Invesco Ltd. (IVZ) Q3 2016 Earnings Report, Transcript and Summary

This presentation and comments made in the associated conference call today may include forward looking statements. Forward looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, geopolitical events and their potential impact on the company, acquisitions and divestitures, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products and other aspects of our business or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should and would as well as any other statement that necessarily depends on future events are intended to identify forward looking statements. Forward looking statements are not guarantees and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q, filed with the SEC. You may obtain these reports from the SEC’s website at www.sec.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Welcome to Invesco's Third Quarter Results Conference Call. All participants will be in a listen only mode until the question-and-answer session. [Operator Instructions] Today's conference is being recorded if you have any objections you may disconnect at this time. Now I would like to turn call over to your speakers for today Marty Flanagan, President and CEO of Invesco and Loren Starr, Chief Financial Officer. Mr. Flanagan you may begin.

Thank you very much and thank you for joining us on our third quarter call. As is our practice, I will review the business results for the third quarter and then Loren will go into greater details about the financials and then we'll open up to Q&A after that. So, let me begin by highlighting the firm’s operating results for the quarter and you will find this on slide 4 if you happen to be following the presentation, which is available on our website. Long-term investment performance remains you know continued very strong at 68% to 79% of actively managed assets, we are ahead of peers on a three and five year basis respectively. Our continued focus on leveraging our broad investment capabilities provide meaningful solutions to client contribute to solid operating results during the quarter and what I think all of us would describe as a difficult business environment for money managers. Strong investment performance helped drive robust long-term net flows of $1.2 billion during the quarter, reflecting solid retail and institution demand across both active and passive capabilities. And total flows during the quarter were just over $19 billion. Adjusted operating margin was 39.7%, an improvement over the prior quarter that reflects our continued focus on running a disciplined business. We also returned $176 million shareholders through dividends, buyback during the quarter. Assets under management were $820 billion at the end of the quarter, up from $779 billion in the second quarter. Adjusted operating income was $399 million in the quarter, up from $330 million in the prior quarter. Adjusted diluted EPS was $0.60 this quarter versus $0.56 in the prior quarter and as noted earlier in the year we raised our quarterly dividend to $0.28 per share, which is up nearly 4% from the prior. We also continued our stock program during the quarter. And before Loren goes into detail on the financials let me take a moment to review the investment performance inflows for the quarter. Turning to slide 7 now, our commitment to investment excellence and our work to build and maintain a strong investment culture helped us deliver solid long-term investment performance across the enterprise during the quarter. Looking at the firm as a whole, 68% of assets were in the top half. On a three-year basis, 79% were in the top half on a five-year basis. On page 8, you’ll see the quarterly long-term flows of $12.2 billion were quite strong across both active and passive capabilities. Flows in the passive capabilities were driven by strong demand from Invesco PowerShares capabilities which has an all-weather line-up that’s well positioned to meet client demand in any type of market. This was the second-best quarter for Invesco PowerShares in its history with roughly $4 billion in net flows and strong flows are helping us continue to gain ETF market share. As we noted during or recent Investor Day, strong passive flows reflected our longevity in ETF market, our deep experience, our comprehensive range of factor and smart data capabilities and our significant track record of innovation. Results on the active side were equally as impressive with solid demand in multi-asset given an income capability, fixed income and other capabilities such as real estate. I will focus on delivery and strong investment performance in bringing our broad range of capabilities to clients contributed positive results in Asia-Pacific with strengths across both retail and institutional channels. Globally we saw institutional flows during the quarter, which continues a series of positive institutional flows going back more than two years now. Client demand trends remain consistent with particular interest in fixed income, multi-asset and real estate and are one but not funded and qualified opportunities are at all-time high. Retail flows also our strongest gross sales rebounded nicely and redemptions moderated during the quarter. This includes a $6.5 billion Rhode Island 529 mandate. Before I hand the call over to Loren let me say a few words about how Invesco is positioned against the changes being brought by the DOL fiduciary rule. We actively engaged with clients as they work to alignment platforms that demands fiduciary rule as we make clear sense of rules approval the key decisions reside with the distribution platforms but we are actively supporting them. The market has gotten an early scare from [indiscernible] Merrill Lynch and last night from Morgan Stanley, but I believe we are still in a very dynamic period with regard to how we’ll play out. It is clear each distributor has a different business mix and we will implement the rule in a manner that will meet its client needs. Based on the discussions we are having with clients we continue to believe that our comprehensive range of capabilities, our distribution expertise, our market leadership all positions us extremely well to help our clients [indiscernible]. If the shift is towards passive as some believe, a decade of ETF experience, our comprehensive range of factors and smart data capabilities, our scale, our significant track record of innovation all put us in a very competitive position. As mentioned during the investor day there are low barriers to entry but very high hurdles [indiscernible] in the EFT business, it will make it difficult for latecomers to do well. Now I will turn the call over to Loren to review the financials.

Thanks very much Marty, quarter over quarter our total assets under management increased 48.6 billion or 5.2%, this was driven by positive market returns of 23.6 billion and we also saw long-term net inflows of $12.2 billion which included as you know $6.5 billion related to Invesco’s Rhode Island 529 plan win. We also saw inflows from money market and QQQs of 5.9 billion and 1.1 billion respectively, these were offset by negative FX translation which amounted to $2.2 billion. Our average AUM for the third quarter was $814.1 billion that was up 3.8% versus the second quarter. Our annualized long-term growth rate in Q3 was 7.1% and that was up from 2.6% in the second quarter. This measure represents our long-term flows in the quarter divided by the beginning of period long term AUM which excludes the institutional money market assets and the QQQ assets. Our net revenue yield came in at 42 basis points which was 1.7 basis points lower than the prior quarter. The change in mix largely driven by currency reduced the yield by 1.1 basis points. This was primarily a result of declining pound sterling rate which was 8.4% lower on average during the third quarter compared to the second quarter. Also, we saw a decrease in other revenues which reduced the yield by 0.7 basis points and lower performance fees in the quarter further depressed the yields by 0.3 basis points. These factors were offset by one more day in the period which increased the yield by 0.4 basis points. A little bit of guidance here, looking forward to the fourth quarter we would expect our net revenue yield to be roughly in line with the third quarter level at 42 basis points assuming consistent market and FX levels in line today. So moving onto slide 12 as we’ve done before we provide the US GAAP operating results for the quarter, my comments today however will focus exclusively on the variances related to our non-GAAP GAAP adjusted measures which can be found on slide 13. Slide 13, you will see net revenues decreased by 1,9 million or 0.2% quarter over quarter to $854.7 million which includes a negative FX rate impact of $18.5 million. Within the net revenue number, you will see that adjusted investment management fees increased by 19.8 million or 2.1% to 982.7 million, this reflects higher average AUM for the quarter partially offset by the impact of currency on our AUM mix. FX decreased adjusted investment management fees by 23 million. Adjusted service and distribution revenues increased by $10 million or 4.9% reflecting higher average AUM for retail products. FX decreased adjusted service and distribution revenues by $0.1 million. Adjusted performance fees came in at $3.8 million in Q3 and were earned from a variety of different investment capabilities including $2.3 million from bank loan products. Foreign exchange decreased these fees by 0.1 million. Again some guidance here, in Q4 we'd expect performance fees to be in line with our historical guidance at 5 million in the quarter. Adjusted other revenues in the third quarter were $19.3 million and that was an decrease of 12.4 million from the prior quarter primarily due to a decrease of 7.3 million in transaction fees from real estate and 2 million decrease in transactional sales charges from our UIT products. Foreign exchange decreased these revenues by $0.1 million. Some guidance here looking forward to Q4, we would expect to see this number increase in the range of $23 million to 25 million. Third-party distribution services and advisory expense which we net against growth revenues increased by 13.8 million or 3.9% and this movement was in line with higher revenues derived from our retail assets under management, FX decreased these expenses by 4.8 million. Moving on down the slide you’ll see that adjusted operating expenses at 515.4 million decreased by 10.8 million or 2.1% relatively to the second quarter. Foreign exchange reduced adjusted operating expenses by $8.2 million during the quarter. Our adjusted employee compensation came in at 339.1 million, a drop of 8.8 million or 2.5% and this was due to lower variable compensation on performance fees. Foreign exchange decreased adjusted compensation by 5.1 million, adjusted marketing expenses fell by 2.2 million or 7.6%, 26.8 million reflecting fewer client events held in the quarter, FX decreased adjusted marketing expense by 0.3 million in the quarter. Our adjusted property office in tech expenses were 82.1 million in the quarter, a decrease of 0.7 million over the second quarter and FX decreased these expenses by 1.2 million. And then adjusted G&A expenses at 67.4 million increased 0.9 million or 1.4% and this was driven by cost associated with several new product introductions. Foreign exchange decreased adjusted G&A by 1.6 million. Again some guidance from Q4, we would expect to see these expense line-items roughly flat with the third quarter other than marketing. We expect marketing spend to increase in the range of 32 to 35 million which is seasonally consistent with prior years. Continuing on down the page, you will see that our adjusted non-operating income increased 9 million compared to the second quarter. This was primarily driven by 4.9 million again realized on our pound sterling US dollar hedge as well as due to mark to market gains in our seed money investments in the third quarter. Firms’ effective tax rate on pre-tax adjusted net income in Q3 came in at 26.5% consistent with prior quarter and guidance here looking forward to the fourth quarter; we believe our tax rate will increase slightly to 27% largely due to the currency impact on the mix of our earnings. And this brings us to our adjusted EPS of $0.60 and adjusted net operating margin of 39.7%. I would say just generally as you probably would expect that foreign exchanges had a real impact on our operating results as reported in US dollars. Just to quantify that for you, when we look at our Q3 versus Q2 results, our operating EPS was resulted $0.018 lower as a result of foreign exchange as well as our margin being impacted by 0.3%. Looking at year-over-year, Q3 to Q3, the numbers are larger obviously, EPS is down $0.034 cents due to currency and our margin is done 0.7% as a result of FX only. So, with that before I turn over to Marty, I would also like to provider a quick update on the business optimization work that we implemented in Q4 of last year. We made very good progress on our optimization efforts and have generated approximately 14 million in annual run rate savings by the end of the third quarter. Some of the bigger opportunities are ahead of us however. But we are confident that we will be able to achieve the targeted rate savings number as we've discussed of 30 to 45 million in 2017. And with that I would like turn it back to Marty.

Thank you operator, could you open up it for questions please.

[Operator Instructions] Our first question is from Robert Lee with KBW. Please go ahead.

Marty can you maybe breakdown I guess a little bit more color on kind of the retail flow trend, I know I think you mentioned Asia Pac but kind of give some sense of what you're seeing Asia, US versus EMEA and then maybe are we getting any sense that ahead of the overall implementation that’s starting to - at this point starting to change kind of investor behavior or activity levels in the US.

Good questions. So I’ll make some comments and ask Loren to come for some of the more specifics. So Asia-Pacific in particular is having a tremendous year both retail and institutional and it is also very broad base there. EMEA continues to be strong for us, we've had that the Brexit and some of the challenges on the continent. Generally it is lower than what we had seen previously but the UK would have really come back from that reserve, the Brexit low but again not robust that inflows as we saw a year ago. But again I think we feel we are on track. In the States with regard to DOL rule, it’s hard to point to the behavior with anything to do with the DOL. I think it’s still more the active passive debate that’s really probably driving behavior more than anything right now. Will it change going forward, it will definitely put an awful lot of money in motion in the US retail channel, there is just no question in my mind as people make the changes from brokerage to advisory and as brokers narrow the platform of money managers and so what that sets up there will definitely be winners and losers and again I think those firms with the breadth of capabilities of both active and passive capabilities are going to be the ones that do well lot of it. Loren you want a little more.

I mean just a little bit more color, I mean in Asia Pac we are seeing significant flows coming in, particularly into Japan [indiscernible] has a big winner there. We are also seeing China mutual funds flows in our joint venture providing good lift and that’s been pretty consistent. In continental Europe net flows continue to really be a little bit mix but our GTR product in particular just every quarter continues to grow both in the UK and in continental Europe. So that’s a continued trend and we are very excited about some of the new product introductions FYI in terms of income oriented products that is similar to GTR product. In the US, it has been sort of a mix of things we are seeing very strong take on products like our diversified dividend product, our core bond plus fund is doing very well and then certainly ETFs, very strong flow into senior loan products and another fixed income products. So I think we are third most successful ETF provider in fixed income year-to-date in the US. So that’s a trend. And then some of that in the [indiscernible] has been some outflows in some of the other products that are more value oriented that have seen performance tick down a little bit. Hopefully that gives you some good color.

And maybe just quick follow-up and second maybe with the DOL theme. I mean obviously there has been all those focus of whether it’s’ due to the mutual fund business and brokerage versus advisory. I would expect that if more money moves to advisory as I think broadly expected that benefits, the SMA business. So could you maybe update us on kind of how you feel about your positioning in the SMA business is that a part of the business that you’ve you know how big is that for you and do you true feel like you have the right offering there or you need to invest in that in those strategies.

So a good question. So we have an SME capability have for a long, long, long time like many people. So again it’s not limited to at all a limitation for us. So we would like to look at it as another vehicle offering to deliver our investment capabilities and again that would be I agree with you it is a need that firms are going to have, they don't have it.

Thank you. Our next question is from the Craig Siegenthaler with Credit Suisse. Please go ahead.

I have a follow-up on the DOL rule, and I’m assuming I probably won't be the last one in this call either. But I'm just wondering are you actually seeing brokers strength the numbers, partners they work with just yet and I'm also wondering what key components of Invesco's platform do you think the firm will you think will help the firm remain large at the main US brokers and in some cases you think you actually be able to increase your share?

I don’t want to get ahead of what announcements have been made and not been made because I'm not sure what's public and what's not, it does seem and it's only been different firm by firm. So I think that’s the first point, I think so often when we have these conversations we think it is going to be a generic outcome and it’s not. And as I said, if you just look at where Merrill Lynch is going where Edward Jones seems to be going and where now Morgan Stanley seem to be going with all the public information you can see that they are taking different approaches to it. That said, the firms that are going to do well which we have been suspecting and again it seems that we are getting early confirmation are those firm with broad ranges of capabilities that are strongly performing they are going to - they’ll do fine in this. We’ve put ourselves in that category. Those firms that actually have ETFs a long track record of ETFs, they’ll also do well those are capabilities that are in need and I pull a third element into where again it is different firm by firm by but those firms that can take the capabilities whether it be a mutual fund or an ETF vehicle and help rate solutions for clients and this is even at the broker level are going to do well. The other element that people are talking about I think and I think we all get in the right context the price sensitivity it is real, the way that the financial advisor is going to meet that need is really a combination of active and passive capabilities that will drive down the overall effective key rate for their clients which is a good thing. And again I think specifically vehicle by vehicle, you need to be competitively priced. If you are selling at a premium price and if you are very strong performance, you’d probably, hopefully can keep it there but there is going to be real pressure there. If you’re at a premium price or not performing well you are in a lot of trouble. And we do believe that the platforms, they will be narrowed and they will be - and again each firm is going be different and we look at ourselves as being on the right side of those outcomes.

Our next question is from [indiscernible] with Citigroup. Please go ahead.

I can’t help myself either, on DOL, can you give us a sense of what percentage if you have it, I know it’s tough given the omnibus relationships that you have with your distributors, what generally if you have it, what percentage of your retail is bucket into brokerage oriented qualified accounts versus advisory?

I don't have that right now but again I'd still come back to the point you're probably making is if you’re brokerage it’s going to go away its’ all going to go to advisors and you're going to be a loser and I don't think you can make that draw that conclusion from what we are seeing. Again just look at Morgan Stanley in the announcement today they're going to keep the advisory and brokerage both open and again I think it doesn't really matter how our capability is there whether it’s in the brokerage channel or in the advisory channel, you have a good capability, you’re going to continue to be there. So, again I know I’m not getting the specific number you're talking about I just don't have it here.

Stepping back there seems to be a bit of a pickup of M&A discussion you've seen it in some of your markets alright with Janus Henderson [indiscernible]. What’s your sense of how the industry deals with this excess capacity muted active flows and some of the regulatory changes, would you anticipate a big wave of consolidation and what kind of shape and form you think it takes and what’s Invesco's role in that?

A good question, look, you've been around the industry a long time and so by now there is a declaration of massive consolidation for a couple of decades. I would say the reality is the environment we are in now which support that notion more than never before. And I’d say much has been driven by the regulatory environment principally and just the ever increasing cost you then have things like cyber security areas where we all spend a lot of money where we never did before. And then the extended period of active passive movement which again I would also say it is when you read about in the paper every day it's probably going to far right, it’s not going back to where it was but it would moderate and I do believe there will be very strong place for active capabilities too. And again we are in a position of we take the answers active and passive. So we are well placed regardless. So, I think what you’re going to have happen in the M&A front is you were firm a without scale I think you’re going to need to do something and so I think you are going to see the likelihood of combinations of undersized firms is probably higher than it’s ever been before. And the other point though is somebody has to be a willing buyer and not everybody is going to be willing buyer of some of those firms. So, I think what you’ll see is organic growth coming from firms that really are not well positioned in this environment.

Thank you. Next question is from Michael Carrier with Bank of America Merrill Lynch. Please go ahead.

Hey Loren, maybe just a couple for you on some of guidance that you gave. So one is just on the other revenues, the rate or the level you gave is a little bit lower than where our expectations have been. So just - is that just fourth quarter, we’re heading into ‘17, I know it's lumpy and hard to predict, but just wanted to gauge kind of what's driving that. And then I think on the expense side, you gave a lot of color on FX in terms of how that's impacting the revenues, the expenses and then the hedge and the non-op, and I know you’ve got the efficiency program in place to lower the run rate, but if we’re continuing to be in this environment, is there any other levers you can pull on the expense side or how much can be offset by FX, pulling that down, just to try to manage through this volatile FX backdrop?

So, good questions. So, on the other revenues, that was specifically just for Q4 guidance, we don't think it’s really a trend. Obviously, it moves around, it's hard to predict and we've seen that line can be somewhat volatile based on timing, just in terms of transactions happening, they can lump up in a particular quarter or be a little bit absent in the quarter. And then certainly when there is more volatility uncertainty in the markets, you can see that number, there is a slowdown, there is a component of our UIT sales that has slowed down, just in line of - in respect to the DOL, uncertainties. And so I think that is something that should hopefully begin to be more clear as to whether that's the true run rate or whether it can come back. But I think right now, we’re looking quarter-to-quarter on that line item. So that’s it. In terms of expenses, is there more to be done, I mean, there is always more that can be done. We’re continuing to look beyond some of the things that we identified in the optimization to see if there are other sort of larger opportunities that can be realized into 2017. As we all know, when we get into our - looking out three years and understanding the need for our incremental margins to be where we want them to be, we have to continue to look and find ways to organize ourselves in a way that would provide that outcome. So I would say there is more to come on that to the extent that we can identify them, but certainly in the near-term, in terms of the optimization, we are eagerly going after those.

Okay. And then Marty, maybe just as a follow-up and the question on M&A in the industry. I guess has anything changed for you guys, meaning it seems like you've done things in the past that have kind of created the business mix that you have. You've been more focused on either launching products, small things on the side and then capital management, whether it’s the dividend or the buyback. Just is there anything that you see shifting in the industry that would cause the firm like you like that has scale to think that you need to become bigger or do something that’s maybe not - that hasn't been the default over the past couple of years?

So I would say, like always, we continue to pay attention to what's available in the marketplace and the way that we look at it really has not changed, is it filling a skill gap for region, those types of obvious things, we’ll continue to do that. There are fewer gaps now than we’ve ever had. I mean, and it gets back to the comment to Bill's question and others in the DOL. We think we've put the firm in a position where client demand is right, whether be alternatives, passive capabilities through factor investing ETFs, et cetera. The institutional business continues to be a huge opportunity for us and the like. That said, we’ll continue to pay attention to what's going out there. I think it's again just my opinion, those firms that are narrowly focused are going to be dramatically more challenged than those firms that are global in the retail market, the institutional market and have a broad range of high conviction fundamental factor-based capabilities. So, but again, we’ll continue to pay attention.

Michael, maybe one more point because I know your question with legitimate, but I think we’re spending more time honestly thinking about ways that we are going to grow revenues as opposed to we’re going to be in a position where we’re having to cut costs, so we’re continuing to invest around new product introductions, continue to strengthen our capabilities. As Marty has mentioned, I mean we think we are well-positioned to actually succeed in this environment. And so that’s really been our focus and being able to grow organically in that 3% to 5% range I think should provide us with the ability to continue to expand margins going forward and we are not sort of looking defensively to protect ourselves. We are, I think, thinking about the opportunities to grow in this market.

So let me stay on that, because I think this is what is different today than prior challenging times when there is a pullback, I mean the traditional playbook was market pullback focus on cutting expenses where we can do that with an eye to making sure that you don't just vanish the firm. That was really more an environment. We thought it was competitive five years ago and 10 years ago, but it’s nothing like today and that's just competitive, but the market shift. So we feel again we’re uniquely placed with the capabilities we have that it would be stupid of us not to continue to invest and grow the ETF business or the institutional business or the solutions business and I think to your point earlier, the most dangerous thing you can be doing, if you are a narrowly focused firm, challenge right now is to be not investing in the future, and I think that's where a lot of firms are finding themselves having to do when I think that's you’re confirming about outcome as far as I am concerned. But you have to be disciplined, right, and that's why we’re very, very disciplined. We’re always looking to be more efficient, more effective and while at the same time invest for the future.

Thank you. Our next question is from Dan Fannon with Jefferies. Please go ahead.

Thanks. I guess Loren, you talked about a flat fee rate for the fourth quarter. I guess if we think about the ins and outs with regards to products from a kind of a flows and your backlog and what you guys are seeing strengthening, can you talk about the direction of the fee rate based on that ex kind of markets and currencies?

Yeah. I mean it’s all positive. So we’re continuing to see institutional pipeline at a much higher revenue yield coming in and what's coming out in terms of the mix generally of the products on the retail side. Asia, China, very positive relative to the overall fee rate for the firm. So, that which would make you think while the fee rate must be going up has been offset obviously due to the FX impacts because obviously the pound has declined even further from where we were in the third quarter and that's why it’s in this flattish kind of range. But again, the trends that have been there for a long time are still there in terms of the types of products that we’re offering more alternatives, I think that it do support a higher fee rate are absolutely still there. And so we feel that it’s not necessarily a situation at all where we’re going to see the mix being anything but a positive for us. Other than the FX which we can't control and certainly in our operating results, you are seeing that and so people shouldn't read too much into the US dollar numbers.

Great. And then I guess Marty, the comments around each of the brokers or the warehouses coming up with different solutions, I guess just from a servicing perspective and how you guys are dealing with that, it seems like that’s a burden on the industry to now have to deal with all the various different platforms in a, not in a uniform way and so that seems like costs, that seems like more investment on your guys side. I guess, is that the right way to interpret that?

So it's a good question. Here is my view on it. So at one level, there is no change from the standpoint of those firms have always had brokerage business and advisory business and the movement to advisory has been a trend and the desire of the broker, the distributors for a number of years. So, the industry is already set up to serve that way. Now again, I’d come back to in this environment, what - there is an awful lot of work to comply with the DOL and so it is firm like us that have the depth of capability through wholesale, Invesco consulting that can help make the move, because they are real moves that with their client base. So again, we have the resources, we have the capabilities and we can help them make those changes. I think the biggest concern that I think everybody has heard over more recently was a real concern that there is going to be a large proliferation of share classes, because each distributor wanting to serve the clients in a different way and I know this is no great insight, but it seems to be the industry is coalescing probably on a couple of share classes which would be some costs associated with it, but I mean that’s very doable. And I think it’s much better outcome for both we and the end clients. So again I think what I would do is go back to the firms that have resources and capabilities to support their clients through this change are going to be in a better position than those that don’t. And again this gets back to the part of the questions about scale and M&A. I mean, if you can support your clients beyond just an investment capability, you’re at a disadvantage.

Thank you. Our next question is from Brennan Hawken with UBS. Please go ahead.

Hey, thanks, good morning. Thanks for taking the question. Sorry to add to the extensive row of tequila shots, that are the DOL questions, but I had a couple more for you, sorry. Not asking for attribution here, but thinking broadly in the dialogs that you’ve had with your partners and obviously they are at a greater depth than we’re seeing out in the press and such, can you give us a broad sense or even a range of how much you expect that the wealth management product shelf could end up shrinking for commission accounts?

It's hard to answer that question. I would say what is a truism across-the-board, you would get the feedback that the pace to advisory account will pick up at a material rate driven by the DOL, but again I think that's consistent with the direction of travel that has been in place and, but again, you see cross currents in that, right. So Morgan Stanley has, I think, they are going to support both channels, right, but that said, their advisory business has been growing quite dramatically and it will continue to. So it’s hard to size, but I think if you look back five years from now, the predominance of assets will be in advisory. I think that's a fair conclusion to draw.

Okay. Well, okay, that's fair. Good enough. And then thinking about maybe down the line where this might lead to potential cost-cutting opportunities and of course understanding that this isn’t a near-term thing, right, because you just highlighted earlier how you’re going to need to be there to support your partners as they go through this transition, but ultimately beyond near-term, this is probably going to lead to some pretty substantial differences in distribution dynamics, you guys do tend to have a pretty large wholesaler team. And so when you think about how those selling dynamics in to this channel might change, what kind of expense cut opportunity could that lead to if we end up seeing a channel that is more focused on home office and less on the field, can you help us try to frame what kind of opportunity ultimately that might lead to from an expense cutting perspective?

Yes. So interesting perspective. I think the answer is more along this line. I don't think the demand for support is going to go down, it will probably only go up. But it will be different and so if you go back 10 years ago, if the role of a wholesaler was to, here is a great fund and here is why you should put it in your portfolio, it has a great long term track record, it is in that grade, the nature of the support is going to be very different and the field support if you want to call it that will be much more of individual’s focus on solutions and how - as they are working on their asset allocation, how do you help them build a portfolio range of different investment capabilities, the range of different vehicles that would meet their need. So it would be a very different type of support. So what you can’t size right now is it doesn’t stay the same, but just different skill sets or is there a sort of a size issue that you're talking about and I’d say it’s too early to conclude whether or not there are real cost savings there. My instincts would be the demand for the support is going to be there, but it’s going to be different. So the cost savings opportunity might not necessarily be there, which then gets you back to the prior questions that again if you’re not a firm with resource and capabilities to support the client, you’re extremely disadvantaged in this environment going forward.

Okay, great. Well, a lot of uncertainty, but thanks for the color and helping us walk through that.

Thank you. Our next question is from Alex Blostein with Goldman Sachs. Please go ahead.

Thanks. Just sticking with the theme, so Marty, one of your earlier comments, you mentioned refocus on the management obviously is one of the pretty critical criteria is the shelf space. For instance, people kind of rethink would stays in and stays off. So, can we drill down a little more into that? We obviously haven't seen any aggressive fee cut reductions from the active community yet. Do you anticipate that's coming and I guess more importantly, thinking through Invesco's product lineup, which products could be more susceptible to fee cuts and I guess do you anticipate yourself make any reductions to secure shelf space?

So, again, it's - in the light of the environment and from a macro view, I think that's a good question. I think the reality is, if you look at the larger firms right now, their fees are already very, very competitive, because they have the scale to have lower fees. So I don't sense that there is going to be a massive - within those firms, I don't think, you are going to see much of a change. I think the firms that are disadvantaged are again back to, if you don't have scale in your asset levels, your fees are almost by definition, higher and you are disadvantaged. You got to solve that one where the other and there is no lesson to solve that. So again, specifically, and again, we do, like everybody else, see all the time. We know they’re very competitive and we also have the added benefit too of adding the factor-based capabilities, so we can actually help also drive down the blended fee rate within these four financial adviser and we also have solutions capabilities that we have in that portfolio too.

Okay, thanks. And then just a second question, I guess about the robust solution offering you guys bought a couple of quarters ago, can you talk a little bit about the opportunity I guess to leverage that, as the distribution dynamics evolve, I’m not sure there is a way to expand that or more of the B2B concept or is this still going to be largely targeted on that directly working with the client.

Yes, no, so early days. We are thrilled with Jemstep and it is focused on reporting our business partners. And again, I would put this in the context again of firms need more and more tools to help clients meet their needs and it is definitely going to help us with that. We see that already with the interest in it and it’s frankly additional tool that will help clients with things like onboarding in a more efficient and effective way with their asset allocation, if it is open platform. So again, it is very supportive what they’re doing and we think it is important development for us.

Thank you. Our next question is from Glenn Schorr with Evercore ISI. Please go ahead.

Hi, there. Just a quick follow-up on a lot of this. I'm curious in terms of the factor base of ETF world specifically, as the business evolves, you gave us some good stats on the importance of first mover advantage, but when you talk about code supporting your distribution partners, how important is the established 3 to 5 year track record in terms of not just being on shelf, but actually getting the flows because what we are all seeing is a huge proliferation of products being put out by everyone [indiscernible] these days, but given your presence, how much is that 3 to 5 year track record advantage?

It's huge. Look, I think again, go to the macro point that we’ve all talked about, don't extrapolate your knowledge on mutual fund development with ETF development, right. So there is a limit to how many ETFs there can be within, as you want to call it, a certain segment and it is typically three that are successful. [indiscernible] US Equity income fund, I don't know how many there are in the category, it's probably I don’t know, 400 or something. So there is an inherent limitation right there and the other thing, you’re looking at real track records with these factor based ETFs that have long track as opposed to extrapolating, back testing type experiences and no one needs to take that risk when you have a broad range of capabilities. The other elements that again, we’ve talked about and others have talked about, it's the total cost of ownership of those ETF's and it's just not the fee, it’s the liquidity and those firms that have a presence, they’re going to get the backing to create the liquidity, which is going to drive down the total cost of ownership also. So we have founded it to be a realism that the breadth of product, first mover advantage, but, by the way, the long track records really matter a lot, and I think as we have said before, the barriers to entry are very low that the barriers to success are very high.

I appreciate that. Just one follow-up, you mentioned in your comments on Japan, the success in selling some REIT product there as you look for yield. Can you talk about just real estate demand in general, you’ve got a big real estate business, but I didn’t hear too much of it in the puts or takes in terms of the current environment?

Yeah. No. It continues to be, as we look forward in that sort of institutional pipeline and qualify, it has been high demand globally. So again, I think it’s one of the best teams in the business and they continue to be doing very, very well and we don't expect that to end any time soon.

Thank you. Our last question is from Michael Cyprys with Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for taking the question. So, Marty, if I could just follow up on your point earlier on the price sensitivity is real, just curious how Invesco is planning to deal with that over the next few years, particularly as DOL goes into effect, it just seems like there is more money shifting in to passive and lower fee products, just how do you think about competitively pricing active management and the elasticity of demand? And just the second point there is just given your scale, how do you think about the opportunity to be more aggressive?

Yes. Look, again, those are broad questions, hard to answer broad questions like that, because it gets very specific, so how I would answer it is, we look at where we are priced, our prices are very competitive and they tend to be very competitive with again those firms that have a certain size and have very competitively priced products. And with solid, especially good performance, they’re going to continue pretty well. I don’t know how to answer it other than that. I think what you could see probably in future is I do think that the stronger only can get stronger. More money is going to go towards those firms with more money, more breakpoints, these will drop, but again, that would be a continuation of what's been in the past. Again, I just think it's the smaller firms that are under lot of pressure.

I think their impact is probably going to be the share class that gets introduced, as we've seen sort of both costs, share classes that are stripped down, don't have transfer agency costs, all these things, I mean that's going to be the biggest sort of near-term impact, but I mean obviously the management team is going to get looked at as well.

Yeah. Actually Loren does bring up a very good point. I don't know how much attention has been paid on it, but part of it in this low return environments, this active, passive movement that we've talked about and have seen dramatically active managers in packaged products have been at a real disadvantage just because of the expense ratio where frankly, it is a pass through a lot of expenses, whether they would be 12b-1, [indiscernible] and you are probably on average at a disadvantage and average fund of probably about 45 basis points every year and as these pure share classes come out, that's going to be benefit for active management also and the competitive returns vis-a-vis passive funds.

Okay, great. Just last follow-up here on DOL, you mentioned more money moving from brokerage to advisory, can you talk about how you position to capture those flows and maybe you can elaborate a bit more in terms of marketing and sales efforts there that you are putting in place to capture that and also vehicle delivery changes?

Yes. So I mean, it is vehicle and again everybody is going to solve that. I don’t think that's going to be much of a competitive advantage one way or the other. You’re going to respond to your partners as you’re going to need. Again, I think the thing that’s going to be differentiating is those firms that can help their partners make the shift from where they need to from brokerage to advisory and again it gets to firms like ourselves that have things like Invesco consulting, broad field support, thought leadership to help them work through those changes and again a broad range of capabilities. So we think we’re positioned very well for that and with the money involved, we like the money in motion. That’s going to be good thing and we think we are going to be a net beneficiary of it at the time we get through the other side.

Okay, thank you.

Okay. Well, thank you, everybody very much and we’ll talk to you next quarter. Have a good rest of the day.

Thank you. That concludes today's conference. Thank you for participating. You may now disconnect.