Oct 26, 2016
Executives
Andrea Prochniak - Director, IR Peter Kraus - Chairman & CEO John Weisenseel - CFO Jim Gingrich - COO
Analysts
Jeff Ambrosi - Bank of America Merrill Lynch Bill Katz - Citigroup Robert Lee - KBW Surinder Thind - Jefferies
Operator
Thank you for standing by. And welcome to the AB third quarter 2016 earnings review.
At this time all participants are in a listen only mode. After their remarks there will be a question and answer session and I will give you instructions on how to ask questions at that time.
As a reminder, this conference is being recorded and will be available for replay for one week. I would now like to turn the conference over to the host for this call, the Director of Investor Relations for AB, Ms.
Andrea Prochniak. Please go ahead.
Andrea Prochniak
Thank you, Jeff. Welcome to our third quarter earnings call.
This conference call is being webcast and accompanied by a slide presentation that's posted in the Investor Relations section of our website www.abglobal.com. Peter Kraus, our Chairman and CEO; John Weisenseel, our CFO; and Jim Gingrich, our COO, will present our financial results and take questions after our prepared remarks.
Some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I'd like to point out the Safe Harbor language on Slide 1 of our presentation.
You can also find our Safe Harbor language in the MD&A of our third quarter 2016 Form 10-Q, which we filed this morning. Under Regulation FD, management may only address questions of a material nature from the investment community in a public forum, so please ask all such questions during this call.
We are also live tweeting today's earnings call. You can follow us on Twitter using our handle @AB_insights.
Now I will turn it over to Peter.
Peter Kraus
Good morning everyone. And thanks for joining us today.
Let's start off with a firm-wide overview which is on Slide 3. Gross sales increased 43% year on year, an 8% sequential [increase] during the third quarter.
Net flows, however, were significantly affected by two large outflows which we have previously disclosed. Specifically a large institutional client redeemed a $7.6 billion portfolio of alternative investments that we'd been managing at a low fee.
We also concluded our Rhode Island CollegeBound 529 fund relationship which resulted in a $6.7 billion outflow. In combination these two events account for $14.3 billion of the $15.3 billion in net outflows we experienced in the quarter.
We finished the quarter with higher average end period and AUM due largely to market performance and timing of flows. Now we’ll review the quarter's flow trends in more detail and that is on Slide 4.
Firmwide gross sales increased to $19.9 billion. In institutions gross sales of $5.2 billion were flat sequentially, though, up from last year's third quarter.
Clients remain hesitant to invest seeing US markets as expensive and finding opportunities abroad elusive. Absent the alternative investment redemption, net flows were $2.3 billion negative with some lumpy outflows from global government bonds, global and U.S.
investment grade credit and emerging market debt. By contrast, retail gross sales of $12.3 billion were our best since the third quarter of 2013 and up 14% sequentially and 56% year on year, that thanks to our bounding demand from fixed income investors in Asia, ex-Japan and the US.
Absent the 529 outflow, retail was $1.3 billion net flow positive for the quarter. Private wealth at gross sales of $2.4 billion were flat sequentially and up 14% year on year.
Excluding the 529 outflow there, net flows were slightly positive. Now let's move on to Slide 5 where we’ll talk about our investment performance beginning with fixed income.
Most of our strategies have performed well this year. Through quarter end our percentage of fixed income and outperforming strategies was 83% for the one year period and 90% for the three and the five year periods.
Moving to Slide 6. Equity investment performance improved significantly during the third quarter but still lags for a number of our services for the one year.
43% of our active equity assets were in outperforming services for the one year period. For the three year, however, it was 63%; for the five year, 64% -- in each case much improved from where we were at the end of June.
You can see that for many of our services, the three and five year performance remains excellent. Now let's review our client channels beginning with institutional and that is on Slide 7.
While the backdrop remains challenging, we're encouraged by the interest in new and diverse services we're seeing from institutional clients around the world. We funded our first Multi-Manager Target Date CIT mandate during the third quarter at $340 million.
Another growth area is risk reducing services. The managed volatility and strategic core equity strategies that we've designed to provide downside protection are in this category.
We've seen more and more institutional interest there as well. Our biggest pipeline add in the quarter was a $425 million mandate in Australia for our managed volatility equity service.
We also had $185 million win in emerging market strategic core and two major consultants just upgraded our U.S. and emerging market strategic core equity funds.
In fact, momentum in these and other equity services drove nearly half of our $1.8 billion in new additions to our pipeline. That's the pie at the bottom right.
And our total pipeline of $5.4 billion is the most diverse we've had in years by region and that's the pie at the top right. We also added another compelling new capability to our institutional offering during the third quarter.
We acquired Ramius Alternative Solutions, that is a provider of customized, factor-based and alternative risk premium solutions for institutional clients. In an environment where traditional hedge funds are having a tough time delivering the performance to justify their fees, we see a real growth opportunity for teams like Ramius that can successfully and cost effectively replicate certain hedge fund exposures for institutional clients.
Now let's take a look at retail. That's on Slide 8.
Our $12.3 billion in retail gross sales in the third quarter were at our highest since the third quarter of 2013. For the year to date retail gross sales of $31 billion were up 12% versus the comparable period in 2015.
This is driven by strength in Asia ex-Japan where sales increased by 27% for that period and in the U.S. where retail sales were up 48%.
I'm talking about the chart at the top right. U.S.
retail excludes sub-advisory where we had a large win last year that hasn't been repeated this year. As you can see from the bottom left chart, industry-wide fixed income fund sales in Asia continued to accelerate in the third quarter.
On a rolling three month average basis, sales for the first two months of the quarter more than doubled versus the same period last year. In the U.S.
many of our retail fixed income services are outselling category competitors which is leading to strong market share gains. In the world bond category where industry-wide U.S.
fund flows have been negative, $16 billion to date, our global bond fund ranks number two by net flows and has more than doubled its share of the category’s net flows moving up to 8.3%. AB high income ranks number three in the category, that has seen more than $10 billion in net inflows this year and it gained 3 points of market share to 6.6%.
On the equity side, our U.S. large cap growth fund has bucked the dramatic industrywide trend.
While industrywide US large cap growth mutual funds have sustained nearly $78 billion and net outflows year to date 150% increase from the same period in 2015. Our AB US large cap growth fund has been net flow positive ranking number seven in the category and more than doubling its share.
You can see these gains on the bottom right chart. Let’s move on to private wealth management and that is on Slide 9 where we also have a strong momentum story to tell.
The left side chart shows just how dramatic the flow improvement in this business has been. Year to date net inflows of $800 million represent a $900 million increase from 2015’s net outflows and this includes the $400 million 529 outflow.
Several things are working in our favour during these uncertain times: solid investment performance, innovative and relevant offerings and unique risk management and well planning capabilities. Combine these factors with a stable team of financial advisors and you get the kind of momentum we've been able to generate.
Assets have grown by 14% so far this year, not only that but while our advisors have maintained their 2015 average of two new client relationships per quarter so far in 2016, their new account size has grown by 30% on average. And we've also attracted $850 million in new assets to our suite of targeted services -- new and innovative offerings designed with more sophisticated self directed investors in mind.
With annual FA turnover on track to be our lowest in history, and a steady pipeline of new and emerging talent, we think we can continue this positive trajectory in a business that's so important to AB’s success. We’ll finish our business discussion on the sell side which is on Slide 10.
Our third quarter revenues of $111 million were down, 13% year on year and 3% sequentially as trading activity slowed globally. As you can see from the chart top right, industrywide trading volumes were down sequentially year on year during the quarter by 9% in the US, 16% Europe, and 17% in Asia.
The U.S. and Europe experienced steep sequential volume declines as well, though Asia improved from a depressed second quarter.
Bottom left chart shows the U.S. volatility index which fell sharply in the third quarter versus the prior year depressing trading.
However we're playing the long game in this business and know that differentiated research is what ultimately drives client activity. We're constantly striving to improve upon our already impressive standing on the sell side.
The most recent recognition of this is the 2016 II All American survey where Bernstein moved up a spot from 2015 to number seven overall this year with two thirds of the team's ranking in the number one and the number two position in their respective sectors. In fact, every Bernstein fundamental research team that has been publishing for at least one year was top ranked from number one to runner up in 2016.
That is a testament to the consistency and the quality of the talent in the team. I mentioned last quarter that our pipeline of research analysts is at its highest level in years, about 60% above are ten year average.
During the third quarter two new analysts launched coverage, a mid-cap chemicals analyst in Europe and a beverage analyst in Asia. I'll wrap it up with a few highlights from the third quarter, that's on Slide 11.
Although two large outflows affected this quarter's headline flow picture, this should not overshadow the strong underlying momentum we're seeing in so many parts of our business. Our fixed income investment performance has been consistent in volatile times and our active equity services have improved significantly for the first half.
That's leading to diverse new pipeline adds in our institutional business and strong retail sales in the U.S. and Asia ex Japan.
Our innovative new offerings like Multi-Manager Target Date, commercial real estate debt and private well targeted services continue to attract new clients and assets to the firm and we're continuing to innovate with forays into areas like factor based solutions with our Ramius acquisition. Finally we've made these investments in growth and innovation while at the same time containing costs.
Our adjusted operating expenses were down 3% year on year in the third quarter with declines in every major category. And we added 70 basis points to our margin.
I'm proud of what our people have been able to accomplish this year despite many of the challenges we face. I'm confident in our ability are to navigate the challenges of tomorrow as well.
Now I'll turn it over to John.
John Weisenseel
Thank you, Peter. Let's start with the GAAP income statement on Slide 13.
Third quarter GAAP net revenues of $747 million increased 1% from the prior year period. Operating income of $185 million increased 30% and the 22.7% operating margin was 310 basis points higher.
GAAP EPU of $0.52 compared to $0.42 in the third quarter of 2015. I will now focus primarily on our adjusted results.
As a reminder, we provide non-GAAP measures in addition to and not as substitutes for our GAAP assaults. We base our distribution to unitholders on our adjusted results which remove the effect of certain items that are not considered part of our core operating business.
You can find our standard GAAP reporting and a reconciliation of GAAP to adjusted results in our presentation’s appendix, press release and 10-Q. Our adjusted financial highlights are included on Slide 14.
[Second] quarter adjusted net revenues of $613 million decreased year on year due to lower Bernstein Research Services revenues but increased sequentially as a result of higher base fees. Operating income of $149 million and a margin of 24.2% increased versus both prior periods.
Total operating expenses declined versus both prior periods and contributed to our improved financial results. We earned and will distribute to our unitholders $0.45 per unit compared to $0.43 in last year's third quarter.
We delve into these items in more detail on our adjusted income statement on Slide 15. Beginning with revenues, total net revenues of $613 million decreased 2% year on year but increased 1% sequentially.
Base fees increased 1% year on year as a result of higher average AUM across all three distribution channels, partially offset by lower fee rate realization reflecting a mix shift from higher to lower fee products. Sequentially base fees increased 3% due primarily to higher average AUM across all three distribution channels.
Bernstein Research Services revenues decreased 13% year on year and 3% sequentially due to a decline in trading volumes in the U.S. and European markets.
Moving to adjusted expenses. All-in, our total operating expenses of $464 million decreased 3% year on year and 1% sequentially.
Total compensation and benefits expense decreased 3% year on year due to lower base, incentive compensation and recruitment expenses. The 2% sequential increase resulted from increased base compensation and commission accruals.
We accrued total compensation, excluding other employment costs, such as recruitment and training, as a percentage of adjusted revenues. In the third quarter this year we accrued compensation at a 50% ratio in line with both the same prior year quarter and the second quarter this year.
Third quarter promotion and serving expenses decreased 11% year on year and 15% sequentially due to lower T&E, trade execution and marketing expenses. T&E and marketing expenses were seasonally higher in this year’s second quarter due to increased client conferences during their quarter.
G&A expenses decreased 1% year on year and 2% sequentially due primarily to lower professional fees. More favorable foreign exchange translation also contributed slightly to the decrease versus both periods.
Operating income of $149 million for the quarter was up 1% from the prior year as expense declines outpaced revenue declines and increased 10% from the second quarter driven primarily by higher base fees earned on higher average AUM. Our operating margin of 24.2% for the quarter was up 70 basis points from the third quarter 2015 and 190 basis points from this year’s second quarter reflecting the operating leverage of our business.
In addition, our third quarter adjusted operating income of $149 million was $36 million lower than our GAAP operating income. This is primarily due to the exclusion of two items from our adjusted results that are not part of our core or recurring business operations.
First, we reversed $21 million of contingent payment liabilities related to past acquisitions since we believe it is probable that the conditions required to trigger payments will not be met. Second, we adopted the new consolidation accounting standards for variable interest entities for GAAP reporting effective January 1, 2016.
Since the first quarter of this year we consolidated certain seed investment funds that had not been consolidated previously. Although this increased GAAP operating income by approximately $15 million it had no effect on net income or EPU.
Therefore we deconsolidated these seed investment funds for our adjusted reporting in effect subtracting the $15 million from our adjusted operating income. Both items are included on the GAAP to adjusted reconciliation included in this presentation’s appendix.
Finally, during the third quarter we determined that the frequency with which we settled our U.S. intercompany payable balances with foreign subsidiaries over the past several years created deemed dividends in accordance with Section 956 of the U.S.
tax code. Historically we have funded our foreign subsidiaries as they required cash for their operations rather than prefunding them to reduce the intercompany balance to zero on a quarterly basis as required by Section 956.
To address this we have established an estimated U.S. income tax liability related to the total deemed dividends, including interest and potential penalties of $46 million as of September 30, 2016 for AllianceBernstein LP.
Of the $46 six million, $38 million relates to the cumulative effect for years prior to 2016. So we revised the balance sheet to reflect the reduction in partner's capital of this amount as of December 31, 2015.
The remaining $8 million reduced income for 2016 in equal quarterly increments over the first three quarters of this year which reduced the EPU for the third quarter of 2016 by $0.01. There is no impact on any of our prior unitholder distributions.
This resulted in a third quarter effective tax rate for AllianceBernstein LP of 6.2%. The year to date effective tax rate is 7.4% which is higher than the 6.5% year to date rate reported last quarter.
Going forward we intend to no longer permanently reinvest foreign earnings generated after 2016 and instead will allow them to flow back to the U.S. and be taxed at the appropriate U.S.
tax rate net of applicable foreign tax credits. We anticipate that this will increase the effective tax rate for AllianceBernstein LP to approximately 8% beginning in 2017 based on our current estimates of the percentage of pretax income we expected to drive from the foreign jurisdictions and applicable foreign tax credits.
And with that, Peter, Jim and I are pleased to answer your questions.
Operator
[Operator Instructions] Your first question comes from the line of Michael Carrier with Bank of America Merrill Lynch.
Jeff Ambrosi
Hi, this is Jeff Ambrosi filling in for Mike. Thanks for taking our question.
Given the recent adoption of the liquidity risk management rules by the SEC, what challenges do you see and what is the likely impact on your US mutual fund?
Peter Kraus
Thanks for the question. Well the rule is slightly less onerous than was originally proposed, so compliance with it will be more manageable than it might have otherwise been.
We don't anticipate any significant issues in complying with it. I think that the funds that we currently manage aren't going to be managed any differently relative to that requirement, that disclosure and our risk controls which have been consistent in terms of providing liquidity for the funds in a manner that makes sense for them and makes sense for the investors.
So other than I guess a little bit more ink that is used in the prospectus I don't actually expect it to be very significant.
Operator
Your next question comes from line of Bill Katz with Citi.
Bill Katz
Good morning everybody. Thanks for taking questions.
First one is just to come back to retail, it’s been an area of I guess challenges for the rest of the industry or the bulk of the industry and yet your underlying long story is much stronger than that. What do you think is going on here?
Is it simply performance is good or is it some kind of strategic positioning -- repositioning that you feel like you're gaining here as the business continues to vintage?
Peter Kraus
Well, I think, Bill, the story is reasonably straightforward. It's persistent performance and in some cases really excellent performance.
And you know, we called out both the high income global bond, U.S. large cap growth, performance statistics that have been quite strong.
And a recovery which we've been talking about the last year or so in the Asia ex Japan marketplace where we've seen flows return from very depressed levels in the high income space. I don't think there is anything more structurally going on that’s putting us in that position.
You might add that as you know we've been hard at work trying to get more services on platform, support those platforms perform and that continues the pace and that has a bit of a tailwind to it as well.
Bill Katz
And then on the institutional business for a moment. Appreciate the mix improvement and sort of broadening out of the type of mandates you're getting but the pipeline itself is down sequentially.
What might be driving that, how is that potentially looking as we go into the new quarter? And then one thing that sort of caught my eye is your fixed income performance is very good, that you called out some lumpy account losses within fixed income.
Are there any underlying shifts you’ve seen in terms of product demand?
Peter Kraus
I wish I could give you an insightful intelligent answer on that, as you know institutional tends to be lumpy in and out and I must admit I don't really think there's any particular trend to the services that suffered some outflows, there’s no endemic performance issue. They are institutions making decisions that are idiosyncratic to themselves, reallocations between categories that sort of normally goes on.
We have large clients. When they move it's good and bad.
And that -- and it's as you say or as you point out it's lumpy. Unfortunately, Bill, I just don't think there's much more there to it.
John Weisenseel
Bill, this is John. I would just add that in addition to what Peter just mentioned, we did have $3.1 billion in pass-throughs that funded during the quarter.
So these are transactions that were not in the pipeline last quarter or at the end of this quarter. They came in during the third quarter and they funded, and that $3 billion is a pretty good number compared to previous quarters.
Peter Kraus
That’s a good point, John. Bill, you also asked the sequential question.
I think we've been saying over the last couple of quarters that the institutional space has been quiet. And I don't think that's changed much.
It’s perhaps a little bit more enthusiastic but it's still quite.
Operator
Your next question comes from the line of Robert Lee with KBW.
Robert Lee
Good morning everyone. Just first curious about maybe the target date business, I know you called out a target date CIT win.
I am just curious first maybe how your venture with Morningstar is going really -- I don't think I heard too much about it and given a lot of what you read about more open architecture target date products, you certainly benefited to some extent. But how do you feel about the progress there?
Is it meeting your expectations? Do you think there is -- it's really kind of just starting to build?
Peter Kraus
So I think we've learned in the space is a couple of things. The open architecture approach is quite interesting to employers and to fiduciaries.
By the way the CIT is an open architecture structure as well. It's not powered by Morningstar but by Mercer.
And so it's essentially structurally or strategically the same structure. But we also have learned that in the Morningstar space or the retail space, that the track records matter, meaning not having a track record is more challenging to sell.
We now have I think close to two year track record and we believe that the three year time period is going to be obviously more important than we had thought when we started. We have good track records in most of the funds, some excellent track records.
And so I think next year is going to be important for us but we did learn that the three year track records are important for fiduciaries to make a change.
Robert Lee
And then maybe the follow up, just curious about the Ramius transaction. Obviously its size is pretty small but when you look at some of the strategies, I think, you acquired -- you could maybe talk about your plans there, number one, for how much leverage you think you have with that through your distribution.
And then also just from very high level, does that -- a lot of those strategies seem to be popular in the ETF world, at least on just kind of very high level. And I know that's not a particular business that you've talked about having a lot of interest in.
But do you see that some of the things that they do as being a way also to develop as some of your peers have in ETF platform?
Peter Kraus
So the Ramius team is a very experienced set of research/investors that are focused on replicating at low cost what are high cost alpha-generating activities. And they have tailored their products to their services to be a solutions provider to large buyers in that space.
The size of the business today could grow by many times that is consistent with the way that we've made acquisitions in the past, not looking for fully formed, fully grown businesses but rather businesses that have the opportunity for significant upside growth, explosive upside growth. And Ramius falls in that category.
Big benefit for the Ramius team and for us is that we have the ability to connect with more clients, to have multiple discussions about solutions with multiple clients at the same time, that broadens the depth and range that the Ramius team can actually engage with clients and ultimately design solutions for them. First and foremost we want to build out that institutional business.
But clearly the technology that we have there and the capability to actually identify attractive anomalies in the factor world expands our ability to do that in the retail space and if we wanted to in ETF space. So I would say, Robert, that's a good point, it gives us optionality down the line.
But I think first and foremost the opportunity to significantly grow by multiple times, not by percentages, by multiple times, the asset base we have, this is a business that they’ve currently built is first and foremost.
Robert Lee
And maybe just one follow up if I could. I guess you can't get through any call without a DOL question nowadays, so.
Peter Kraus
And can you tell me what does the DOL stand for?
Robert Lee
Fiduciary, I think I don't know. So just maybe as it relates to the private client business, I mean obviously you're much more upmarket than many of the advisors out there who impacted.
But just kind of -- as you've kind of delved into it, any update on tweaks to your own business model you think may be necessary or incremental spend around it?
Peter Kraus
I think in a word for us specifically the DOL doesn't have a significant impact. Yes, we will certainly have to do some things differently to ensure full compliance but we don't think any of those changes are major.
And we already have been operating for years around the transparency and fiduciary guidance that the DOL is moving the industry towards. So again for us it's not really a big issue.
I do think the DOL changes in the marketplace obviously. And I know lots of people have talked about this during the week and many more will talk about it.
But I do think the DOL changes are going to have -- and we've all talked about this, all meaning all people in the industry have talked about -- are going to have significant adjustments to how financial advisors engage with their clients all over the country. And it's going to have a significant effect on what those clients actually populate their accounts with, meaning active versus passive.
It will have a significant effect on the fees that managers charge, the manner in which those fees are charged and the manner in which the advice is given, it will have an effect on how services are arranged, how services are modelled, how risk controls are actually reviewed, how firms actually create consistency around their risk management and around the advice that they give in that channel. All those things are going to be – will have an impact on the ultimate asset that investors are invested in and ultimately on our businesses in terms of what we distribute to them.
None of it is particularly clear, meaning specifically clear. Generally it's absolutely clear, meaning that transparency goes up, there is more fee pressure, the character of the assets in the funds are going to be subject to greater scrutiny firm-wide point of view.
And advisors are going to be held to a higher level of responsibility under the fiduciary rule as prescribed by the DOL.
John Weisenseel
I would just add one thing, Rob, is as Peter mentioned the business has always run -- and we've always run the business with a high degree of transparency on fees, and to the extent that the industry moves to full transparency given the fact that our fees generally tend to be lower than the all-in fee that people may find elsewhere, I think we may actually find this to be a benefit over the long term. If in fact people are making decisions on fees, which they say they are.
Operator
Your next question comes from the line of Surinder Thind with Jefferies.
Surinder Thind
Good morning, guys. Just to start off, maybe a little bit of color around expenses.
How sustainable do you think your cost containment effort is? Or put another way, how lean are you guys currently running?
John Weisenseel
Yeah, I would say, Surinder, it’s John, that we've done a lot of work over the past four or five years on the expense side, particularly starting out with all that was done in on the occupancy side. So I think when you look at things like the non-comp expenses, promotion, servicing and G&A, we're pretty much, they’ve been very stable.
They may change, fluctuate from quarter to quarter depending upon seasonality, for example, the $39 million that we saw in promotion and servicing, this quarter is definitely on the lower end. But as I mentioned there was a seasonal T&E and marketing spend in there.
It also got some of the benefit from lower trade execution which comes about -- which is correlated to lower Bernstein services revenues. If they're trading less stocks the execution expenses are lower.
So I think as far as modeling these expenses, I would look at the previous four quarters’ run rate and assume going forward it should be around that level or increase a bit based on inflation.
Peter Kraus
Surinder, think there's a broader question that we're also focused on -- and I don't think we have precise specifics, meaning we did X here and Y there but I think we recognize that there needs to be a persistent attentiveness to lowering the cost of actually providing what we provide to clients. And that cost lowering is not only in the vein of non-compensation expenses but also compensation expenses.
And I'm not talking about lowering comp per se but actually getting things done more efficiently through the use of technology and more advanced processes and procedures. And look, at I think we'd be less than clear-eyed about the impact of technology and what technology has been able to do around the world in many different industries and we need to find ways to apply it here too.
And I think that that does give us an opportunity to improve margin over time through means other than just raising revenues. So I think we've said over time that look we think we've done a lot of work on the non-comp expense, particularly in the rent, we’ll keep at it.
But I think we're finding as technology improves data accumulation, processes improve technologies around providing that information more efficiently to users improves, we think we can actually create some efficiencies in the non – or I will put it, the headcount part of the business. I still think that what's going to get everyone excited in the world is revenue growth.
So don't miss that point.
Surinder Thind
Absolutely. And just to clarify that, so is the thought that basically there will be a bit of a trade off between technology and headcount?
Meaning that you'd hopefully basically employ greater technology teams. Like, technology costs are going up across the board no matter where you look.
And then obviously, the offset would be just simply higher productivity, so meaning lower headcount.
Peter Kraus
Look, I think it's more prosaic than that. How many places in the firm do we use systems that are somewhat alike or actually have relatively consistent output but they're tailored, they're slightly different.
They're things that people, that systems grew up in or grew up with. And do we really need to do that and isn't there an easier way to or a cheaper way to effectively apply a single technology across businesses to produce a result that may not be precisely what you historically had but is more than sufficient to manage the business going forward and that has a lower cost to it.
So -- by the way there are new technologies. There are new systems that are available that weren't available ten years ago or five years ago.
That can actually accelerate that process. And so look, this is -- there no silver bullet in these kinds of processes, these are one step at a time, they take a lot of effort but there are savings there and you do put yourself on a more efficient operating platform and over time -- this is not like a one shot deal but over time you can actually create efficiencies in the firm that take your operating costs down.
Surinder Thind
Got it. So kind of a slow, steady grind towards greater productivity.
Peter Kraus
Yeah, this is not like tomorrow we're going to make something change and it's going to have a huge effect on, that's not going to happen. But look there's constant pressures in anybody's P&L, meaning there's inflation.
Costs go up persistently. So our job is to be able to blunt that as best we can in the cost structure.
And if we can actually out-run that, then we can actually keep the cost structure flat or down and as we get revenue growth the margin improves faster.
Surinder Thind
And then maybe just as a follow-up, another DOL question, but perhaps just thinking more broadly about the impact of the new rules on the industry. Maybe not as much impact on you guys, but when we just kind of think of the regulations and kind of where gross sales activities are, things like that, what is your feeling around what the current environment is and is there another step function lower post the implementation deadline in April?
Or are we already kind of there at this point? Or could things get much worse?
Peter Kraus
When you say gross sales, you mean total assets, you mean active versus passive or what –
Surinder Thind
I'm sorry, I should have clarified that, yes, within the active domain.
Peter Kraus
Yeah, I don't think there's anybody that I've spoken to in the active world that doesn't see the DOL as a challenge in the active to passive debate. I also think distributors and financial advisors are concerned about that.
I mean to give credit where credit is due, I think financial advisors want to provide good advice to their clients and that may not always be passive investing. And if you're forced into passive investing because of fee considerations is that really the right decision for your client and how do you actually deal with that.
And so yes I think the early on reaction is going to be keep it simple, passive is going to be easier, it's low cost. How do you argue with low cost?
But over time that low cost solution is going to have a cost. Unless you assume that there's just no alpha in the world and that's a pretty tough assumption, because we know there is alpha in the world.
The question is what do you pay for it. And how long do you stay exposed to it in periods of under-performance and what often happens in the industry is clients financial advisors sell underperforming managers and they buy performing managers, so you're buying a manager late in their performance cycle and you're selling a manager early in their recovery, before the recovery occurs.
And so that cost you hundreds of basis points in returns. So one positive thing in the DOL world that nobody really talks about.
But if you assume that firms are going to be stronger in their compliance in their risk management techniques to create some consistency about clients’ exposures to various factors that actually produce returns over time, you could assume that the world or the investment world will stay more consistently exposed to factors that actually do produce returns, and you'll see less churn. If you did see that over time you actually could produce alpha for clients.
But I think in the first instance, Surinder, everybody's instinct, yours and all of the industry is that low cost is going to have a negative effect on active flows.
Operator
[Operator Instructions] Your next question comes from the line of Bill Katz with Citi.
Bill Katz
Thanks so much for taking the extra question. On the private client business, I appreciate the slide that shows that multi-year trend of improving sales.
And you've talked how you're not really at risk from the DOL perspective. Is there an opportunity for market share gain?
It seems like there could be a fair amount of FA flux over the next year or so as that rule gets implemented. And then, within that business, and I apologize, I should probably know this, what is the mix between advisory versus brokerage relationships that you might have?
Peter Kraus
So on the latter question we have almost zero brokerage relationships. It's entirely advisory, we are a 40 Act [ph] – we’re a investment advisor, we really don't run brokerage businesses, in fact I don't think I can think of an account where we have that.
So that's a zero issue for us. As Jim mentioned which I think is a pretty good point.
We don't often talk about it. We have been historically very transparent in our fees.
And when you line up our fees versus the industry's sort of multi level fees, because you have advice fees and you have manager fees and sometimes you have platform fees. Our fee levels for the size clients that we engage with are actually attractive and sometimes the lowest.
And so if transparency on fees becomes more better understood in the industry and if people seriously do consider fees as critical, and I'm not saying that tongue in cheek meaning that, look, I think sometimes you pay a higher fee because you believe you're getting good service, so there's nothing wrong with that. But if fees -- if you have service is the same, then fees obviously matter.
And in that case we are going to -- we are going to win because our fees are actually lower.
Bill Katz
Okay and just one last one for me. Thanks again for taking all my questions this morning.
Just given both your role at Alliance as well as your prior background, sort of curious your thoughts of M&A into the industry. You've obviously had one of your peers do a merger of equals.
The stocks have not reacted well to that. You've picked up Ramius and some other small things along the way.
How do see M&A playing out for the industry and then how do you see AB's role within that?
Peter Kraus
Well I think that the lower growth environment is clearly going to make companies think hard about how do they expand their income, if not their margins. If on a standalone basis that becomes more and more challenging.
And so that does lead people to think about consolidation. The interesting question is how much expense can you take out when you put these organizations together?
And that, I think that remains a challenging transaction or a challenging process for the industry. You create redemption activity.
If you take out significant people, clearly there are capacities to create some expense saves in the middle office parts of these businesses but there's not -- there's just not huge opportunity there. So the Janus Henderson deal is interesting because it's a merger of equals and there's no premium and perhaps that's one potential way to go forward.
But we're paying a premium and you have to basically take out a lot of expense to pay for that and/or grow the business faster than it grew before. That's really hard to do when you're similar sized companies and when you're fully formed companies.
So our view has been and continues to be, acquire companies where our scale, our footprint, our geographical capabilities, our distribution capabilities can actually materially accelerate the growth, so we can earn back the premium we paid to buy the business because we want to buy good businesses and where we can grow the business significantly, not 10%, 20% but 2, 3, 4, 5 times or 10 times, because that's what we can actually produce a return for our unitholders. So that has been our view on it and as it relates to consolidation, i.e.
are you taking capacity out of the industry, that is not something that consolidation within the asset management industry produces. So when anybody buys another entity, they're not looking to take out the investment team.
They're looking to grow the investment team. And so consolidation just is a geography question as it relates to capacity.
Capacity goes from one place to another place, but capacity doesn't actually shrink and that's a bigger problem for the industry because you could argue that the industry has an over-capacity of actively managed businesses, given the amount of monies available in active management and I've said that before. And I think that that is a persistent issue.
End of Q&A
Operator
There are no further questions at this time. I turn the call back over to Andrea Prochniak.
Andrea Prochniak
Thanks everyone for joining our conference call today. Feel free to contact investor relations with any follow-up you may have.
Thanks and have a great day.