IGM Financial Inc

TSX:IGM

Earnings Call Transcript 2018-Q4

[Operator]

Please be advised that this conference call is being recorded. Good afternoon, and welcome to the IGM Financial Fourth Quarter 2018 Earnings Results Call for Friday, February 8, 2019.Your host for today will be Mr. Keith Potter. Please go ahead, Mr. Potter.

[Keith Potter, Senior Vice President Finance & Treasurer]

Thank you, Patrick. Good afternoon, I'm Keith Potter, Treasurer and Head of Investor Relations, and welcome, everyone, to IGM Financial's 2018 Fourth Quarter's Earnings Call. Joining me on the call today are Jeff Carney, President and CEO of IGM Wealth Management and President and CEO of IGM Financial. We have Barry McInerney, President and CEO of Mackenzie Investments; and Luke Gould, Executive Vice President and CFO of IGM Financial.Before we get started, I'd like to draw your attention to the cautions concerning forward-looking statements on Slide 3 of the presentation. Slide 4 summarizes non-IFRS financial measures used in the material. On Slide 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 it over to Jeff Carney, who will review IGM's full year results starting on Slide 7.

[Jeffrey Robert Carney, President, CEO & Director]

Thank you. Turning to Slide 7 on 2018 highlights, IGM achieved record-high adjusted earnings per share. 2018 also marked the second consecutive year where our 2 main operating companies gained market share. We're proud of our abilities to deliver investment fund net sales at $1.4 billion in a year that saw overall long-term industry net redemptions of $7.4 billion. We managed our expense growth for the year to 5% relative to 2017 excluding restructuring provisions. This is in line with the guidance provided on the Q3 call and was driven in large part by fourth quarter expenses related to IG Wealth Management's brand launch and ramp-up of our back office transformation activity. We are reaffirming our 2019 guidance of 4% noncommission expense growth and 3% in 2020. As I mentioned before, while there is discretionary spending that could be managed in a sustained market downturn, much of our spending is on business transformation that provides longer-term savings, and we are focused on servicing our clients in this environment as well as building new relationships.Turning to Slide 8 on the quarter. We ended the fourth quarter with total ending AUM of $149.1 billion. While the industry experienced a tough fourth quarter, we note that we are now sitting at $154.3 billion in AUM as of January 31, 2019. We continue to gain market share in Q4. Adjusted earnings per share for Q4 of $0.75 is down 5% from last year as markets turn negative in the quarter. In January 2019, we made an additional investment of $50 million in U.S. dollars into Personal Capital. IGM is the largest shareholder in this company, with over 20% ownership. We're very excited about the growth opportunity here. As at January 31, 2019, Personal Capital has $8.5 billion in AUM, $650 billion in aggregated assets and over 2 million users. We intend to enhance our disclosures on Personal Capital for our Q1 2019 results and will share more insights on upcoming calls.Slide 9 displays the performance of various indices and currencies which provides the backdrop for the industry we have been operating in. 2018 and the fourth quarter in particular brought market volatility and negative investment returns across major equity markets, including the S&P/TSX composite, which declined at 11.6% during the year. This volatile market caused the global trade tensions -- caused by global trade tensions, political uncertainty and concerns around the stage of the market cycle tested investor and adviser confidence. The beginning of 2019 has fared much better with major market indices rebounding strongly during January. The TSX rose 8.5%, offsetting over half the losses experienced last year. However, it remains well below its mid-peak 2018 numbers.Slide 10 provides context for the industry fourth quarter and annual net sales. Propelled by market volatility, the mutual fund industry ended the quarter with long-term fund net redemptions of $15.6 billion, down $19.5 billion from Q4 2017. As you can see on the chart on the right, the long-term mutual fund net sales rate also turned negative on the last 12-months-trailing basis. Industry ETF net creations remained positive during 2018 and the fourth quarter, though results in these product categories were also down year-over-year.Turning to Slide 11, on our results for the fourth quarter. Investment fund net redemptions were $225 million, down from net sales of $749 million in Q4 2017, which reflects the challenging environment. Adjusted net earnings of $180 million was slightly below $191 million in Q4 of last year. Q4 adjusted earnings per share were $0.75.On Slide 12, we show the segmented results for your reference. And now I'll go into the IG Wealth Management section.So turning to IG Wealth Management on Slide 14 and starting with 2018 highlights. We continue to transform IG Wealth Management in 2018, including enhancements to products, segmented pricing and compensation and the new brand launch. We also made strong progress towards our technology transformation, including launching a new client portal and completing our program road map for 2019. We are encouraged with the progress and have full agenda for 2019 including accelerating technology transformation and conversion to Series U unbundled pricing for all clients. 2018 net sales of $485 million during the year were strong given the industry context, and gross sales were the second-best annual results in our history.Turning to the fourth quarter highlights and the results. In November, we announced some targeted pricing changes that I'll speak more to it in just a moment. IG Wealth Management continued to capture market share as we focused on our high net worth solutions, which represents 48% of our gross sales. That's up from 45% in Q4 '17. We continue to experience solid asset retention with long-term trailing-12-months redemption rates that remains well below industry peers.Turning to Slide 15 on operating results. IG Wealth Management experienced net redemptions of $125 million for the quarter or 0.6% of average AUM, which is almost 7.5x better than the advice channel long-term net redemption rate of 4.7%. On a trailing 12-month basis, you can see that the positive 0.5% net sales rate for IG Wealth Management is also well above the advice channel. We have just reported January net redemptions of $39.7 million. We're entering the RSP season with investor confidence being tested, which has created headwinds. That said, we plan to be in positive net sales for the RSP season.Turning to Slide 16. High net worth solutions represents $41.5 billion of our AUM and 48% of total sales. We also continued to make great progress in delivering better beta and are focused on managed solutions, which now represents 50% of our AUM and 76% of our gross sales. Our unbundled fee structures, where the client pays the advice fee directly, now have $25.3 billion in AUM and account for 76% of our high net worth sales.Slide 17 highlights our Consultant productivity metrics for full year 2018. We've discussed on prior calls how we are transforming our distribution network. Over overall objective is to focus on our most productive Consultant practices and increase team size and team proficiency. We also overhauled our recruiting practices to emphasize the quality of the recruits at the top priority. On the left side of the page, you'll see an intentional result of these strategic changes. The first is to have stronger Consultant practices, which in 2018 was slightly below 2000; and second, having fewer but higher-quality new Consultants. Evidence for these improvements is reflected on the right side of the slide where you'll see that the productivity of our recruits were up 33% during 2018, and this builds on the 9% achieved in 2017. Gross sales per Consultant practice increased modestly. Overall, productivity increased 13% during the year.Slide 18 highlights the November 15 announcement of the pricing enhancements at IG Wealth Management. The announcements included adviser fee reductions to households with over $1 million in assets with IG Wealth Management. We are further enhancing fee transparency by opening unbundled fee options to all clients during Q3 2019 and expect to have substantially transitioned most assets to unbundled solutions by mid-2020. The changes are expected to result in a reduction in IG's annualized weighted average fee rate of 3 basis points starting in Q2 2019, beyond the recent trend. Luke will speak to this in his remarks.Our competitive positioning is now strong across client segments for the cost of advice and comparable product in the MER as we are now better than 50th percentile in both metric. Going forward, we see less pricing pressure on advisory fees, which should serve us well as we move to fully unbundled pricing this year. These pricing changes combined with our compelling product and service offering positions us well in the competitive mass affluent and high net worth space.Slide 19 highlights our client rate of return historical redemption experience. IG Wealth Management's long-term trailing-12-months redemption rate of 9.2% remains well below the industry average of 17.9%.I will now turn it over to Barry to discuss Mackenzie's results.

[Barry Sean McInerney, President & CEO]

Thank you, Jeff, and good afternoon, everyone. If you could please turn to Slide 21. I'll start with a few 2018 highlights from Mackenzie. Our transformation is now complete, which is following 5 years of hard work. We achieved a new all-time record-high mutual fund gross sales level of $10 billion and the best retail net sales in 20 years. Third-party advisers now rank Mackenzie in the top 3 for both mutual funds and ETFs. As we continue to execute on our strategy, Mackenzie is well on its way to being #1 and delivering operation -- operating leverage. And we're now focused on executing our strategy and pivoting in a competitive environment.For the fourth quarter, the market volatility proved challenging for the investment fund industry. In that context, we continue to gain market share. Investment fund net redemptions were $91 million. Mackenzie's retail investment fund net sales for $198 million, including strong contributions from both mutual funds and ETFs. This is in the context of long-term mutual fund net redemptions of over $8 billion for the advice channel.Mackenzie's investment performance as measured by Morningstar improved in the quarter with a number of notable star rating upgrades. And during the fourth quarter, multiple Mackenzie investment management teams were also recognized by Lipper and Investment Executive for their strong investment performance.Slide 22 highlights Mackenzie's operating results for the fourth quarter of 2018. Q4 mutual fund gross sales of $2.3 billion, an all-time record high, were up 4.2% year-over-year. Investment fund net redemptions of $91 million compares to net sales of $477 million last year. Mackenzie continues to capture market share versus peers. Our long-term mutual fund net sales rate of 0.4% exceeded both the advice channel and the overall industry, and if you included both ETF and long-term mutual funds together, Mackenzie delivered an organic net sales rate of 3.5%.Fast-forwarding to January, Mackenzie's investment fund net sales were positive at $30 million. So far the RSP season is off to a slower start than usual as advisers spend time with clients reviewing their existing position.Slide 23 provides details on our Q4 sales results. This quarter, we have displayed retail flows by category in the table to help you understand Mackenzie's broad-based strength in this very important space. Mackenzie captured 7.4% advice channel long-term mutual fund gross sales during the quarter, which represent a significant increase relative to the 2017 levels of 5.4%. And our gross sales capture rate improved in 4 of 5 asset class categories. Mackenzie also recorded its ninth consecutive quarter of retail investment fund net sales, which totaled $198 million in Q4, in a quarter where nearly all peers experienced mutual fund net redemptions.On Slide 24, Mackenzie's ETF AUM was relatively unchanged quarter-over-quarter as positive net creations from retail and Mackenzie mutual funds were offset by market returns and some rebalancing from IG and IPC. Mackenzie's full year 2018 ETF net creations were the third highest in the industry in Canada among the 33 industry participants.On Slide 25, Mackenzie's long-term investment performance remains solid. Over 50% of mutual fund assets are in the first or second quartile of our 1-, 5- and 10-year periods. 47% of Mackenzie's AUM is in 4- or 5-star-rated funds, the fourth highest in the industry, and up from 38% the previous quarter. And focusing on F Series, which is the most relevant for the IIROC channel, Mackenzie is very well positioned with 17 of our 20 largest funds being rated 4 or 5 star by Morningstar, and 9 of these funds are rated 5 stars.In Slide 26, you can see that our growth-oriented boutiques as well as the global equity and income and fixed income teams continue to have a significant portion of AUM in 4- or 5-star funds. Ivy's investment stock performed particularly well during the last quarter of the year, leading to Morningstar upgrades to 4 stars for some of Ivy's largest funds. Our performance in downmarkets is the norm for this boutique.Finally, Mackenzie was recognized for industry-leading performance with a number of achievements at the 2018 Lipper Fund Awards. In addition, Phil Taller, the leader of our Mackenzie growth team, won the Investment Executive's 2018 Mutual Fund Manager of the Year.I'll now turn it over to Luke to review IGM's financial results.

[Luke Gould, Executive VP of Finance & CFO]

Great. Thanks, Barry. Hi, everybody. So moving to Page 28, I don't have much to add relative to what Jeff said, but just would indicate at the chart on the left and remind that we did see an increase of 3.5% in our assets in January, which recovered about half of the 6.6% decline. And I'd also note, as of yesterday, we're up another 1% in client returns in February, so we've now covered about 70% of the Q4 decline.Moving to Page 29, you can see our earnings in millions of dollars in EBIT on the left, and you can see our margins on the right. And I'd highlight 2 things. First, starting on the left chart, number one there, I'd call out the net investment income and share of associates earnings at $47.8 million in the fourth quarter and would highlight this is down from Q3, and this does that move around from quarter-to-quarter, but I'd call out a few items in there. Now first, we do mark-to-market gains and losses on seed capital through earnings, and we had losses of $3 million from equity market declines in the quarter. We also have some lumpiness in our proportion of share of [ wherewith like co-earnings ] given that we record analyst estimates for each -- earned each quarter and we true up for any difference in the subsequent one, and this quarter did have $3 million of negative true-up from Q3. I will also talk to just some lumpiness in the net investment income line in IG's mortgage business on the coming slide.Second, you can see noncommission expense of $269 million in Q4 and, as mentioned by Jeff, we are in line with our full year guidance, and we do have -- did have Q4 costs associated with brand relaunch as well as incremental costs associated with our transformation program. And I'd note that the brand relaunch is obviously designed to drive business growth, while the transformation program is designed to bring long-term cost savings to shareholders.On the right, I'd say first at the top, the gross revenue rate was stable for IGM overall, and I'm going to speak a bit more to it -- to that number in the IG section and Mackenzie section. But I call out the commission expense line, and you can see it was 67 basis points in Q3 and it's up to 71 basis points in Q4. And I'd remind that on our last call we made reference to changes to field management at IG, where we reduced the number of regional directors and that we had a benefit in our Q3 results related to this, and we're going to see some offset in Q4. And we did see that offset as we did reassign the responsibilities from these regional directors. And we have recruitment and training of dedicated compliance and recruiting resources that offset those reductions in Q3, and I'm going to speak more to that in the IG section.Moving to Page 30, you can see the income statements for IGM. The first 3 points you can see on the right, I've covered, but I would speak to the fourth one. And you can see, I think everyone's noticed, we did have a lower effective tax rate during the period, and this was a result of favorable developments on certain tax matters, and our tax expense reflects $5 million related to this. Going forward, we expect that 22% would be a more appropriate guidance, but we did have those favorable developments in this quarter's results.Moving to Page 31, I'm going to spend a bit of time on this slide because there was such movement in Q3 and Q4 on it. So first, I'd highlight the annualized management and admin fee on the left of 201.4 basis points. That's very stable in relation to Q3. And you can see at the very bottom row, we did continue to see migration of the composition of our clientele in favor high net worth clients. And so there was some very slight movement but, overall, very stable. And as highlighted by Jeff, we did, as everybody knows, introduce our segmented pricing for households in excess of $1 million. We announced it in November. It becomes effective Q2, and it is going to reduce this amount about 3 basis points during -- in Q2. And then now a bit of time reconciling the asset-based comp rate and the sales commission rates. So starting at the left -- I'd remind, we did reduce our regional director complement from 92 people to 67 in the second quarter, and we did see the benefit in terms of cost savings from this in Q3. And you can see the rate going from 49.5 basis points to 48.5, and that was $2 million per quarter. Also in relation to those changes, in the commission rate line, you can see we went from 1.8% to 1.7%, and that was another $2 million in savings. So $4 million in savings in Q3. And again, that was timing as we offset a lot of that through introducing centralized compliance recruit resources, which ramped up in Q3 and were fully in effect in Q4. And that's what caused all of those resources there on the asset base comp line, and that's what caused the rate to rise. In addition to this, we did have some nonrecurring net costs associated with that same initiative of about $2 million during the quarter, and that was in that same asset-based comp line. And I would remind, those changes we made to regional directors and change their responsibilities was designed to enhance field management effectiveness while also providing long-term net cost savings, and we're quite optimistic that we're going to be successful in both those fronts.I have moved now to Page 32, which has IG's income statement, and I've commented on the item 1 and commented on item 2, on the fee rates and on commissions, I would give one further comment on net investment income and other. You can see we earned a $10.9 million this period, down from $13.3 million last quarter. And I would note and remind, this is largely our mortgage results. And while we employ hedge accounting and we don't have the same element of volatility that we used to, there are still areas where we do have accounting mismatches and a period where rates change in different directions. We have some fair value adjustments that affected the quarter. You'll see this in the MD&A, and I'd point to Q3 as being more indicative of the ongoing run on this business.Moving to Page 33, I'd highlight Mackenzie's weighted average fee rate on the left at 80.5 basis points, very stable with Q3. And I'd remind that we did introduce retail pricing enhancements in the second quarter. I also note, in relation to Barry's remarks, the retail business is performing very well, and this does have a bearing on the weighted average fee rate given that higher-margin business.And then on Page 34, you can see Mackenzie's P&L. And the only item I'd highlight again is if you go to net investment income in the second row from the bottom, you can see $3.1 million in losses, and that was all seed, and there was nothing unusual there. It was all a decline in line with equity market decline during the period.I'll now turn it back to Jeff.

[Jeffrey Robert Carney, President, CEO & Director]

Great. Before we open the lines for questions, I'd like to wrap up by providing a brief look forward on Slide 35.Market volatility is testing investor and adviser confidence in a way we haven't seen in a number of years. While January has brought with it strong equity market rally, some of the underlying concerns such as trade tensions and political uncertainty remain top of mind today. It's in these types of environments where clients need the confidence that comes from working with a financial adviser and having well-developed plans. And advisers need the right product solutions and support to meet the needs of investors' increasingly complex financial lives. Across IGM financial, we remain focused on executing against our client-centric strategies and one IGM approach to delivering future earnings growth. This management team has demonstrated its ability to outperform peers and gain market share through a range of financial market conditions. The strategic decision and business investments we have made over the past 5 years have reignited our operating companies. The work we're doing on our client-facing technologies and back office has only begun. And 2019 will be a very important year for us as we deliver on our major promises.As we mentioned, Mackenzie's transformation is complete. The company is well positioned and focused on executing against its growth strategy. Mackenzie is primed for operating leverage and earnings growth. IG Wealth Management's transformation continued into 2019, adding to the impactful actions already taken to position the company to capture greater share of Canada's $4.5 trillion wealth market and deliver long-term, profitable organic growth. We expect 2019 to be a year of continued improvement for IGM Financial, and I look forward to sharing our progress with you.With that, I'll now turn the call back to Keith Potter.

[Keith Potter, Senior Vice President Finance & Treasurer]

Thank you, Jeff. And Patrick, if I could just have you open up the line for questions.

[Operator]

[Operator Instructions] The first question is from Geoff Kwan from RBC Capital Markets.

[Geoffrey Kwan, Analyst]

My first question is on your expense growth, kind of reiterating your guidance there. And I understand, Jeff, your comments around a lot of this stuff is kind repositioning, reinvigorating the business. But historically, I thought, in the industry, when you had markets be down, a little bit more volatile, often the kind of a comp or other aspects, the consensus, can kind of come down a little bit. So was that reflected in the Q4? Or is there something else there as to why you're just reiterating the 4% for 2019?

[Jeffrey Robert Carney, President, CEO & Director]

No. There is no abnormal issues, and that 4% is the right number.

[Luke Gould, Executive VP of Finance & CFO]

And Geoff, do you have an additional question as just how variable -- or what level of variability is in our noncommission expenses? Is that part of your question?

[Geoffrey Kwan, Analyst]

Yes, like I said, I just kind of thought, historically, as the expenses often come down a little bit when you had the markets kind of behave as they've been.

[Luke Gould, Executive VP of Finance & CFO]

Yes, we do have small elements for our noncommission expenses, some advisory fees. But absent that, for the most part, it's not variable with asset levels, and that includes our people cost. A lot of the drivers on our people costs in any given period relate to things like market share, investment performance and the like. But as far as having the management team and all of our organizations tied to AUM, that's not how we pay our people.

[Geoffrey Kwan, Analyst]

Okay. Okay. Second question is on the IG side. The noncommission expense, it was kind of $145 million Q1 to Q3 last year and then obviously had an uptick with the rebranding stuff to $160 million. How should we think about how that number is going to evolve through 2019? Is it going to be kind of gradually bringing it down? Is that going to be a step function? Or what's the kind of the sense that it should be?

[Jeffrey Robert Carney, President, CEO & Director]

It will be in the context of our hitting our targets that we'd shared with you before. So we still would be -- that our plan is to deliver to the 5% going to 4% going to 3%.

[Geoffrey Kwan, Analyst]

Yes, but what -- sorry, Jeff. But within the quarter, so is it going to be a gradual decline from the $160 million to get you to the 4%? Or is there kind of going to be a seasonality on how that expense plays out?

[Jeffrey Robert Carney, President, CEO & Director]

I mean, the seasonality is really around the RSP season when you elevate your advertising expenses. But outside of that, it's -- we're executing our programs, and there might be a capitalization expense that come through as we implement on our projects.

[Luke Gould, Executive VP of Finance & CFO]

And Geoff, it's a very good question on timing. And I'd guide you, we gave guidance throughout the year that we were kind of under our guidance for the first 3 quarters and we didn't have what happened in our brand relaunch in Q4. So I would look to last year's seasonality for IGM as being more indicative to what you're going to see from us in 2019.

[Geoffrey Kwan, Analyst]

Okay. And this will -- if I can ask one last question. Just given where that share price is and your balance sheet being pretty healthy, has there been thought around doing more share buybacks?

[Luke Gould, Executive VP of Finance & CFO]

Yes, we have been reflecting on that, Geoff. But you know our view on our stock: we're buyers, and we're just trying to manage all the opportunities that we have to deploy our capital against that very resisting one, which is do we engage in share buybacks at this time.

[Operator]

The next question is from Gary Ho from Desjardins Capital Markets.

[Gary Ho, Analyst]

My first question is just on your advertising spend. Can you give us an update and -- on how effective this initiative has gone? Whether that's kind of new client leads or new clients coming into the system or whatnot? How do you measure the success of this program?

[Jeffrey Robert Carney, President, CEO & Director]

I'll start with some of the facts. The have fully integrated relaunch campaign reached over 85% of our target audience, and hopefully, everybody on this call saw some of our commercials along the way. And so -- and it was right around the RSP season, obviously, where a lot of transactions take place with clients. So generated very positive sentiments, and we -- the early third-party tracking shows that our value prop is resonating and has begun to translate into increased client acquisition. And there's find adviser searches on investors groups from the Internet have significantly -- it's up over 20% from the previous year. And 40% of that, we have to -- can be directly attributable to our digital marketing plan. And we're realizing significant improvements in cost per acquisition as a result of that. And we feel very positive about the program, and so we look forward to seeing the increased activity. We've already seen it in the short-term, but we expect to see more of it. And obviously, this isn't a onetime event. This is an ongoing investment that we're making in our brands over time to compete against the banks as well. And so we're excited about the response we've had from the advertisers, and we'll continue to update you as we go forward.

[Gary Ho, Analyst]

And then maybe that's a good segue into the kind of the outlook that you kind of provide for the RRSP season, positive flows. Can you maybe comment on that what you're seeing on the front lines given, I guess, some nervousness from investors and maybe relative to last year? Or kind of give us insight.

[Jeffrey Robert Carney, President, CEO & Director]

We worked hard early on even before the season started to make sure that we [ predicated ] our Consultants, and we look at where RSP opportunities wherever we didn't have them and went in deep on all of those things to identify those opportunities. But mostly, it was energizing the field. And our leaders got out there and talked to them about the importance of this type of contribution because of the benefits you get from contributing to RSPs. And so it's early, but it's really picking up now. So it's a slow start from here, but we're starting to see some increases in the last 4 weeks, and it's accelerating.

[Gary Ho, Analyst]

Okay, and then switching gear. My last question, just on the Personal Capital. What is the strategic importance of that investment to IGM? Are you planning to leverage some of the technology expertise within the company? Or how should we think about the increase in ownership there?

[Jeffrey Robert Carney, President, CEO & Director]

Yes, I mean, I think you should -- first thing you think about is that we're-- we really like this company. So we -- I'm on the board of the company and learning a lot in that. And so we think it's a company that has a really unique model, and I don't know how -- if people have done some homework on it or not, but what they'd done is offered a free aggregation service. And there's a big amount of clients who have signed up for that free service, and it gives you an integrated statement. And so then the company can then look at that integrated statement and call -- use their advisers to call them and they can pick whatever segment they want to pick because it's a variety of different types of financial consumers that are using these tools. But they go in there and convert them in -- through an adviser, they convert into a client. And so it's a very intelligent way to use advertising to tell the story of Personal Capital and then translates into new clients that then translates into economics for the firm. And so it's really exciting. And then you can target the clients you want. So in this case, in this company's case, their target is in roughly the $250,000 to $1 million and so -- and versus the -- some of the robo-advisers where they're more like $30,000 to $50,000. So this is a mass affluent, high net worth model that's using the free aggregation service as its value proposition to then convert people into clients. And they're just doing it over and over again every day. And we're helping them to tell that story. And they've got an incredible technology stack that they've built. And the founders of this were the founders were Intuit, so if anyone used TurboTax or any of those kinds of things, that was the founder who's created this company. And it's not easy to replicate what they've been able to do in their secret sauce. So we think it's a company that we'll continue to monitor and watch, but longer term, we'd like to see how they do, and if they do well, we'll probably continue to invest more.

[Gary Ho, Analyst]

And I think -- I forgot if it was last year or the year before, there were speculations that they might go public. Is there any update on that? Is that the plan? Or...

[Jeffrey Robert Carney, President, CEO & Director]

No, and I understand. I mean, I think it's the market volatility has made that a little more interesting. And then -- we're not -- now that we have continued to invest in them, they've got enough run rate to keep going. And so we're in a very good place in our optionality here, and we're excited about where this could go.

[Operator]

The next question is from Paul Holden from CIBC.

[Paul David Holden]

So another kind of more specific question on the SG&A over the last couple of years has been a little bit of a change in pattern in terms of the D&A expense that get included in SG&A. So my thinking is that probably should increase in '19 given the level of investment in '18 but just wanted to verify that.

[Luke Gould, Executive VP of Finance & CFO]

Good question, Paul. Interestingly, yes. The nature of what we're spending on, there's actually less capitalizable, if that's where your question going, I think, to amortization. But I would highlight a lot a disclosure we've introduced on IFRS 16 in leases. And so that's something that you will be seeing in January 1, is we have a lot facilities across the country, and so we have about $100 million in lease obligations that's coming on balance sheet as both an asset and a liability and what this means is we're going to be placing an element of what is now in the cash component of the -- of our noncommission expense, is going to be partly amortization. And that will be worth about $25 million, that reclass, I'd call it.

[Paul David Holden]

Okay, but that won't impact the gross amount? Or will it because the pattern's a little bit different?

[Luke Gould, Executive VP of Finance & CFO]

It's slightly lower, if anything. But it's more or less net neutral. I mean, it's a reclass. But your other question on what we're investing in, so much of what we're spending on transformation and otherwise is not stuff that's capitalized so you can expect most of our spending is actually period recognized.

[Paul David Holden]

That's helpful. In terms of the redemption rate at IG, I mean, you highlighted that it remains well below the industry, and it does, but it has picked up a little bit recently. And maybe that's simply a function of market volatility and should be expected. But my question is, how do you look at the redemption rate? Like, is that simply money going from one IG fund to another or money from an IG fund to cash with an IG adviser? Or there any kind of addition leakage out of IG and people are taking money back in the deposits? Maybe some thoughts around that.

[Luke Gould, Executive VP of Finance & CFO]

And Paul, that question was on the IG redemption rate, right?

[Paul David Holden]

Correct, correct.

[Luke Gould, Executive VP of Finance & CFO]

Yes, it's -- you know, we desegregate this in many ways. So I'll first start with, part of your question is, what is this? This is money that's leaving the IG [ focused ] funds. So this is money that's leaving our dealer, is the way that you can think about our dealers. Second, we break it down into a number of dimensions. The most key for us is account closures versus partial. And when you think of something as an account closure, that's a client who's leaving us and leaving their planning relationship. And the other component is, in many ways, fulfillment of the investment, meaning, somebody's taking money out to fulfill the initial objective or otherwise doing something with it, consumption or otherwise. And what I'd highlight in what we're seeing right now is that increase from 8.7% to 9.7% in the last year is a stable account closure rate, and that's less than half the rate and an increase in those partial redemptions. And it does correlate, as you can see, with industry activity and a lot of the sentiments and confidence that we're seeing. So that's what we know, and that's what I tell you on that one. I don't know if that's helpful.

[Paul David Holden]

That, it is helpful. So then the follow-up question then in terms of that uptick of roughly 1 point or so year-over-year, are there solutions you can to provide help reduce that rate, as again, whether it's a function of market volatility or otherwise, to keep it within IG wealth?

[Luke Gould, Executive VP of Finance & CFO]

The biggest thing, to the extent that we've got -- on the account closure, in other ways, we've got track of where the money's going, if it was going to a competitor. But on this rate, it is tracking sentiment. And that chart on 19 that Jeff walked through is really making that point that were out there day in and day out making sure people are committed to their plan. And so that's what you'll see this environment, is there's a little uptick in a more volatile environment. But we think that's the hallmark of what we do, is making sure we're working with people and they're committed to their plans. And we don't see any noticeable uptick in a period like this.

[Paul David Holden]

Okay. Next question then for -- to Mackenzie. I want to ask a couple of questions on sales into the IIROC channel, specifically. You mentioned the focus on F Series because that's what IIROC advisers want. So maybe you can talk a little bit about penetration rates into IIROC because, as I understand, for the industry, notwithstanding the recent quarters, it's a long-term downtrend in terms of the demand for mutual fund product in that channel.

[Barry Sean McInerney, President & CEO]

Yes, I'll speak in general terms, but it's a good question. Thank you. As you know, we're a multichannel firm and as we talked to on the retail side it's focused on IIROC and MFDA, and the integrated firms as well, those have had most. And we're being -- last few years, we're being even more particular to understand their specific needs. For instance, MFDA, which has always been good to us at Mackenzie for years. We have had a good market share there. We launched fund and ETFs so they can get assets to ETF via mutual fund as an example. And we've launched Precision tools last year to help the advisers to have a desktop way of developing portfolios as we focused to help them with portfolio construction and other component parts thereof. IIROC has been a real growth area for us, actually, for 3 or 4 years now. We, historically, have -- well before Jeff and I arrived, we were -- you can hardly -- we were more of an MFDA shop at Mackenzie. Now we're very nicely balanced. And the IIROC channels, again, more ETFs. We started our ETF business, actually, 3 years ago with particular focus on the IIROC channel. So that -- we're doing well in ETFs overall. As you know, that in retail segment is mostly an IIROC play. Although, of course, now we're broadening our ETF distribution, institutionally. And then the liquid alternatives that you're well aware of that story, about to be the first out of the gates and thinking -- all of us thinking that's going to be a high-growth area. Again, that level of sophistication associative alternatives, which really helps in overall portfolio when it comes to investors' risk adjustment return, is more than IIROC play. So I don't know if I could specifically comment on the market share per numbers, but you can safely say that our market share gains that we've had now for quite a while, and their accelerating, has been across the board and across all the channels. That's by design as we again be more specific about needs that are varying now between those channels. And I think we've done a good job to date. And finally, as you know, with an ability to hit the marketplace with both mutual funds and ETFs, it seems to be resonating. I think we're one of the few firms that's growing both very quickly, but we're doing so with the same distribution channels and team at Mackenzie, same manufacturing, the same operations. It's really provided us with a nice competitive advantage to hit the marketplace. And obviously, in the upswing in both, ETFs obviously did benefit than mutual funds last year in net creations or net flows. But our expectation is they're both going to grow going forward, each a little faster because we're newer. And again, we've been saying this for quite some time now, but our approach to marketplace, as a solution provider is to get out there and use both of them as component parts in helping advisers portfolios. I don't know my answered your answer specific questions, but again, the market share is by design and have been translating into increasing market share across the multiple channels that we've been penetrating.

[Paul David Holden]

Okay. No, that does answer my question. But I will give -- provide one more follow-up do that. And I mean, the other thing you hear about IIROC channel is it's particularly become price-sensitive. And that probably plays into the ETF trend you talked about. But sounds like you've -- you're having success with other solutions. Liquid alternatives is one you pointed to. If you have a good differentiated product or solution for IIROC, is it still possible to sell into that channel that sort, would call it, a traditional fee type rate?

[Barry Sean McInerney, President & CEO]

Yes, I mean, I would say that, again, our experience with the IIROC has been -- and you've seen the market share gains and the sales have been very broad-based by asset classes. Some of those traditional, again, strong performance. We've -- you know we've made moves on our pricing to either simplify or to lower to remain competitive. We'll always monitor that and move when we have to. We think more pricing reductions will occur in Canada but will be gradual and will relax accordingly. So we think you can -- I see your point. It's a good question. But we think, just taking IIROC specifically, yes, more focused on transparency on fees when you go into a lower-return environment than we all expect for the next 5 or 10 years than there is more increased scrutiny onto the fees as a percentage of the overall return. But our success has been broad-based. And even within IIROC, both the more traditional type of our boutique offerings that have 4 or 5 star, obviously, competitively priced, and the new offerings, the ETFs and the alternatives. So I think we do help in planning still. In our experience, advisers, they appreciate building blocks, appreciate the strong performance, and they need to have a blend of mutual funds, ETFs and traditional asset classes and new ideas like the alt space, which will be a real particular focus for us going forward.

[Luke Gould, Executive VP of Finance & CFO]

Actually -- and Paul, before the other one, I'd go back at Page 23. I think that's an important point you're on. And when you look at the Mackenzie's retail disclosure that we gave this period, which is this new disclosure for us, and you look at the mutual fund sales and we've highlighted the gross there, I guess it's key to say that like over half of those sales are to the [ big 6 ] IIROC firms, and the IIROC-licensed advisers is really kind of the core of who we serve. And when you look at the product categories where people are choosing Mackenzie, it's broad, but it's more in global equity. Barry already highlighted the success with revenue we made in those families, whether to be U.S. mid-cap, whether it be Ivy Foreign, et cetera. And these are our bread and butter. As far as its margins and pricing, we're very competitive, but this is what we're selling there, and that is our core channel.

[Operator]

The next question is from Graham Ryding from TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

So I just want to follow back on that IFRS accounting question at the risk of getting a little technical. Did you say $25 million was moving from the other line in noncommission to the amortization line in the noncommission bucket at IG?

[Luke Gould, Executive VP of Finance & CFO]

Yes, Graham, that's right. With IFRS 16 on leases, we basically capitalized all of the operating leases. And so now what will be recorded is amortization and what used to be a lease expense.

[Graham Ryding, Research Analyst of Financial Services]

Okay, so EPS relatively neutral but benefit the EBITDA by $25 million.

[Luke Gould, Executive VP of Finance & CFO]

Yes, and the largest piece of that is amortization. There is also a piece that's obviously interest, but that's all a reclass.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Could you -- staying with IG, could you remind us just in terms of your technology transformation project? I guess, what you've completed to date and what's to come? And maybe a time line?

[Jeffrey Robert Carney, President, CEO & Director]

Yes, Mike's been -- Dibden's been busy. So that's the good news. We've launched a new industry-leading fund accounting service, successfully, we implemented. So as you know, we've put like write-down on a previous venture of building our own. So that's now up and running, and it's right at the front of the industry. So we've got a modern fund accounting capability which will enable products and everything else that we do. We've got robotic processing automation going. So we've got 6 bots planned for the end of the year, and they will, obviously, do their job, and therefore, that will reduce human cost and scale us as we go forward. We've got a pilot rollout to our advisers for account opening, transfers and account maintenance, and the full rollout will be Q2 2019. And we've got our new online portal going, and it's now available to client so they can get their statements and tax documents on their own and go into the site and fill that address -- and access all of that. And our new digital advisory desktop powered by Salesforce is targeted to roll out in the second half of 2019, and that will be a huge productivity driver. So Mike's been busy, and he's done a great job in executing. And his team, they've been together now for probably 18 months, and they're really getting up to full productivity.

[Graham Ryding, Research Analyst of Financial Services]

Okay, sounds like a lot's happening in 2019. Is it largely done by the end of this year? Or is it still a multiyear process?

[Jeffrey Robert Carney, President, CEO & Director]

A big part of it will be done in the first 2 years, 2.5 years.

[Luke Gould, Executive VP of Finance & CFO]

Yes, and a lot of 2019 is really executing on the vision and the design. So I think, through this year, there will be a lot of clarity coming to you on exactly what we're doing on outsourcing and automation. So it is really a year of lifting in the year. We'll be communicating with you on the way.

[Graham Ryding, Research Analyst of Financial Services]

Okay. Great. And then just my last question. The IG Consultants, just what's the expected attrition dynamic? Would you expect the numbers to continue to decline in 2019 or stay where it was ?

[Jeffrey Robert Carney, President, CEO & Director]

Great question. So we want to, basically, have 2,000 team. And I think I've said this early on when I joined, that -- there's the IRA -- not the IRA, RIA model in the U.S., you can look at. But our goal is to have very diverse skills within each team so that there's people who are insurance specialists, there's people who are tax knowledgeable, there's people that are -- and these -- each of these 2,000 teams to grow very large in assets and what they're responsible for. So it's up to their energy, their passion and all the capabilities that we bring to them to grow their team and their assets as big as they want to grow them. So there could be a very, very large team with lots of asset at some point in our company, and we already have very large ones already. But it's -- so we want to scale that up. So that's a big part of our story. But we also want to have it at 2,000 because if you don't have a cap, then we'll get back in to the story of always just recruiting more and more. Now if we get to 2,000 teams and every team's got $500 million of assets or something, then we'd start thinking about how we're going to go from there. But it's -- but that's how you should think about it. And then as I said earlier, the new recruits that are coming in are -- the screening, the process we run, because, you may not remember, but we centralized recruiting so now that we have professionals that are actually doing all the interviewing. And that's why the productivity's going up, and it's showing up in the numbers. So we feel really excited about where we are. But if you ask, you should think about 2,000 teams and more productive because of the skill sets that are inside those teams.

[Graham Ryding, Research Analyst of Financial Services]

Okay. That's helpful. And when you say team, like, I look at your numbers you break, are referring to that greater than 4 years Consultant practices?

[Jeffrey Robert Carney, President, CEO & Director]

Correct, yes.

[Graham Ryding, Research Analyst of Financial Services]

Okay. So the new Consultants that are less than 4 years, as to your recruitment pipeline, you're not referring to that?

[Jeffrey Robert Carney, President, CEO & Director]

No. And -- but the new recruits that we did bring in are substantially higher in productivity than the historic ones were.

[Operator]

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

[Scott Chan]

Yes, Jeff, just going back to the IG Consultants. Is it stable going forward? I guess the productivity ratio is going to be more important. And you mentioned it went from 9% to 13%. And kind of when you envision your full ninth inning of this IG revamp, kind of what target are you -- are you targeting on that productivity ratio?

[Jeffrey Robert Carney, President, CEO & Director]

It's more -- we've got a goal for the organization, and then we'd look at each team on their own. And some are going to be -- they'll be a diverse group of that, but all of them are going to have a threshold of a certain amount to stay within that context. So that way I think about it is if you're doing your modeling and things, just 2,000 teams and they're going to grow. And you'll see the numbers every quarter as talk about them, and we'll give you more color as we go.

[Scott Chan]

Okay. And Barry, just on the liquid alts, can you just update just us on the traction that you guys were first out of the gate? And you mentioned that could be like a very, very big product line, and I agree as well too. And maybe, just maybe, talk about potential demand or potential liquid alt funds that could be in the pipeline that you could be suited for the marketplace.

[Barry Sean McInerney, President & CEO]

Yes, sure. It's a great question. Yes, we're very positive on that segment. It's -- there's some that say that it might grow to a $100 billion size in Canada at some point in the future. So the -- and you're probably aware of what we launched last April as a multi-strategy liquid alternative. In other words, it consisted of a number of sleeves in it. Our experience, Jeff and I, in the U.S. was the multi-strategy category is the deepest category for liquid alts in the U.S. It allows an adviser to have it all put together for them so they can to plug it into a portfolio as opposed to having to deal with all the different sleeves. So it is an educational sell. We're on -- we're approved on multiple platforms now. Flows are coming in. Like, we're over $400 million in our, we call it, MS, our strategy, the multi-strategy. What -- the way we designed it, though, is that each of these sleeves itself, their track record started from the day that we launched in April. So what we tend to do, which we will message and convey in due course, is start to offer some sleeves as individual offerings when we think it's appropriate to do so because the multi-strategy consists of long, short, global macro and market neutral. And they're all put together in one holistic solution, but that design allows us to pull them out and launch them individually if need be. So we'll monitor the demand for that. But now we're just really focused on the multi-strategy, obviously -- principally, in the IIROC channel. And it's been well received. And you know what, other competitors are launching an app, and that's a good thing because all it's going to do is educate quicker the industry. And there's a lot of different ways you can do this. And so we'll -- collectively, the industry will get up to speed quickly on it. And we're very confident we'll gain our fair share of the market share, and it should be a good -- a nice growth area, and the fees are healthy and justifiably so given what they can do to -- with uncorrelated. Particularly, as you know, equity is -- and we're getting towards of the end of the bull run. We know the story. Interest rates, although they stopped a little bit rising, but at some point, they could start rising again. So you've got these liquid alternatives that are uncorrelated to both stocks and bonds. And they're a really nice sleeve to put into an overall portfolio.

[Scott Chan]

Right. Okay. And just lastly, Luke, just on the interest expenses on the P&L, and I haven't found it yet, so maybe you can help me out. It's been very variable over the last 2 quarters. Is there something that causes that variability that I'm not aware of?

[Luke Gould, Executive VP of Finance & CFO]

You saying on the interest expense?

[Scott Chan]

Yes, on the interest expense line.

[Luke Gould, Executive VP of Finance & CFO]

Yes, we did some restructuring of our debt that we're really proud of earlier in the year. So we had $375 million that was coming due in March of this year. We redeemed it early, and we partially funded it with an issuance of a 30-year deal that we did in July. And so that noticeably took down our interest expense in that restructuring. And right now where it's heading, it will -- level stayed after that restructuring we did.

[Operator]

There are no further questions registered at this time. I would like to turn the meeting back to Mr. Potter.

[Keith Potter, Senior Vice President Finance & Treasurer]

Thank you, Patrick. That will conclude our call, and thank you for your participation today and enjoy your weekend.

[Operator]

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