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IGM Financial Inc
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Please be advised that this conference call is being recorded. Good afternoon, and welcome to the IGM Financial Fourth Quarter 2019 Earnings Results Call for Friday, February 14, 2020. Your host for today will be Mr. Keith Potter. Please go ahead, Mr. Potter.
Thank you, Melanie. Good afternoon. I'm Keith Potter, Treasurer and Head of Investor Relations, and I welcome everyone to IGM Financial's 2019 Fourth Quarter Earnings Call. Joining me on the call today are Jeff Carney, President and CEO IG 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. Slide 4 summarizes non-IFRS 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 the fourth quarter results for IGM Financial.And with that, I'll turn it over to Jeff Carney to cover IGM's full year 2019 and fourth quarter results, starting on Slide 7.
We finished the year with record-high AUM of $166.8 billion and AUA of $190.2 billion driven by the best financial markets improvement since 2009. We had investment fund net redemptions of $142 million. IGM's adjusted earnings per share were $3.19 during 2019, which was down slightly from our record high in 2018. I'm pleased with the progress we've made in our business transformation in 2019 that is further improving the client and adviser experience. We achieved these enhancements while managing non-commission expenses growth to 3.3%, which was better than our guidance of 4%. We are maintaining our 2020 expense growth guidance of 3%.Turning to Slide 8 for Q4 highlights. Total AUM and AUA both increased 3% during the quarter. Investment fund net redemptions were $141 million. IGM's Q4 2019 adjusted earnings per share increased 12% year-over-year to $0.84, a record-high Q4 result. IGM was recently named to CDP's A list as a leader in the disclosure and management of carbon emissions. We are the only Canadian company on this list. We have also been named to Corporate Knights' Top 100 Global Sustainability Leaders List. We see sustainability and climate-related topics of growing importance to all our stakeholders, and we'll continue pursuing opportunities to make a positive impact.Slide 9 highlights the performance of major equity and fixed income indices. Most equity markets were up during the first quarter of 2019, capping off a strong year during which our clients earned investment returns of 13%. January client returns were a positive 1.1%. And so far, February has been an even stronger month for client returns. Turning to Slide 10. I start by reminding that the industry experienced just over $15 billion of net redemptions during Q4 2018, with severe equity market declines. This large outflow has rolled off the 12-month trailing net sales rate, driving the industry net sales rate up sharply. The industry advice channel experienced long-term mutual fund net redemptions of $0.8 billion during Q4, up $7.4 billion from Q4 2018. Strong equity market performance and improved industry flows should support a better RSP season than we saw last year. Turning to Slide 11 on our results for the fourth quarter. Record-high average AUM of $164.5 billion increased 7.6% year-over-year. Investment fund net redemptions were up $141 million during Q4 2019 and were an improvement over net redemptions of $225 million last year. As I mentioned, IGM's Q4 2019 adjusted earnings per share were $0.84, up 12% from Q4 of last year, and represents the highest fourth quarter in our history.Slide 12 contains the breakdown of IGM's quarterly results across our segments. I'd highlight that earnings at IG Wealth Management and Mackenzie were up -- both up in the quarter relative to Q4 2018. I'd note that the Corporate and Other segment reflects the inclusion of IGM's share of Personal Capital losses of $4.5 million, which we began equity accounting for January 2019. Excluding this amount, earnings increased strongly across all segments. Turning to IG Wealth Management's full year 2019 and Q4 2019 highlights on Slide 14. AUM reached a record quarter-end high of $93.2 billion, up 2.6% during the fourth quarter and 12.1% for the full year of 2019. IG's Q4 gross client inflows increased 7.7% relative to last year as we continue to have success attracting new high net worth households, which has driven improvements in consultant productivity. We're also seeing an improvement in gross and net sales during February relative to last year. Finally, IG achieved a number of important milestones during 2019 on our journey to modernize the company and deliver better client and adviser experiences.On Slide 15, we're introducing a new view of client activity which covers total gross and net flows from IG clients. This view is now relevant with the recent launch of the IG advisory account during Q4. This new single-fee-based account enables all clients to hold our unbundled managed solutions, high-interest savings accounts and other assets. Going forward, fees will be earned on assets within the account. On this basis, gross client inflows of $2.5 billion were up 7.7% year-over-year, and net client outflows were $112 million.Slide 16 includes some additional perspectives of Q4 gross sales. Sales into our high net worth solutions increased to 27% and to $1.3 billion. Better beta also remains a focus with managed solutions representing 84% of our long-term gross sales. Slide 17 provides more insight into how our client segmentation has shifted since 2016. I have 2 main points on the left chart. First, you can see that since 2016, we've increased the emphasis on acquiring new households with greater than $500,000. Second, we tightened our recruiting standards and are requiring fewer mass-market households. This has created some headwinds in our flows. But we're confident of our strategy, and that it's working, with high net worth momentum accelerating in the recent quarters.And on the right, our National Service Centre now has $1.7 billion in AUM and over 200,000 clients. The center is staffed with salaried financial advisers providing clients with smaller accounts, a value proposition and great service levels. At the same time, this has freed time for consultants to focus on segments with more complex needs.On Slide 18. First, I've mentioned that we've been focused on hiring fewer but higher-quality recruits. Gross sales per Consultant with less than 4 years increased by 17% in Q4 relative to last year. And we saw even stronger growth of 26% of -- from Consultants in their first year with IG. We had another strong quarter of recruiting, up over 50% from the same quarter of 2018. These recruits are coming from traditional sources as well as experienced financial planning focused advisers. We're also focused on increasing sales productivity of our experienced consultant practices, which saw gross sales per practice increased by 24% in Q4 of 2019 relative to Q4 2018.As I mentioned, IG completed a number of important milestones during 2019 on our journey to transform the company, as you can see listed on Slide 19. These initiatives will enhance our competitiveness, fee transparency, consultant productivity and overall efficiency as they get fully rolled out in 2020. We also have other exciting initiatives planned to further transform our business. Some of these include: digitizing key processes and forms; further modernization of our client portal; enhancing our high net worth products and services; and accelerating our high net worth household acquisition with continued client segmentation efforts.Before passing the call over to Barry, I'll close my remarks on Slide 20 by providing some perspective on the strength of IG's investment product offering. As I mentioned, we now have unbundled pricing options available to all clients. These solutions are expected to account for virtually all of IG's sales in the near future. With that context, I'm pleased to share an example of the print and digital promotions we've been running earlier this month. The ads feature the strong performance of our managed solutions, with 9 of 14 of IG Wealth Management portfolios rated 4 or 5 stars by Morningstar for Series U. Over to you, Barry.
Thank you, Jeff, and good afternoon, everyone. Turning to Slide 22, which shows Mackenzie's full year and fourth quarter highlights for 2019. Mackenzie's investment fund AUM reached $64 billion at the end of last year, a new record-high level and a 15% increase over the course of the year. We saw strong growth in a number of our categories, and 2 I'd like to highlight here are our ETF platform and our alternatives products. Since launching our ETF business in April 2016, just under 4 years ago, we've experienced rapid growth to $4.7 billion. Mackenzie has built the sixth-largest ETF platform in Canada through a successful organic strategy. We've also continued to be a leader in the alternatives products category, which reached $1.3 billion in December. 2017 to 2019 combined was the best 3-year period in Mackenzie's history on a number of key metrics, including record-high total mutual fund gross sales and record -- sorry, and record retail mutual fund gross and net sales were also the highest. During 2019 alone, we generated over $1.4 billion of investment fund net sales at a time when advice channel peers experienced meaningful outflows. Mackenzie's rankings by financial advisers is among the best in the country, driving strong retail net sales and increasing IIROC and MFDA sales penetration.Focusing on the fourth quarter, Mackenzie saw record-high mutual fund gross sales. We also recorded Mackenzie's 13th consecutive quarter of positive retail mutual fund net sales, and ETFs saw their 15th consecutive quarter of positive retail net creations. Mackenzie won 4 Lipper Fund Awards during the fourth quarter and 12 Fundata awards last month, which we're very proud of. These awards honor funds that lead in delivering strong risk-adjusted performance relative to their peers. Slide 23 highlights Mackenzie's operating results. Mackenzie continues to capture market share versus peers in the advice channel. Our long-term investment funds, which include both ETFs and long-term mutual funds, had a net sales rate of 2.4% during the 12 months ending December 31, 2019. Record-high Q4 adjusted mutual fund gross sales of $2.5 billion increased 5.6% year-over-year. Total investment fund net sales were $301 million during Q4. And last week, we announced January's net sales of $338 million. Mackenzie experienced net redemptions of $86 million in the institutional, subadvisory and other category. And I spoke on our last call about our strong institutional pipeline, and I'm happy to report that our team continued to add new wins during the fourth quarter. As of the end of last year, we had over $1 billion of unfunded institutional and strategic alliance net inflows that are expected to fund over the next 3 to 9 months. $200 million of this fund is in January and is included in the mutual fund sales reported in our January press release.Our retail results are highlighted on Slide 24. Mackenzie's retail sales captured 6.5% of advice channel long-term mutual fund gross sales during the fourth quarter and 7% for the full year. And as I mentioned earlier, mutual funds and ETFs are consistently attracting positive retail net flows quarter-after-quarter, and we've seen our strong retail net flows momentum continue into January and February.Turning to Slide 25. Net flows in the ETFs continued to be strong during the fourth quarter. I mentioned earlier that Mackenzie's ETF AUM was $4.7 billion at the end of 2019. During January, we exceeded $5 billion in assets, and we're nearing $6 billion halfway through February. Our ETF assets continue to be diversified across by type and investment strategy, with retail picking up approximately 45% of Mackenzie's ETF AUM.On Slide 26, you will see that Mackenzie's investment performance remains strong. At the end of the quarter, more than 50% of Mackenzie's mutual fund assets were above median in the 3-, 5- and 10-year periods, and 47% of Mackenzie's AUM is in 4- or 5-star rated funds.And finally turning to Slide 27 to look at investment performance and net sales across our investment boutiques. Value-oriented strategies remained out of favor, and the source of our retail net sales results are consistent with that. Mackenzie's growth-oriented boutiques continue to have a majority of their assets rated 4 or 5 stars and are attracting significant net sales in the retail channel. Our global equity and income team -- and fixed income team are also performing very well at attracting assets.With that, I'll turn over to Luke to review IGM's financial results.
Great. Thanks, Barry. Just going to move to Page 29, and I'll echo the remarks earlier from Jeff Carney. Financial markets were very good to our clients and shareholders, with 2019 up 13%, and that continued into January and onto February with very robust markets and a really confident environment.Moving to Page 30, the results were pretty uncomplicated this quarter. You can see on the right, our net revenue rate is -- has been trending at stable at about 1.21% throughout the year. And you can also see the impact of operating leverage with the unit cost going down significantly and our EBIT margin increasing from 52 basis points in Q4 2018 to 57 basis points this quarter.Going to Page 31, which has IGM's consolidated income statements. I'd highlight, first, the bottom left: net earnings of $200.8 million, up 11.6%; and EPS up 12%, reflecting an all-time record-high Q4 result. I have 2 comments on this slide. First, you can see in point 2 the non-commission expense. Expenses are down 1.1% from last year, and our full year result was better than our guidance. At Q4, we did have some of the benefit of our fund services outsourcing arrangement that we announced last quarter. And as Jeff indicated, we are keeping our guidance of no more than 3% growth in this line during 2020, and we will expect to provide guidance in H1 around expense outlook for 2021 and beyond as we continue our transformation program. Second, I would highlight one small thing that we had in Q4 2019. A few small nonrecurring adjustments in the tax provision line were just over $1 million, and we would expect this line to be running closer to a 22.4% effective tax rate in future quarters.Moving to Page 32, 2 quick comments on IG's debt margins and fee rates. You can see net management and admin fee rates of 197.8 basis points in the quarter continue to trend as expected. We do continue to see an increasing composition of high-net-worth clientele within our asset mix, and this has continued to impact the fee rate. On asset-based comp, I'd give guidance for next year that as DSC, which we discontinued selling in 2016 -- but as the existing block continues to mature, we do see upward pressure in the asset-based comp rate and would expect this to be around 53 to 53.5 basis points during 2020. And offsetting that, on the right chart, the sales commission rate, which has been running at about 155 basis points, will be closer to 125 basis points throughout 2020.Moving to Page 33, you can see the income statement for IG Wealth. Earnings before interest and taxes of $206.3 million were up 19.9% from last year. The only comment I have on this slide is to remind that net investment income and other in Q4 2018 was depressed because of a few fair value adjustments in the period, and the $16.8 million recorded during Q4 2019 is more reflective of our run rate from this point on. I've also given a guidance earlier on non-commission expenses. They were down 4.8% in the quarter. Part of this was timing of expenditures in Q4 of 2018, and we have given our guidance for 2020 of keeping that within that 3% growth. On Page 34, you can see Mackenzie's net revenue rate is stable. And this reflects continued strength in retail as well as the greater proportion of assets in equity products.And then moving to Page 35, I'd just highlight in Mackenzie's income statement that we had earnings before interest and taxes of $41.4 million. This was up 16.9% from last year. And we do expect continued meaningful earnings growth in 2020 given the operating leverage inherent in the business and the continued growth we're seeing.That concludes my comments. I'll pass it back to Keith.
Yes. Thank you, Luke. Melanie, we'll open up the line for calls.
[Operator Instructions] The first question is from Geoff Kwan.
Jeff, as we get closer to -- or making progress on this transformation, if we're having this conversation a year from now, I'm just wondering how you would define a successful 2020, whether or not there's certain milestones regarding the transformation, any sort of specific numerical metrics as to how you kind of think about benchmarking 2020.
Yes. I mean we're excited about our momentum. And the quality of the work we've done and the investments that we've made into our value proposition, obviously, with the Salesforce implementation, which is going really well, which is going to scale our Consultants and we'll have a modern technology to be able to have better conversations with our clients and be on top of all of our information. And so we're really excited with that. That's already in motion, so that's being rolled out as we speak. We've got a great team working on it and working closely with Salesforce. From a product standpoint, there's lots of great things going on with our product shelf, and it's inspired our Consultants. By bringing in BlackRock and T. Rowe Price and other big manufacturers, and they've been taking advantage of those new products and maybe sharing those with their clients as we go forward. But I'd say it's a lot -- there's a lot going on behind the scenes that will be coming out in the months to come. And -- but we had -- we definitely have momentum. We're landing some projects already. And we're excited about what that's going to do to our value proposition.
Okay. And then just on the retail side at IG Wealth, do you have -- do you feel comfortable that at some point in 2020, you'll be able to consistently get back into the positive flows?
Yes. I'm feeling very good about this, I mean unless something happens in the market in the next months. We feel very good about the momentum we have. We've been building out for the RSP season, and we expect to get our share, and we're excited about that. And our teams are ready to go, and they're calling their clients and prospects. And so we expect to have a strong couple of months here.
And then maybe just my last question, dovetailing off of that in this commentary. Because you talked about having a better RSP season, it sounds like you're -- it sounds like you've got some momentum into RSP season, also curious as to Barry's comments. But when you take a look at it overall within the industry, like given what we've seen in the industry in terms of improving overall flows, do you feel like it's going to be kind of a normal-ish RSP season? Are you feeling this could be a more optimistic RSP season than usual?
Yes, I think it's going to be above average. I think so because we've had a tough year, and then we've sort of had some balancing. And then now we're starting to get better again, and the markets are giving people confidence. And hopefully, we'll have a long path of the markets behaving this way so that we can get through it. But we're optimistic. We think that there's a lot of opportunities for us to just locate relationships with other providers, and we're going after all those opportunities. Our Consultants are very excited about what's ahead of us. And with now having more capabilities and -- around them, they feel more confidence in going after those high-net-worth clients that we want, and we're seeing our significant growth in our high net worth area.
And Barry, your thoughts?
Same sentiments. As we all know, when we came into the RSP season in 2019 from the market downturn of Q4 2018, it was -- investor sentiment was the confidence was not there. And what was there was focused quite a bit on fixed income flows. So this time around, and before I barometer read Mackenzie, you probably noticed our Q4 in 2019 was quite strong. And we felt that coming back very nicely from a confidence perspective. And then of course, this has just continued in January and mid-February, and the confidence in investments is right there. So it's much better year-over-year, certainly. And to Jeff's comment, probably yes, probably above average. A little ways to go here on the RSP season. Our -- as you know, us, Mackenzie being the manufacturer, we tend to get RSP flows in March as well because the advisers are taking in deposits and they deploy that in March. So we have 3 months to see how it is. We're feeling very, very good about that. And if I may, because you had a great question on the IG side about how you would define success for 2020. For us, as we indicated, we -- for Mackenzie, we're having a good run here. We've had 3 consecutive years, our best 3 years on many, many measures. And so for success of -- for that to continue into 2020, we don't see why that would not. It could accelerate a little bit more in 2020 versus the prior 3 years, which would be good a good thing. Lead with performance, lead with innovation, keep advisers and investors happy. We'd like to see the flows come from multiple channels and multiple vehicles, mutual funds and ETFs, and nicely geographically dispersed across the country and also having a number of our boutiques succeed. And so with that that is what gives us some business diversification. So yes, overall -- but just to echo Jeff's one proviso the markets are -- still remain quite buoyant and confidence is there. And so if that takes a turn, then I think we're all confident we'll gain market share, but that might pull back some of the flows a bit. So...
The following question is from Gary Ho of Desjardins Capital Markets.
Just a question for Luke, just on the non-commission expense. It has jumped around a bit from quarter-to-quarter. Luke, can you help us out, in terms of timing, how this will trend in fiscal '20? And also can you provide a bit more color in terms of the Mackenzie number this quarter? It was quite a bit higher, $92.6 million.
Yes. Sounds good, Gary. So seasonality, you can expect it to be similar to 2019 going into 2020. We do have normal seasonality in Q1 with a high and it does taper off and then come back a bit in Q4, right, given the seasonality of our business and our promotions. Mackenzie did have some severance in the fourth quarter and so is -- that's something that was in the results. That said, we gave guidance for the full year and run overall. And so as far as Mackenzie into 2020, we're expecting 3% growth or better. And yes, the seasonality should be in line with the history.
And can you quantify that onetime severance?
Yes, it's approximately $3 million.
Great. Perfect. And then just related to this, just looking out maybe beyond 2020 and into '21, is kind of 3% growth how we should think about this line item looking out?
I'd say right now, Gary, 3% or better is what we've put out there for 2020, and we're going to meet that. In the first half of 2020, we are expecting to give further guidance for 2021 and beyond. We are working through our transformation program. We have a number of exciting opportunities that we work on to, a, improve the client-adviser experience but also to run our business more effectively. So we'll be -- we'll have greater transparency to provide to all of our stakeholders later on this year. But we do expect before June to come out with that announcement of guidance for 2021 and beyond.
Got it. Great. And then next question is going to the IG Consultant count. It was down again, 3% versus Q3. I felt the tone from the last call was that was going to stabilize and level off. Just want to hear kind of what the plans are looking out. I did see, offsetting this, the Consultant productivity, this did improve year-over-year.
Yes. It's Jeff. We're excited. We've got -- historically, we've been an organic organization where we brought in people from other firms or professions that came into our -- and integration, and that's great. And -- but now we also are recruiting experienced Consultants. And so we're seeing a lot of pickup on that. They like the culture, what we have, and they're really excited about being a part of IG Wealth. And so that's a new opportunity for us. And the talent that's coming in is generally from the banks but others -- other competitors as well. And so I think you'll see that continue to go. And I said in a call before that we wanted to get to 2,000 teams, and that's still our goal. And we'll be working on that as we go forward. So -- but it will take time, obviously, to get there. And I wouldn't say we'll get it in the first year, but it'll be met over time. But we want to -- we still want to hold the standards that we've done for new people coming in through their career path versus the opportunity to have them come from the industry. So I think you'll see a lot of good things coming out of that, and it will elevate our value proposition as well.
And Gary, it's Luke. Maybe I'd add too just to set expectations. The math of how we set up our field now with consultant practices, representing those practices over 4 years, I'd make 2 comments. One, we tightened our recruiting standards significantly. And so to get in that bucket requires a 4-year graduation. And so over time, we're recruiting at about 350 people per year. We have the capacity to approve more if they meet the standard. But they do have to graduate to 4 years to get in that number. At the same time, we have natural attrition of people just retiring or otherwise leaving the industry. And their clientele is being reallocated to our existing practices. And as Jeff said, those practices are -- we're focused on improving their productivity. The average practice size right now is $45 million, and there's a lot of room for upside here as we cater to high-net-worth clientele. So that's our focus, is productivity. And there is some math going on now where there's normal attrition of people leaving the business or otherwise retiring, and we're only recruiting at a certain level. One geographical comment, that's what Jeff said, is right now on recruiting experienced advisers, we have been including them in the under 4-year line. Next quarter, we are looking to reclassify them. Over the last 2 years, we've recruited just under 100 of those people. They are very productive. The survivorship is going to be extremely high, obviously, given that they have experience. And we are targeting a level of 2,000. But there's that geographical issue that we have a very attractive proposition at IG. And for the first time ever for a number of reasons, we are able to attract experienced people to our platform, and we are doing that, and we'll be providing greater transparency into that next quarter.
Okay. Perfect. And then just last question for me. Obviously, the model generates decent free cash flow. Just in the past, I know you've invested in Personal Capital, WealthSimple, et cetera. Just looking at 2020, what are your priorities for capital or free cash flow allocation? Will you look at buying back stock at these levels?
We obviously feel our stock is a bargain. We always -- obviously, always feel that way. We're very bullish on our future. We do feel that we've got a noticeable amount of excess capital. And we will be evaluating over the period how we deploy it. Share buybacks would be a consideration, and we're looking at a number of opportunities to really enhance our business. And we've tried to be clear with the things that would be attractive to us, whether it be expanding distribution reach or the product and service capabilities of our core firms. So as the year unfolds, we'll give guidance on how we do deploy that capital. But more than anything, we do not look forward, just like you don't, to having it sit on our balance sheet unproductively.
And will you provide that in your Investor Day, perhaps?
Absolutely.
The following question is from Graham Ryding of TD Securities.
Just a follow-on on the Consultant conversation. You gave some color that you're recruiting experienced advisers as well as people sort of coming from different industries. For the advisers that are leaving IG, are they moving to other competitors? Or are they shifting out of the industry altogether? Is it a mix?
It's a mix. Like, there's always people coming and going. It's humans, okay? But there's no material thing going on there. It's just people are -- we're always recruiting. So is everybody else. And -- but there's -- we've got a very stable Consultant force.
Okay, got it. And then IG, just on the sales trend. It sounds like the improvement you're seeing on the high net worth side is not enough right now to offset the lower sales from the more mass market households. Is that the dynamic? And I guess, why is it offsetting more so you're not in the net sales positive level?
Yes. It's just the math of turning over the smaller accounts into the larger accounts, and that's playing out as we go. So it takes a little bit of time. So it was a drag because we used to go after smaller accounts, and now we're not doing that anymore. So that's just rolling through, and that will go away, and that in our flows -- sorry, net flows will go up.
And Graham, just on the strength of -- on Page 16 and 17, Jeff walked through some of the highlights. The gross sales are up 6% in the quarter, but it was 27% to high net worth. And so right now, that 6% overall as we are heading into 2020, we're now running at 20% up year-over-year. And that high net worth acquisition is really driving it. But -- so we have worked through not to add -- not taking on clients we shouldn't be taking on with under $100,000. And so you see the headwind there, and we're doing that for the long-term health of business. But the high net worth strategy is working, and we see a lot of momentum there, and we tried to illustrate on some of these slides.
So when I look at the sort of the market share of IG relative to the banks in the advice channel, is that why you're sort of giving up some market share, because of that shift away from the mass market?
Yes, it's -- and there's 2 elements to that, Graham. One is not taking on that clients that traditionally we were taking on as we've changed our emphasis, and the other is not recruiting people who otherwise wouldn't mix in the business, and those people did use to bring in clientele. And most of the clientele were in that same segment. So that is a short-term headwind. But the long-term tailwind is happening with the high net worth improvement. The other thing I would guide -- that we would guide is just around comparing us to the industry in that IG is a dealer. And one of the enhancements that Jeff walked through is that we will be more focused on giving disclosure around our AUA as opposed to our AUM because that is really the measure of the clientele coming into our dealer.
And on that last bit, the fees that you get on the AUA, where does that flow through on the administration line in IG? Or where do we see that?
I think that's a question that we're expecting as to -- with the announcement of the IG advisory count and the move to unbundled, we are now charging advisory fees on third-party business. And so we are enhancing our disclosures that next quarter, and I highlighted that a few quarters -- previously on the call that, because of the change in the character of our business, we will be changing our disclosures to better reflect the fact that we're charging our advisory fees, which is the largest component of our revenue, on products that go beyond our AUM.
Got it. So it's already in there right now or just you're going to break it out?
Right now -- and it's a good question. Right now, it's embedded -- to the extent that we have unbundled,it's embedded in the management fee line. Going forward, we will have a wealth management revenues line, and we'll provide the detailing of the advisory fee as opposed to the product and program fees.
And we're also fully transparent in our fees.
The following question is from Tom MacKinnon at BMO Capital.
Just asking further about the transition at IG Wealth and the impact on the flows. When you embarked on this movement more into high net worth, did you envision that the flows would suffer? And when will you declare victory in that, okay, now we have the platform that we want? And would there be a lag impact you would see on flows like after that? Or like, how long before this transition in terms of your business and then this transition in terms of flows would be expected?
Yes, it's happening right now. Like, it's -- we're just going through it. So it won't take that long. But we're going through that process right now.
Is your plan to ultimately just service only high-net-worth clients?
Yes, clients over $500,000. Exactly.
And when you embarked on this thing, did you envision -- this transition plan, did you envision that it was going to hurt flows?
Yes.
Okay. Then maybe...
We -- I mean I tried to say this on the call many times, but we're competing against $500,000 and up. I think that's where we're taking that model. That's why we're investing in all this technology and Salesforce, and everything else is, we believe, by having every one of our Consultants having to have CFP so that they can unlock the full potential of every one of our clients. And that's our whole strategy, and we're using the best resources globally to do it, including Salesforce and others for suppliers, including BlackRock and others, and we're just the puzzle that puts it all together. And using all of these incredible capabilities differentiates us from everybody else. And then our Consultants are going to become much more productive as a result of that. And they'll be using the skills that they actually have on -- that they were using for clients who were over $100,000. Now they're doing it with millions and $5 million and $10 million clients because that's what their expertise is. And we think we can be the very best at that. And it's why I love this company from the day I came here, is that we're grounded in all the knowledge you need to unlock the full potential of every client. And we want to make sure, and I'll use this word, but it's -- we want to make sure there's no leakage in their savings. So we want to be able to unlock every possible capability of how they can save for their families and what they're trying to achieve, whether charities or whatever else it is. And it's by making sure that we monetize the full potential of that client. And everybody wins, obviously, because if we do that, the client wins, which is the most important thing in their families. The Consultant certainly wins because they're monetizing their full potential, so then they can be able to do that, and that will drive their compensation. And obviously, the firm wins huge because we've already got a lot of clients on the books. And we're bringing in more clients now than we have historically in 2 ways: one through -- with taking consultants away from other firms but also our ongoing organic growth of our Consultants. And when we get that 2,000 teams and they're all productive and they're delivering that value proposition, I don't know how anyone beats us.
Well, I appreciate the color and the passion there. Luke, I think you mentioned something on Slide 31 about tax guide. Should we just expect the same kind of tax rate? Or did I hear you mention something different?
Yes. Right now, there's -- it would -- the tax -- the effective tax rate was a little bit elevated this quarter because of some onetime items. So I just wanted to give that guidance that we're running closer to 22.4% in effective tax rate. So I want to make sure people are clear on that. And obviously, there's a few things that cause it to bounce around, including the proportionate share of equity account for investment. But I just want to give that guidance because it was a bit higher in the quarter.
And sort of what is the guide for the tax rate then?
22.3%, 22.4% [ next quarter or... ]
Great. And then the last question is, we saw your majority shareholder restructure, and they're working towards more of a financial services focus now, at least, somewhat of a change in strategy -- or a more focused strategy looking at building out their alternative asset platforms as well. Is there any way that you guys see IGM fitting into that mix going forward? Or is it just sort of just business as usual for IGM given the restructuring of your parent?
Is the question on the simplification of their structure, which we felt...
Well, not necessarily -- but then the more focus on financial services, is there any kind of way of -- as they focus on alternative funds, is there anything that -- is there any way that you guys benefit as a downstream company from that?
Obviously, we have ongoing conversations with all our group of companies and other leaders and share what's going on. And if there's ways to partner with any of them, we going to definitely have that opportunity. I know that there is some work being done on that, and there's certainly more demand for alternatives and sort of liquid alternatives, which Mackenzie has already done a great job at. But we want to be in that space, too. And we want to [ build ] off of that to our Consultants within IG Wealth if the clients will demand it. And we wanted to make sure we have it. And Barry's got great experience in that space and knows a lot about it. So we'll definitely be a big player in that space.
Yes. But there hasn't been any specific discussions in terms of their revised strategy now with you guys at all, has there?
Well, for us, it's really -- as IG Wealth, where we, too, we can hire anyone, right, so we can go look and find places to go. But we've already got liquid alts. So I'm sure Barry's looking at that space as well. And again, he's got a lot of experience in that space. So we'll see how that plays out over time. But it's obviously -- there's more demand for it. You can see that clients are asking for it, and we want to be a big part of it.
And if I can add to Jeff's comments, just independent of that, as he mentioned. The alternative space is obviously very large and growing very fast globally, and we've been trying at Mackenzie from a manufacture perspective to continue to monitor trends globally that may or may not come to Canada. You've obviously seen us build an organic ETF platform quite successfully. We've launched a number of socially responsible investing funds now that are growing very, very nicely. And then in the alternative space, obviously, we've launched and are focused quite a bit on the liquid alt side because that's how the individual investor can access these return patterns. But we're always watching and looking and assessing the attractiveness of the alternative space independent of our parent company because it is a full-service asset management company. It's an area that we monitor and evaluate [indiscernible] and we'll get to that at the appropriate time.
[Operator Instructions] The following question is from Scott Chan of Cannacord Genuity.
On your 2020 SG&A 3% or better guide, if you look at Investors Group and Mackenzie platform in isolation, is there one of the platforms where you're spending more, say, on the IG transformation plan?
Yes, good question. So right now, it's clearly at IG. So a lot of the things we're embarking on, let's just -- starting with the move to unbundled and, as a company, with the migration of all of our clientele to our nominee platform, our dealer platform. So that's been a lot of work. That's been over 6 years. And especially in the last 2, that will have been a $140 million program, and we're just nearing the completion of it in the coming few months. So that's been a lot of investment. And it really does not only enhance the products that we're bringing to market and the ability to have a fee-based account, but it really does enhance the adviser-client experience. And we're so pleased that that migration could be done mid-2020. On top of that, the adviser portal with Salesforce was another big investment for the IT network to really accelerate their relationship with the clients. And another big investment would be on the brand relaunch and enhanced marketing with the financial well-being score and all the work around helping to quantify on a 100-point scale how optimized our clientele's financial well-being is, and we believe that's industry-leading. So those have been some of the key things that we're working at IG specifically. And then on top of that is all the transformation work around IGM's operations. And we've planted a number of flags over the last few quarters and giving you updates on that. And there is more in the works, as Mike Dibden and all of us are working on bringing that 5-year transformation forward to life and really realizing all those opportunities to outsource or automate and really drive efficiency.
So let me add -- I'll add Mackenzie's perspective. Sure. And so we're -- but candidly, we're feeling good about our ongoing investments we're making in the business too, that are making all of us ahead of the curve. We -- you've probably seen us launch the new products. Because it's all about innovation and attracting scale, so we've been launching 2, 3 years now, again, ETFs and SRI and liquid alternatives. We announced late last year the formation of a dedicated alternatives team under Michael Schnitman. We announced also a dedicated SRI team under Fate Saghir, a lot of work we're doing with our Chinese partners with CAMC. We continue to expand our distribution, retail distribution and our institutional institution. So that's not been a constraint for us at all to do that. Looking at more digital wholesaling in Canada, we'll be using more data and more virtual -- digital applications and approach to enhance productivity of our wholesalers. So yes, it's -- for us, it's the ongoing investments of the organization at Mackenzie and the firm to remain relevant and continue to fuel this nice 3- and, we think, multiyear momentum that we're part of. But the -- the sum of the investments aren't as significant and transformational as our IG partners. But as Luke mentioned, there's the IGM transformation, outsourcing of fund services and other aspects, that benefits all the operating companies within IGM, including Mackenzie and, obviously, IG and other stuff. Thanks for the question.
And Barry, just on the institutional side, the $1 billion that's unfunded, can you give us a flavor of what asset classes that might have been in?
Yes. What we're happy with is that we're getting a nice variety. We don't mind getting $1 billion-plus in one strategy any time. But we're actually -- it's been a combination of emerging market equities; global fixed income; U.S. long, short in the alternative space; and global equities. So it's a nice variety. We've got -- so the pipeline's strong. The pipeline is strong. We expect more wins in the next little while, which we'll announce for you. But those are all wins announced. And as you know, in the institutional role then, we want to start to show you the pipeline in terms of formal approved wins. And then there's the funding period where you have to onboard those assets. So what we'll do going forward, as we've done on several calls now, is say here's what the wins are and here's how much is funded, here's how much is unfunded. So for instance, $200 million of that came in January. And so we announced that in our flows in January. So we've got -- so we still have around over $1 billion unfunded wins that are coming in Q2 and Q3.
Do you think the strong pipeline can offset the -- just the general headwinds on the institutional side including at Mackenzie in terms of bringing into positive sales?
Yes, no. You raise -- if you don't mind -- raising a topic in terms of definition of institutional. So we probably should parse it out into the 2 categories, which we do because we have an institutional team. And they go after -- one group are Canadian platforms, dealers, et cetera, the bank platforms and others who are very sophisticated consumers, and they actually evaluate and hire managers with an institutional lens. We call that institutional. Subadvisory, let's call that. And then there's the pure -- let's call it the traditional institutional, which we're also winning in, where those are pension plans and the investment Consultants who are very influential in those buying decisions with their clients. And those are in Canada but also outside Canada, in the U.S. and Europe, also. So I don't want to confuse the issue, but if we could parse that out going forward that those are 2 types of institutional wins. It is common for managers to classify institutional business to include both subadvisory as well as the traditional pension plan in endowments, [ at least some ] wealth fund type of wins. So we kind of categorize this as one whole, also.
Yes, definitely. And out of those 2, which one is crying out for more demand at Mackenzie? I assume it's the former, the subadvisory and, to a degree, institutional.
Yes. I mean they're both -- we're winning in both. I mean again, it's not -- we're very focused. Like, we're not out there trying to be machinegun at looking at all of our strategies, but a very handful, selective institutional-quality strategies from our boutiques that we're marketing. And we've been actually successful right now in both of those categories. The latter one has been just recently. We've been building that up hard to get out there and speak to institutional consultants, get on their radar screen and get on long list, get on short list. The sale cycle's quite long. So we're getting some nice traction there. It's still early days, and we're very focused. But yes, the former is the one that also is [indiscernible]. It's growing nicely for us, the subadvisory, and has been across multiple mandates.
And just last question, for Jeff. In your opening remarks, you talked about we've seen the best equity markets in 2019 since the credit crisis. But yet, your EPS was $3.19. In the prior year, it was $3.29. So how do we kind of think of kind of growth during this transition at IGM?
Of earnings or growth...
Earnings growth. Earnings growth.
Oh, yes. Well, that's -- we're all here for that. So we're excited about our value proposition, as I said. It's -- we got our print. Like at the end of the day, you'll have to see how we do. But I can't give you forward-looking results here, so I'm not going to go there. But we've -- we're -- we've put a lot over the last 3 or 4 years into IG Wealth to make that as the leader in the industry. And the value proposition is we've told you about the clients that we're going after, and we're getting traction and Consultants are getting more confidence. And so the momentum is building. And so you're going to have new objectives for every quarter, and we'll see how we do. But we believe that we are going to have a long run here because of the value proposition but also because of the quality of our teams and the Consultants that we have.
There's a lot of operating leverage here. And I would highlight with the 2019 remark, average assets were only up 3%, a result of the timing of equity market coming down in Q4 2018 and then coming back up. So there's a lot of lift going into 2020. And with the fixed cost base, there is just a ton of operating leverage to the business, and we're here for double-digit earnings growth. And that's what we hold ourselves accountable to.
The following question is from Graham Ryding of TD Securities.
I'll try to be brief. Two follow-up questions. Just, Luke, you threw out some numbers. I just want to make sure I heard them correctly: asset-based rate is going up from 52 to 53 to 53.5 basis points. Is that right?
Yes, that's right.
And then the other one you said, I think, was the sales-based commission rate was dropping down. Is that...
Yes, that's right. So we're still going through that. As we discontinued DSC in 2016, so we still have some legacy DSC on the books. As the DSC continues to mature, asset-based comp goes up at that time. And so that's going to continue to go up. But at the same time, sales-based compensation is coming down. And so that will be about 125 basis points next year, and you have the right numbers for the asset-based guidance we gave.
And that compares to that sales-based rate, the 156 this year?
[indiscernible] so it'll be closer to 125.
Yes. Okay. And then my last question is, do you guys provide any numbers -- or have you talked to about sort of the number of households that your consultants are servicing that are greater than $500,000 relative to the number of households that are less than $100,000, and sort of how that's evolving?
The best disclosure we have is the -- we've obviously provided rich disclosure on the component of our sales that are high net worth solutions versus not. And we have given the share of our assets that also relates to those different client segments. And that's the level at which we'll continue to do that. The other thing we've done in our investor materials is to actually show our market share in each of those segments. And so in the -- what we call the mass affluent, being $100,000 to $1 million, our share is 5% of all Canadian savings, wherein the -- we call -- what we call high net worth as opposed to ultrahigh net worth, the $1 million to $10 million category, our share of Canadian savings is 2%. And that's where we're focused. We know that our financial planning is most suited to those with complicated needs, and as Jeff said, we believe we're the best at it. And so that's where we're focused, is building our share in those categories. And we will help to furnish you with transparency into where our flows are coming from and growing. And right now, as you've seen, we have really moved our practices not to emphasize households with under $100,000 unless they have the character that they are going to grow into a client with more complicated needs. So you see that headwind, which is a near-term phenomenon. And we're still pleased with the success we're seeing and actually seeing that amplification of acquisition of high net worth clientele, because that's what our strategy is about. And perhaps -- sorry, said another way, we're now at 58% of our sale activity going to high net worth solutions, and we're also over 50% of our assets being with high-net-worth clientele. And that's going to be the continuation of the trend.
There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Potter.
Thank you, Melanie, and thanks for those joining the call today. I wish everyone a good weekend. And with that, I'll close the call.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.