WisdomTree, Inc. (WT) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the WisdomTree Q3 Earnings Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Jason Weyeneth, Director of Investor Relations. Please go ahead.

Good morning. Before we begin, I would like to reference our legal disclaimer available on today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including, but not limited to, the risks set forth in this presentation and in the Risk Factors section of WisdomTree's annual report on Form 10-K for the year ended December 31, 2017. WisdomTree assumes no duty and does not undertake to update any forward-looking statements. Now it's my pleasure to turn the call over to WisdomTree's CFO, Amit Muni.

Thank you, Jason. Good morning, everyone. Since our operating data is already known, I'll quickly go through the important items for the quarter and then turn the call over to Jono for some closing remarks before opening it up to Q&A. So beginning on Slide 3. Our global AUM was $59 billion at the end of the third quarter, reflecting net outflows, partly offset by market depreciation. Continued political and trade war uncertainty in Europe and Japan drove further outflows from HEDJ and DXJ. However, we did see DXJ flows turn positive in September, driven by Japan market technicals and slight weakening of the yen. During this brief period of demand, we exhibited market leadership, producing inflow market share of greater than 80%. As the chart in the middle shows, demand for our fixed income strategies remained near record levels, while domestic equity suite generated inflows for the ninth time in the past 10 quarters. The chart on the right breaks down our inflows by listing region, with Canada continuing to show strong organic growth. Turning to the U.S. segment flow highlights on Slide 4. Despite the outflows due to DXJ and HEDJ, we continued to see the benefits of flow breadth and depth from our strategic initiatives surrounded by solutions, investments in technology and new distribution channels and partnerships. The number of funds with creations on a daily basis remains above historical levels and the percentage of our assets in core funds continues to grow, generating inflows for the 11th straight quarter. At the fund level, we saw demand for our U.S. equity ETFs, which had their strongest flow quarter in nearly 2 years, led by the mid- and small-cap funds from both our dividend and earnings-weighted families. Demand for our floating rate treasury strategy has also accelerated. USFR generated $208 million of inflows during the quarter with strength continuing into October. While our U.S.-listed ETFs had outflows for the quarter, we did see trends improve on a monthly basis with inflows of $188 million in September and positive flows continued until volatility this week. We saw strength in USFR, our Dividend Growth Fund, DGRW, and our U.S. multifactor fund, USMF. Let's take a closer look at our international segment flows on Slide 5. Our Canadian products generated inflows of $78 million, driven by our quality dividend growth and yield-enhanced Canada aggregate bond ETFs. Organic growth remains impressive and we have raised over $500 million of assets since entering the region. In Europe, industry flows overall remained muted and commodities, where the majority of our exposure is, were out of favor. We had $268 million of gold outflows, which is roughly in line with our AUM market share. On the positive side though, through the first few weeks of October, we have seen a reversal of trends with inflows across Europe and into our gold products, helping offset the equity market volatility. Also in the quarter, we continued to leverage our enhanced scale and resources in Europe, bringing 2 new ETFs to market, borrowing from the IP of our U.S. strategies. Now turning to the financial results on Slide 6. Revenues were just under $73 million, reflecting lower-average AUM due to outflows and market pressure on certain asset classes and regions. Non-GAAP operating net income increased slightly to $14.7 million or $0.09 per share in the quarter. I'll remind that we have 2 non-GAAP items. First, the gain associated with marking to market the fair value of our future gold commitment payments and acquisition-related costs. The adjusted tax rate in the quarter was 27.6%. As we look forward, we expect a blended tax rate of roughly 26% to 27%. The reduction from our prior guidance, which was 29% to 30% reflects tax planning within our international segment and the overall regional mix of our business post the integration of ETF Securities. Turning to the U.S. segment on the next slide. Gross margins were 82.3%, down sequentially reflecting lower-average AUM and mix shift in the quarter, recent product launches and new regulatory costs. Based on current AUM levels, we expect gross margins to remain around similar levels. Adjusted operating margins for the U.S. segment increased slightly from the second quarter to 33.5%. Total expenses, excluding acquisition-related cost, declined 7% sequentially to $33.5 million. The decline was primarily driven by lower incentive compensation as well as the marketing efficiencies we identified on our last quarter's call. The compensation ratio for the first 9 months of the year was 27.6%, the lower end of the 27% to 29% guidance range. As we think about full year results, we anticipate the compensation ratio in the U.S. will remain in the bottom half of the guidance range. Turning to Slide 8. Let's take a look at the operating results of our International segment. Gross margins were 71.3%, down sequentially, reflecting cost for new fund launches in the quarter. We expect gross margins going forward of 72% to 73% in the near term as we see the benefits of our Canadian platform scaling. Adjusted operating margins for this segment were 23.9%. Total expenses, excluding acquisition-related cost increased 3% sequentially to $17 million, in large part reflecting the full quarter ownership of ETF Securities. Speaking of ETF Securities, the integration continues to go very well and we will soon be launching a rebranding campaign that will continue for the next few months. Thank you, and now it's my pleasure to turn the call over to Jono.

Thank you, Amit. Good morning, everyone. Given the recent heightened focus by investors on industry fees, I wanted to spend a minute discussing why WisdomTree's positioning in an increasingly intense competitive environment is amongst the best in the industry. In the early 2000s, when I was formulating the plan for WisdomTree, the SPDR had already been in the market for nearly a decade, priced at 9 bps and the 3 largest asset managers in the world were the 3 largest ETF sponsors. It was obvious that pricing for beta would only go down from there. With no legacy issues to confuse me, I saw clearly the nearly unlimited potential of the ETF structure and knew it would be the future of asset management. But I also knew that to build a viable and profitable business, we'd need a different product strategy. If you're going to launch beta, you need to be first like what ETF Securities did in Europe around commodities, or what we did in the U.S. around floating rate treasuries and the China 500. But beta is a tough business to defend. If you aren't first, you need to be better. Whether it be fundamentally weighted index-based or fully transparent active, the majority of our ETFs are designed to be beta. We are delivering the promise of active management with the benefits of the ETF structure. We call this Modern Alpha. The results of our product strategy and business model have been impressive over the past 10 years. Our approach has resulted in faster growth than our active and passive competitors, while achieving superior economics. While this chart is backward looking, the combination of the performance records, the early entry and speed at which we've been able to get products established in the marketplace and the competitive initial pricing of the funds allows us to better navigate fee pressure, and this is also repeatable going forward. To illustrate these points, let's take a deeper look on Slide 10 at U.S. equities, the most competitive category, where fee pressure has been the most intense and where we have generated average inflows of $1 billion a year over the past 6 years. The table on the bottom left shows a pricing comparison of active mutual funds versus WisdomTree's Modern Alpha approach versus ETF beta. We are delivering an active-like experience at less than half the cost of active managers operating in the legacy structures. While more expensive than beta, we aren't beta, and we deliver an altogether different experience and value proposition. WisdomTree offers strong-performing differentiated strategies and solutions in the right structure at the right price. Looking at the table on the right, in aggregate since inception, our $15 billion domestic equity franchise has beaten 84% of active and passive mutual funds in ETFs, net of fees, while charging just 28 bps for large caps and 38 basis points for mid and small. In several categories, the performance is even stronger with return since inception beating over 90% of active managers and beta. And even more impressive would be our after-tax and after-fee turns. We've generated these strong returns for investors, while delivering virtually 0 capital gains. This is Modern Alpha. These track records reflect both funds launched 12 years ago as well as newer funds with higher active share and even more differentiated investment approaches. Because of a number of factors including Model Portfolio, solutions and partnerships, we expect even faster growth in this segment of the market. We feel very good about our product innovation and product strategy, not just in the U.S. equities as illustrated here, but across our entire product line-up. We are very well positioned to thrive in this competitive environment. We've also made great strides in our diversification effort, and the platform is the most balanced it's ever been, as you can see on Slide 11. We have 3 significant categories: international equities; U.S. equities and commodities, each with over $15 billion of AUM with attractive fee rates. While fixed income in liquid alts remains a smaller category, we are very excited about the product positioning and growth potential. Year-to-date, our fixed income product suite has generated over $1 billion of inflows, more than doubling, in essence, since the start of the year. Over the past 4 years, we've been positioning our domestic fixed income fund launches for a rising rate environment. It feels to me we are stronger in domestic fixed income in 2018 than we were in U.S. equities in 2006. The $25 billion of outflows from DXJ and HEDJ since their peak has masked the impressive execution of our growth and diversification strategy. In addition to the strong positioning of our product platform, we've enhanced our marketing effectiveness, leveraging technology and advanced data analytics. We've also expanded our distribution through our solutions offerings and partnerships. During the quarter, we signed additional distribution agreements to make our funds and models available on platforms with preferred access and/or with no transaction fees to customers. This quarter, we added Cetera, the second largest independent broker-dealer network, Ally Financial, where we are the primary ETF provider in their commission-free platform and E-TRADE's TCA ETF platform, where 77 of our ETFs are available. We've also explained -- we've also expanded our global reach through ETF Securities acquisition, our Canadian expansion and new distribution relationships in Asia. Looking past the pain from DXJ and HEDJ, WisdomTree is on the cusp of the next wave of growth, while delivering sustainable attractive financial returns for our shareholders. I appreciate your interest in WisdomTree and we can now open up the call to questions.

[Operator Instructions] Our first question comes from Craig Siegenthaler from Crédit Suisse.

I just wanted to start on the technology business. So we know AdvisorEngine results aren't consolidated yet as WisdomTree's ownership is still below 50%. But I wanted to see if you had any data points in terms of how the business is performing including like new sales activity, revenues or any color on the aggregate number of client touch points?

Yes. Thanks, Craig. We're going to have Kurt MacAlpine, Global Head of Distribution, touch on that.

Craig, so on the AdvisorEngine, the feedback on the overall platform continues to be very strong. This feedback gives us confidence that we've invested in what we believe to be the best technology platform in the industry. As you'll probably remember, we, through AdvisorEngine, closed the transaction with Junxure in January, which across the combined business of AdvisorEngine and Junxure, we now have relationships with 15,000 advisors across 1500 firms that account for over $600 billion in network industry assets. So over the course of the past few months, our team alongside the AdvisorEngine team has really been very integrated and we're collaborating on sales and client development in a very active manner. We're now at a place where we have a series of clients that have either already adopted the AdvisorEngine platform or are in the process of adopting it, so signing contracts, and have also already selected WisdomTree as a core component of their investment management offering. So we're definitely still in the earlier days as is the overall kind of digital industry or business. But we are seeing some very promising early results and have a very rich pipeline of prospects that we are jointly selling through together.

And then on the recent inflows into your rising rate-fixed income ETFs, including USFR and also the interest rate HEDJ products, who has been the biggest buyer of these ETFs? Is it RIAs, hedge funds, retail?

It's Kurt again, Craig. The primary buyer so far has been the RIA channel. It is the channel we've obviously had historical success, very strong relationships. The theme and the product is resonating extremely well, but it tends to be primarily from RIAs with some diversification from the wire houses and independents as well.

Our next question comes from Bill Katz from Citi.

This is Brian Wu on for Bill Katz. You announced a number of recent distribution partnership wins. Any way to quantify the incremental opportunity of those relationships? And how should we think about the impact of third-party costs?

It's Kurt again. So just to step back and talk about the strategic partnerships. So we believe we're kind of on the cutting edge of the forefront of the various types of deals that you've seen in the industry, and the range of firms that we are entering into strategic relationships with. So despite these only being in the market on the long end for a little over a year, these partnerships have really demonstrated a material -- or have been a material contributor of net flows to us as a firm. So we don't break it out specifically in terms of attributing those to deals that we've conducted versus not. But just to give you a little bit more of the sense of the types of partnerships that we're going after and what we look to get from them. So there's really -- to simplify, there's really 2 types of partnerships. The first one is firms, where we're partnering with firms or platforms that have advisors that are already actively using ETFs today. So think of these as RIA custody platforms and firms that are just heavy users of ETFs. So as we think about these partnerships, these are areas where we can generate a material flow in a very short period of time, because essentially the partnership is reducing the friction cost of trading and allowing us the opportunity to deliver our strategies and Advisor Solutions program to them. So TD Ameritrade is probably the best example of this, and we've realized really considerable results as a result of it, both from our individual strategies and our model portfolios. The second type of partnerships that we're going after are with firms that have yet to fully embrace ETFs. So think of these as like independent broker-dealers or retail platforms. So for these, we think the potential is great and probably just as great if not greater than those that are using ETFs today. But there is a huge education component, both on the ETF structure, our strategies and the Advisor Solutions program. So these will take a little bit longer to realize the results, but we do feel that the potential for these is the same.

And on the cost side of it, we do have a revenue sharing arrangement that's based upon growth of assets from these partnerships. You can see it on our income statement. And guidance that we've given around that is we think about it as sort of 3% of our advisory fees, is a way to think about modeling it.

Very helpful. And just a follow-up, you announced the launch of index-based transparent active funds. Can you provide some color on the value proposition of that vehicle? How it differs from ETFs and a bit on the long-term opportunity there?

This is Jeremy Schwartz, the Global Head of Research. So we think -- Jono emphasized very heavily our Modern Alpha approach to try and add value. We're not beta, we're trying to increasingly add alpha. And we've done that through index strategy from 12 years ago with our dividends and earnings. And certainly, the market volatility is making them ever more relevant in managing valuation risks. But we are increasingly pushing out the alpha curve and try to add even further value to differentiate by these higher-active products. So there is a recent example in 2 months ago, we launched our international multifactor, emerging markets multifactor. We've had 85% type active share. There's been a lot of volatility in the international markets over broad cap weighting, these sites are adding 400 basis points into developed roles, 500 basis points in emerging markets, over other multifactor strategies. It has been very unique in the marketplace, and so it's really allowing a little bit more qualitative assessment than pure index space. We do think this is the next generation of where ETFs are going. It's going after the active funds in a much more holistic fashion.

And if you go back to my slide that showed sort of pricing and the CAGR of our business, this is -- these trends or these types of funds are how we sustain sort of that sweet spot of pricing for the next decade.

Our next question comes from Michael Cyprys from Morgan Stanley.

Just curious if you can update us on the international initiatives that you have in place? You spoke a little bit about your ETF Securities, if you can just kind of go around the world and just update us on some of initiatives in Europe, Canada, Japan and other places around the world where you are thinking about next making some moves?

Sure, so it's Kurt MacAlpine here. So just to give a quick kind of tour around the world to where we are at. We have locally listed products in 3 different markets. Obviously in the U.S.; in Europe with the ETF Securities acquisition, as you mentioned it really kind of strengthened our foothold there; and about 2 years ago, we had launched locally listed products in Canada as well. In terms of where we're distributing our products today, we're essentially positioning ourselves to get in front of about 90% of the global wealth opportunity, either through our own proprietary distribution in these 3 markets or through distribution alliances or strategic partnerships. So the most critical markets for us, on the partnership front, in addition to where we have our own offices, Latin America is a large and fast growing market for us. We have a partnership relationship in Israel. And then we also have a distribution partnership, which is newer in nature across Asia. And then we have a limited distribution partnership in Australia and New Zealand as well.

And just for clarity, I don't -- we don't anticipate starting a new market where we are launching locally listed product, right now it's just the U.S., Europe and Canada. I'm not sure if there is anything else on horizon.

Got it, okay, so just those 3 markets is where you would have local product and in the other regions, you're going in with U.S.-listed product, is that right?

It's U.S. and UCIT and in fact, why ETF Securities is so important to WisdomTree is over time, the usage structure will become the predominant structure for the international investor, the non-U.S. investor, because of the tax efficiencies that they get on the UCIT structure. So it's an incredibly important franchise.

Got it, okay. And just follow-up on M&A. So you've done the ETF Securities acquisition, how are you thinking about M&A here? Or is there anything left as you're thinking about increasing scale in terms of ETFs and in AUM? Or is it more about distribution and then sort of M&A that can come from that? Or any sort of additional technology, capability that could be helpful as you're thinking more strategically?

Mike, it's Amit. Yes, so I think what you just rattled off are the areas that we focus on. Areas that we can either expand or diversify our product offering, get into the different asset classes, particularly also very, very interested around our technology and building out technology solutions, digital wealth. I'd say, right -- we have the dry powder for it, but I think right now, our focus is really on the ETF Securities acquisition, making sure that, that's properly integrated. We always will keep our eyes and ears out. But right now, our focus is more -- looking more inwards.

Really focused on organic growth.

Got it. Okay, any quantification of dry powder as you're thinking about for potential M&A at some point?

We have capital. When we think about allocating our capital, we try to balance it between the returning capital to our shareholders, to paying down the debt that we just took on as part of the ETF Securities acquisition and the remaining piece is dry powder and to make internal investments for growth. Right now the balance that we have is -- we're kind of happy with.

Our next question comes from Melinda Roy from Deutsche Bank.

This is Melinda Roy filling in for Brian Bedell. Could you maybe just talk about how your franchise has performed in the last week, given the recent equity market volatility? And maybe just give us a sense of net buying and selling activity for retail versus institutional investors?

I'll give you some numbers for the week and then maybe I'll have Jeremy talk a little bit about some of the market performance. But just if you look at this week on a net basis, we had about $160 million of outflows globally. But if you break that down by region, what we -- if you back out HEDJ and DXJ, which was the predominantly of the outflows that we had in the U.S., we were actually about $100 million positive, and $100 million was really coming in from flows in commodity themes as well as our U.S. fixed income strategies. So here is a particular example of why we did the ETF Securities acquisition, so that we had more balance to our overall product mix.

Yes, and just to add a little bit more color to that. So the market -- equity markets are down almost 10% in October. And our AUM is really just down less than 3%. You've seen gold rising over 3% in October, so you really saw, from hedging the whole asset base of the firm, we saw very positive contribution from gold diversifying the equity. So that acquisition is really showing through in your sort of global market risk beta for AUM. But further, just on our equity platform and how it's performing, certainly it's been a momentum market and growth market and we had a lot of value-oriented strategies, which have shown up incredibly well in October. So relative performance even on our equity franchise has been very strong in October, and so I think overall, we're seeing good opportunities from that.

In fact, if Jeremy -- if you go back to the U.S. equity slide that I was talking about, we had very strong 10, 12-year performance numbers against a very unfavorable backdrop for these strategies. We would expect more reversion to the mean where the next 10 years should look better than the last.

Our next question comes from Chris Shutler from William Blair.

Some pretty intriguing product launches, some multifactor ETFs back in August, a lot of features packed into those products. It would seem like those types of strategies have good long-term potential. In general, I don't think multifactor ETFs have really gotten a ton of traction industry-wide today. So maybe just talk about, why at a category level, you think that's the case? And I'm guessing, why you expect that to evolve?

Yes, I think -- I mean, we offer our positioning leads very much as part of our evolution into more active products. So we talked about Modern Alpha, these are true active -- high active share, to reemphasize, 85% active share, and so it is a -- you don't just want one specific factor. I mean, we've started off with a very lot of value and quality discipline. This is incorporating a much broader range of factors, including a currency factor. So we are really the only one in the industry doing something like that. We launched a dynamic currency HEDJ program back in 2016, where we were the first ones to educate people that you shouldn't be betting on currency that has uncompensated rate of risk, and we still have very strong conviction in that. And this year by the way, is a strong example of that. The dollar is up 5%, foreign currencies are down 5%. So people are compounding their equity risk with foreign currency losses. You can have a much lower volatility by just focusing on the stocks. But as one of the multifactors -- in these -- the multifactor is a currency factor and we believe that's going to help. We're seeing that realtime in the emerging markets, what's happening is in EM currency sell-off worth 75% HEDJ today. So it's a really unique set of funds, and we believe that through the future for ETF is getting more active and we are strongly positioned.

Also Jeremy, maybe a little bit about the liquid alts and volatility.

Yes. I think -- so there are a few different areas we're going with an option. So certainly, we think the rising volatility is supporting the option suite, and we launched the first put-writing fund in the U.S. We brought that over to Europe and in a very quick launch from the European standpoint, they raised about $80 million in the European business in put-writing. We launched more in the U.S. with the Russell 2000 and we have more coming. And we're sort of a leader in options and we believe that's going to be a great family for us with all the volatility of this option suite. So we're also doing long/short -- dynamic long/short funds have been strong performers in their category. We think we're at the forefront of what's happening alternatives, which is one of the highest fee rates with very few ETFs and so we're at the forefront there as well.

Okay. And just one more, Amit, I think from time to time you've talked about AUM by channel. Can you just give us an update on AUM by channel? And I'm particularly interested, if you were to exclude like the 2 big currency HEDJ products, how that changes the AUM by channel, any stats you have on the channels that the recent flows have been coming from?

So Chris, there has not been too much of a change in overall mix. I'd say, maybe a little bit -- down a little bit on the institutional side or maybe up a little bit higher on the RIA side. But let me ask Kurt to give a little bit more color around that.

Yes, I think the biggest change that you'll see is when you exclude the flows of DXJ and HEDJ, it really emphasizes or magnifies the strength that we have in the RIA channel. When you really look within that channel, we have a very diversified set of flows, some very deep strategic relationships of RIAs and some very broad adoption across those platforms. I think that would be the only real subtlety you'd see between adding or removing the DXJ and HEDJ factor.

Can you give some sense of like what the AUM and the RIA channel is today?

We don't give that breakdown in that particular -- that granularity. But it hasn't changed that much, if we look at it, like Kurt said, from a percentage basis.

Our next question comes from Michael Carrier from Bank of America.

This is Jeff filling in for Mike. Most of my questions have been asked, but just one on the annual cost saves that you guys called the last quarter. I think you're expecting to realize $1 million this quarter. So just curious if that was the case, just trying to get a sense of what's in the numbers this quarter?

Yes, so if you look at the results this quarter, you can see the -- with the cost of savings that we identified around marketing efficiencies and compensations, those numbers all flow through this quarter. The savings we'll see coming in next quarter will be mostly coming in from us closing down our local Japan office. Remember, that we shifted our distribution strategy, instead of going with our own team, with partnering with Premia Partners to get into Asia. So yes, we are on track with those cost savings that we had talked about in the last call.

Our next question comes from Brennan Hawken from UBS.

So I note you mentioned that Europe has picked up quarter-to-date, which is great. But overall ETF flows in the region have been pretty disappointing, especially given the expectations for the impact of MiFID. What do you attribute that to, and do you foresee anything specific that might cause that growth to accelerate?

It's Jono. So no, you're right. The flows in Europe have been even more restrained than in the United States where the flows are down a lot. I think a lot of it has to do with the market uncertainty. One, just market uncertainty, volatility in the market but then you have -- Europe has some certain issues, like Brexit, like European elections that have heightened uncertainty for investors and their money just seems to be frozen. So just like in the United States, our long-term prospects, I think, for ETFs are completely undiminished. But in the short term, market sentiment gets expressed very quickly in ETFs.

Okay, that's fair. So basically geopolitical risk, kind of trumping some of the other, maybe, market structure factors.

Market innovation structure stuff. Exactly right.

Yes. That's fair. That's fair. Appreciate your comments also about fee rate and value proposition, Jono. But we've seen the fee rate under pressure for a couple of years now. And I just want to try to get a sense for how much of that is mix versus fee cuts?

So it's almost all from mix, DXJ and HEDJ, $25 billion at something like an average of 54 basis points, it's almost all mix. We had very selectively lowered some fees on some emerging market funds that were very, very small in AUM. But I would say, for your question, it's all mix.

So do you think than as a follow-up that, that is somewhat parallel to what we're seeing in the active world, where the lower fee products are also continuing to flow? And is there any reason to think that, that would change? Do you have any reason to believe that, that might change for some reason?

So I'm not quite sure of the nuance of your question, but first let me say that the last 9 years have been the perfect beta market. Cap weighting is a momentum strategy, the markets have been since the election, almost straight up. So one, their performance has been very strong. But we all know that -- though it's hard to execute, the most important number is not fee but after-fee return. If you have a positive value proposition against free beta then you have a positive value proposition. And we do and we're doing it in the structure that is growing versus the historical structure. So very -- feeling very strong about our pricing. Historically, pricing going forward and what we have done -- where we are going forward. It's not -- I wouldn't say that lowering fees necessarily raises your growth rates. All it does it is guarantee you lower revenue. And most of our competitors have really -- they rely more than they need to our maybe not, but they rely very heavily on just the fee component of it versus the innovation in products. I mean, Jeremy just spoke about adding 400, 500 basis points in 2 or 3 months because of the volatility. So I feel very good that all we have to do is continue to launch these fantastic innovative products. And we have some of the longest track records in all of ETF land for our performance indexing or Modern Alpha. And with what Kurt is doing on the distribution side, people are really starting to embrace it and it's what's allowing us to go after firms like DFA trying to take DFA advisors and making them WisdomTree Advisors and asking them and getting from them 30% to 50% of the book of business. So we're very optimistic about the positioning.

Really briefly, and we've been going up against those kind of firms for the last 12 years and we've had better performance. And then some of those advisors, said, well, we didn't have the business model in the same way that they did. But what Kurt is doing at Advisor Solutions really is taking our better funds and then marrying it with that whole business package that really is competing at different level today.

Our next question comes from Keith Housum from Northcoast Research.

Question for you on compensation expense. Obviously, it's lowest spend in several quarters, and I understand the restructuring efforts are part of that. But perhaps a little bit color there on, is the number that was provided this quarter is sustainable? Or was there any onetime items that perhaps brought it down lower than what we may expect next quarter?

So when we think about compensation, I'll just talk around the U.S. side first. We give guidance around that. We expect it to be in the lower end of the range of the full year guidance that we gave, around 27% to 29% will be the lower half. Where we sit today, it all moves based upon our performance and that's really what's driving it down to the lower end of that range.

Okay. A follow-up question, if I could on the distribution partnerships, you guys have with like the independent RIAs. I understand you guys cannot give a lot specific in terms of numbers. But perhaps, can you talk about it has grown 20% quarter-over-quarter? And just some color on the success you have with the new relationships?

Yes, it is really -- it's Kurt here again. So there's really 2 types of relationships withing the RIA channel that we are going after. So there is the custody type of relationships, reducing the friction cost associated with trading, accessing the platforms in a more strategic way, getting better data and getting in front of those advisors. So that business, for us, has proven out to be very high-performing and a very significant contributor. So growth levels there are very, very high. The way we're accessing those advisors once we've created that access is twofold. One, through our sales team, so we are working alongside RIAs and establishing deeper, more strategic relationships. Jono gave the -- made a comment around, we've launched the solutions program, a Modern Alpha approach with the objective of being 30% to 50% of an advisor's book for the advisors that we're establishing partnerships with. And Jeremy touched on, from a performance standpoint, how we have the product performance to go do that. So I think narrowing of the product performance with the Advisor Solutions program has allowed us to start to displace these kind of legacy DFA relationships. So we now can count a handful of firms that have either eliminated or scaled back relationships with DFA in favor of building those types of relationships with WisdomTree. The second piece though that the partnerships allow us to do is through our digital marketing efforts. So because we have a better platform access, because we have better data on these particular advisors, we can be extremely targeted with our digital selling efforts, both in terms of the nature and type of the RIAs that we're going after. So it's an example for RIAs that tend to be more planning-centric or focusing on client service. We can be very tailored around the messaging around our Model Portfolio initiative, which is very unique building those portfolios, open architecture, blending alpha and beta into one particular portfolio or for those that play a very have role in portfolio construction. Our digital efforts are all around thematic investment ideas that align with market sentiment. So apologies for not sharing a specific number, but the growth has been very, very strong and it's really coming from those kind of 2 different areas.

Our next question comes from Mac Sykes from Gabelli.

I actually have 2 question, but I will just say them up front. We've some -- we've heard some advisors like using the Model Portfolio, some do not. But we've also heard about growing adoption of the platforms. Is there any way to parse out the penetration of the model approach? Where it was 5 years ago, now, and where you see it going? And then secondly, maybe you can just provide a little perspective given the recent market volatility, how will that affect sort of year-end higher seasonality for ETF flows?

It's Kurt here, I'll take the first question, and then I'll turn over for the second one. On the Model Portfolio front, so we just began commercializing our model portfolios last year. So while we have been providing portfolio construction services to the marketplace for a while, kind of having our models available from an execution perspective on platforms, really only got launched in the fourth quarter and through the first quarter of this year. The adoption has actually exceeded the expectations that we had set for ourselves internally. So to parse it out little bit, I'd say, from a -- when you think about people that are accessing model portfolios, you typically think about the advisor that's outsourcing the investment function, focused on financial planning and client service and looking for a partner there. We figured we would do well there, given the open architecture and the blending of the alpha and beta into 1 portfolio, and we have done well and that's kind of met or slightly exceeded our expectations. I think the area that we're really outperforming relative to our expectations, though, was on some of these tactical and thematic models. And those are really resonating with advisors that are playing this active role in portfolio construction. So instead of selecting an individual funder or strategy for a particular asset class, they're actually opting to use one of our thematic or tactical models. And actually the growth there has been significantly above the expectations we had originally set for ourselves.

And just one point. It's incredibly frustrating how slow sort of The Street has embraced the marriage of beta and smart beta and it's really only just now being integrated into broad books of business from advisors standpoint. So it's been a long education period. We've been doing this now for 12 years, and you're starting to see it go mainstream for the first time. The other point I guess you are asking about sort of the volatility and what to expect for flows going forward. So it's very hard to predict flows going forward, but I think that the midterm elections, regardless of how they go, just having some clarity will stabilize the markets and allow the flows to accelerate in the second half. But it's hard to predict.

And we do have a follow-up from Michael Cyprys from Morgan Stanley.

Just a question on the profitability of the International segment that came up in the quarter to about $5 million operating income, pre-tax. So just curious your thoughts on that going forward? That's like $20 million annualized. Is that the right way to be thinking about that as we go into '19?

Yes, I mean -- obviously, it's all being driven by AUM -- these AUM levels, you see the cost structure, I think that's an okay way of looking at it. Just whatever you're going to assume on flows.

And I am showing no further questions from our phone line. I now like to turn the conference back over to Jonathan Steinberg for any closing remarks.

I just want to thank you all for your time and attention this morning. And we'll speak to you next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.