- again, on this -- changing the comp here at IG. Potentially, this is sort of a change in mix, and then, I guess, I'm trying to figure out what the 7 in the $25 million are. Is that -- as it is, is that going to be a change in the EBITDA related to this business? Is that the way we should be looking at that? So, in a sense, the -- all the asset retention commissions [indiscernible] are going to be about $25 million higher?

[Luke Gould, Executive VP of Finance & CFO]

Yes, Tom, the best way to think of it is, on this $25 million, instead of paying a sales commission where we would have taken the $25 million and amortized it over 7 years, we're paying that $25 million and we're expensing it upfront. So the amount that's going through our P&L. It's not changed, it's just the timing of when it's being recognized that's changed. And your other point on that, is it an impact on EBITDA? Yes, it would be. That amount typically would have gone through commission amortization before, and now it is going to be included in EBITDA. And I would remind, too, the context of what $650 million in commissions paid to the field, this is a very, very slight tweak, but we thought it was noticeable enough to point out to the investment community.

[Tom MacKinnon, Managing Director]

So all other things equal, the EBITDA would be $25 million lower next year as a result of this change?

[Luke Gould, Executive VP of Finance & CFO]

Yes.

[Tom MacKinnon, Managing Director]

Yes. Okay. And then...

[Luke Gould, Executive VP of Finance & CFO]

But the cash paid would be identical.

[Jeffrey Robert Carney, President, CEO & Director]

Tom, it was also a benefit to our clients because we're now paying the same rate for fixed income and equities combined. And so the client experience is a better experience, and I think it's pretty unique in the market.

[Tom MacKinnon, Managing Director]

And then in the earnings then would be $25 million less? Or would that -- would we -- would there be an adjustment in the amortization?

[Luke Gould, Executive VP of Finance & CFO]

Yes. Earnings and EBITDA will be $25 million less this year, but over a 7-year period will be identical. So this is just timing of expense recognition. We're paying the same amount to folks. It's just the character of what's capitalized and amortized versus expenses.

[Tom MacKinnon, Managing Director]

Okay. Got it. So you'd have $25 million off for 2019 -- or 2018 and then that amount would gradually decline to 0 5 years from now or so?

[Luke Gould, Executive VP of Finance & CFO]

Exactly. So that $25 million will have been recorded over a 7-year period. It's all being recorded this year as opposed to being amortized over time.

[Tom MacKinnon, Managing Director]

Okay. Easy. Good. And then the second is just a question with respect to China AMC. I think last quarter, you only had 1 month of them, and you got $3 million in your share of earnings. Your carrying value has gone up quarter-over-quarter. So now you've got 3 months of China AMC, and you only had $6 million from your share of earnings. So it seemed to be a little light just based on that -- some of that arithmetic. So why wouldn't it be closer to $9 million or $10 million?

[Luke Gould, Executive VP of Finance & CFO]

Yes, good question. So going forward, we give guidance of $8 million to $9 million a quarter. There was some seasonality of expenses associated with the fourth quarter for China AMC, but $8 million to $9 million is a guidance we think we can work with.

[Barry Sean McInerney, President & CEO]

And if I -- Tom, if I could add just -- China AMC just from a business perspective. Our position remains -- we're just -- we're so excited by China. I mean, the map, as we said at the Investors Day, is so compelling, double-digit growth, mid-teens, we think, on average. But it's not going to be a straight line, right? So -- as you know. So last year, there were some -- really latter part of '16, early '17, the industry in China experienced some significant outpost money markets. CAMC, obviously, did as well. There's quite a bit of legislation that came down in the industry in China last year. And also, the Congress met with the jury 5 years. There's always -- there's a little bit of noise last year in the industry, and I think it was -- it wasn't one of the better years for the industry. Just near the end of '17, early '18, it was down the last month, the team is feeling really good. We've got some new product launches doing very well. And that cross-synergy revenue that we're pursuing, with the selling our capabilities into China, and I was doing the same here in Canada, we've launched, for CMC, a China equity mutual fund. In ETF, there's sub-advisory here in Canada in the early days, but a lot of good response to it. And then we've launched a [ Kwan ] -driven Chinese equity model that they're actually distributing in China. So we're feeling pretty good this year. That market is currently powerful, but it does have some volatility to it, up and down, at any point in time.

[Operator]

[Operator Instructions] The next question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

I just want to go back to the RSP question, maybe just ask it a different way. Because you said it was -- you said February month-to-date, it hasn't decelerated from January, but if you compare, I guess, month-to-date this year for IGM and Mackenzie compared to last year, is it kind of the same? Is it higher? Or is it lower based on the volatility in the market that you're seeing right now?

[Jeffrey Robert Carney, President, CEO & Director]

It's hard to measure it in days, but we'll see how it plays out. I mean, it really -- there's a rush to the finish every year. This will spook a few people in the industry, advisers. And it will spook you, investors, in the industry. But if -- yes, like I said before, if the advisers are doing their job, they're making sure that they're making a contribution, and that's what I've said to our distribution leaders, and they're out there making sure that's happening. But I know that you're trying to figure out where the industry is going right now, and it's hard because we have different growth rates than others right now, and so if you try to look at our model and then compare it to everybody else, I'm not sure it's going to give you the right answer.

[Barry Sean McInerney, President & CEO]

Yes. I could give you 1 more data point on Mackenzie. Jeff and I saw January, saw January year-over-year, we're very happy with that. February is too early, very lumpy. I mean, February is -- RSP season is like in [ 3 or 4 weeks ]. But the Mackenzie, we -- our mutual funds that we disclosed up close are both retail and institutional. Our retail was stronger, actually, in January. So anytime you want to have retail rather than institutional, January, February, because it's RSP season, so that's another positive[indiscernible] data point for that[indiscernible].

[Jeffrey Robert Carney, President, CEO & Director]

And if -- the advisers are smart. The reduction in the markets is a discount to get the client into the market. So their next thought[indiscernible] should be excited in growing it. So we'll continue to monitor it, but so far, it's -- there's nothing crazy going on.

[Scott Chan]

Okay. And just on your NCIB, you haven't bought back shares, I think, for like 5 or 6 quarters. With the market decline and IGM's talk to the client, how do you think about the NCIB right now?

[Luke Gould, Executive VP of Finance & CFO]

Yes, we'll be continually assessing what to do with our capital and whether it's share buybacks, dividends, debt repayment, you name it. Our goal is to maximize financial flexibility, number one, so we can capitalize on opportunities to make sure we're running and building our business. But right now, we don't see any share buybacks in our current plans.

[Operator]

No other further questions registered at this time. I would like to turn the meeting backward to Mr. Potter.

[Keith Potter]

Thank you, Patrick, and thank you for everyone participating on the call today. And have a very good weekend.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.