Oct 24, 2013
Executives
Alfred P. West - Chairman and Chief Executive Officer Dennis J.
McGonigle - Chief Financial Officer and Executive Vice President Wayne Montgomery Withrow - Executive Vice President Edward Doyle Loughlin - Executive Vice President, Head of Institutional Group and Director Stephen G. Meyer - Executive Vice President Kathy C.
Heilig - Chief Accounting Officer and Controller
Analysts
Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division Thomas C.
McCrohan - Janney Montgomery Scott LLC, Research Division Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division Glenn Greene - Oppenheimer & Co. Inc., Research Division
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the SEI Third Quarter 2013 Earnings Call.
[Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Chairman and CEO, Mr.
Al West. Please go ahead.
Alfred P. West
Welcome, everybody. All of our segment leaders except Joe Ujobai who is traveling internationally are on the call today; as well as Dennis McGonigle, SEI CFO; and Kathy Heilig, SEI Controller.
Now, I'm going to start by recapping the third quarter 2013, and then I'll turn it over to Dennis to cover LSV and the Investments in New Business segment. He will also provide commentary on the Private Banking segment.
After that, each of the other business segment units will comment on the results of their segments. Then finally, Kathy Heilig will provide you with some important company-wide statistics.
As usual, we'll field questions at the end of each report. So let me start with the third quarter of 2013.
Third quarter earnings increased by 32% from a year ago. Diluted earnings per share for the third quarter of $0.38 represents a 31% increase from the $0.29 reported for the third quarter of 2012.
We also reported an 11% increase in revenue from third quarter 2012 to third quarter 2013. In addition, during the third quarter, SEI's assets under management increased by approximately $8.5 billion due to market appreciation and new asset sales.
LSV's assets under management grew by $5.7 billion during the quarter. Finally, during the third quarter, we repurchased 1.9 million shares of SEI stock in an average price of just under $31 per share.
That translates to $58.6 million of stock repurchases during the quarter. Now turning to sales, our new -- our net new recurring revenue sales during the quarter were solid.
Of the $20 million -- the $20.7 million of net new sales events we generated, $18.3 million of them will be recurring revenues. Each of the segment heads will address their sales activity.
As you know, we are continuing our investment in GWP, now SWP, and its operational infrastructure. During the third quarter, we capitalized approximately $8.8 million of the SEI Wealth Platform development and amortized approximately $8.8 million of previously capitalized development.
Now our development agenda for SWP is to continue to deliver U.S. and U.K.
functionality important to the larger advisors and banks in the U.S. and U.K.
markets, as well as further automate our operations. Now just turning to our business segments, in banking, as with other units, our focus is to sell and convert larger banks in both the U.K.
and U.S. Thus far, we are encouraged with the progression in our sales agendas with larger prospects and the revenue opportunities they represent.
We are looking forward to signing and installing these larger prospects, and they -- because they are who we have built the system for, and we know their business will certainly improve our revenue and profit growth. Fortunately, we have a portfolio of businesses and 3 business units are growing their profits nicely.
In the Advisor segment, we have made solid progress in improving our asset gathering, as well as in preparing for the rollout of SWP to the U.S. market.
Both are important to accelerate our growth and profits of this business. Now in Institutional segment, our strong sales and profits globally are living proof of the strong market adoption of our differentiated solutions.
Finally, our Investment Management Services segment continues its success in both selling and implementing new business. They are making progress selling to larger prospects and increasing the business we do with existing clients.
And behind all of our business units, I am encouraged by the feedback I receive from clients and prospects across our company's target markets. Our reputation for delivery and doing what we say we'll do remains intact and has strengthened.
The sales activity and events in all units confirm the positive feelings in our client bases. Now this concludes my remarks.
So I'll ask Dennis to give you an update on LSV and the Investments in New Business segment. After that, he will provide an update on private banking.
I'll then turn it over to the other business segments. Dennis?
Dennis J. McGonigle
Thanks, Al. Good afternoon, everyone.
I'll cover the third quarter results for the Investments in New Business segment and discuss the results of LSV Asset Management. During the third quarter, the Investments in New Business segment continued its focus on the ultra-high net worth investor and the further development of new web-based investment services and the use of mobile technologies.
During the quarter, the Investments in New Business segment incurred a loss of just under $3.1 million as compares to a $2.8 million loss during the third quarter of 2012. I report there's been no material change in the segment, and we expect losses in the segment to continue in this range during the remainder of the year.
Regarding LSV, our earnings from LSV represent our approximate 39.3% ownership interest during the third quarter. LSV contributed approximately $31 million in income to SEI during the quarter.
This compares to $24.9 million contribution for the third quarter of 2012. Asset balances grew by approximately $5.7 billion during the quarter due to increased market valuation and positive cash flow.
Revenue for LSV for the quarter was approximately $92.2 million, and I would note that LSV had a strong quarter in terms of performance fees. I will now pause to take any questions you may have before I move on to Private Banking.
Operator
[Operator Instructions] I'll open the line of Chris Donat with Sandler O'Neill.
Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division
Dennis, just on the LSV contribution, I guess, first if you can quantify the cash flows there that were behind the $5.7 billion increase because I understand the market's going to be part of that. And then second question more tied to your revenue, well, I guess, you just commented that it was good for fees there, but it looked like your fee capture, I calculate that as a percent of average AUM that, that increased.
Can you give a little color on that because it doesn't sound like your ownership changed -- your ownership stake changed.
Dennis J. McGonigle
Right, right. On cash flows, across our client base, new clients, lost clients and cash flows from existing clients, their net cash flows were just over $300 million.
So the bulk of their asset growth was for market appreciation. I would mention there that about $700 million of negative cash flow resulted from client rebalancing.
So our client portfolios with LSV got out of aligned with the rest of the portfolios and they rebalanced assets away. So it's kind of -- in a way, the fruits of positive results, if you will.
Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division
Yes, the high-class problem.
Dennis J. McGonigle
Right. Now, on the -- I wouldn't necessarily focus on the fee side, but they did have a good quarter of performance fees in terms of revenue generation.
And third quarter generally is a pretty good quarter for performance fees, given the calendaring of different client contracts. And that probably makes the fee calculation skewed a little bit.
Operator
And we do have a question from the line of Tom McCrohan with Janney.
Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division
Can you quantify for us the total incremental expenses related to stock options this year related to the accelerated vesting?
Dennis J. McGonigle
You mean just the incremental related to the accelerated vesting?
Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division
Yes. I know for the quarter but how should we think about it for next quarter?
And how much more is kind of on the come there with that?
Dennis J. McGonigle
Yes, the next quarter should really be consistent with this quarter and second quarter, because it's an amortization event through the rest of the year. Then you'll see a drop in option expense in the -- next year quarter-to-quarter.
It will be offset a little bit by -- I don't want to get ahead of our board, but in the event our board issues or grants additional options in the fourth quarter, that would have some impact on expense. But you'll see, we should get a positive -- we'll certainly get a positive delta on expense moving into the first quarter.
Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division
And Q2 was about $7 million as well?
Dennis J. McGonigle
Yes, so what I would point you to, Tom, and this is for everyone, really, we expect to file our Q later today. And in the Q, there's a disclosure on option expense and that it lays all the numbers out, not only for the company, but also by segment.
Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division
And can you just give us kind of a run rate, something we can work with as I -- maybe it's in the Q. That's what you're pointing to that, but kind of a run rate expectation for stock options for next year?
Dennis J. McGonigle
Yes, next year, if we do not issue any additional options, which is not a -- would not be probably a good assumption, but if we did not, it would be about $17 million. -- I'm sorry, about $4 million.
So $4 million for the year, a little over $4 million.
Operator
There are no other questions at this time.
Dennis J. McGonigle
Okay. Moving on to Banking, in the Private Banking business, progress continues in both the buildout and sales activity of the SEI Wealth Platform.
To update the financials. Revenue of $97 million, for the quarter was up 2% from the previous quarter and improved 6% or $5 million from the third quarter of last year.
Revenue improvements were driven by higher recurring investment processing fees, and increased assets under management in our Distribution business. Our Private Banking profits were $1.8 million compared to negative $2.6 million in the second quarter of 2013 and a positive $900,000 in Q3 2012.
Profit was positively impacted by the increased revenue we saw quarter-to-quarter. Further progress in our profitability will be made as we grow our revenue, and scale our operational and technology delivery as we sell and convert larger bank clients or wealth managers.
Turning to business development. As we discussed, as the bank mark unit just shifted its sales strategy in both the U.K.
and the U.S. to focus on larger prospects, these organizations have longer sales cycles and a complex contracting process.
In addition, their conversion to the Wealth Platform involves multiple business segments within their respective institutions. Consequently, our focus on these larger firms pushes out signings and makes quarter-to-quarter sales activity more difficult to predict.
That said, I continue to be encouraged and I know Joe continues to be encouraged by our sales progress with the current prospects and the overall pipeline. Net sales events across the unit for the quarter were $4.3 million of which $2.5 million was recurring.
In the U.S., during the quarter, we signed one additional SEI Wealth Platform client, Barclays Wealth Trustees, a subsidiary of Barclays Bank, headquartered in Wilmington, Delaware. Under this agreement, they will receive investment processing services in the U.S.
using the Wealth Platform. During the quarter, we also recontracted 7 Trust 3000 clients.
Approximately 80% of our Trust 3000 book is committed through 2015. In the U.K., we had a strong quarter converting the backlog, growing assets under administration, scaling the infrastructure and progressing large prospects in our sales pipeline.
We had over $1.3 billion in net cash flow from current clients and increased our assets under administration to approximately $27 billion. A portion of our cash flow came from HSBC Private Bank as a result of converting a sizable discretionary book of business that utilizes our enhanced client portfolio management functionality.
In addition, we have a backlog of approximately $4.5 million in recurring revenue that is scheduled to install within the next 12 months. Finally, our Asset Management Distribution business continued to make positive progress.
Assets under management balances grew $1.4 billion during the quarter, including $500 million from net new cash flow, bringing our assets under management to almost $14.3 billion. We continue to concentrate on the buildout of our solution, the execution of our sales strategies in the U.S.
and the increase in our momentum in the U.K., all with a focus on larger wealth managers. And although we're challenged with our financials, as we sign and convert large wealth managers, new revenue generation will lead to improved profitability.
I'll now take any questions related to Private Banking.
Operator
[Operator Instructions] We'll open the line of Tom McCrohan with Janney.
Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division
On the big deals in the pipeline, Dennis, can you just talk a little bit more about that? I remember you talking about at the Analyst Day that maybe a number of big deals and maybe just put in context in terms of maybe revenues or size or just give us the sense of how big these prospects are.
Dennis J. McGonigle
I guess, first I'll give you a little definition. When we talk about larger prospects, we're talking about prospects that kind of in the initial phase of business we would receive from them would equate to about $5 million or more of recurring revenue.
So that just gives you kind of a definition. Generally, these large prospects might start at that level or above, but then progress to become even larger clients over time.
And that's what we're seeing, as we talk to these larger institutions, they have multiple books of business. There are certain books of business that are logical to start with and then as we continue to add to our solution set, progress across their entire book as we have success.
And we have that -- frankly have had that with SEI over the years with even Trust 3000 clients as they have grown with us. I talked to Joe about the pipeline preparation for the call and basically, his comments were that for the pipeline numbers he talked about or that were talked about at the Investor Day, nothing's really falling out of the pipeline.
If anything, it's gotten better. But there has been good progress on certain names in those pipelines.
And that's kind of where we sit now.
Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division
And the Barclays business that you talked about, is that -- is it fair to say that, that's a launching pad for you to get other additional business from Barclays like in the U.K.?
Dennis J. McGonigle
I think it certainly has that potential. I mean, it's -- I would imagine that within the Barclays family of companies it's a litmus test for relationship with SEI.
And that if we handle it well, it's not a gigantic book of business. It really represents more a segment of their U.S.
side, that if we do well with that, it will give us a great reference point within the institution.
Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division
And one last question. Are you seeing any evidence out there in the market, Dennis, of other firms trying to develop a similar technology platform as SWP or anything you can talk about regarding what you're seeing in the competitive landscape in regards to that platform will be helpful.
Dennis J. McGonigle
Yes. Of the U.K.
side, it's still -- I'd say the competition is predominantly the in-house applications or operational infrastructure, technological infrastructure that the larger institutions have built out over the years. There are certainly software providers that continue to sell into the market as an alternative to a full outsourced solution.
There are -- there is one -- another outsourced services provider, but I guess we would put them in a camp where their technological footprint is not -- doesn't carry the breadth and depth of our technological footprint. But it's a developing market, and I think -- we always view, at least I do, that as we have success, and we have had success, and as we engage firms in conversations, those larger firms are going to stir the market up around us.
And that will ferret out whether or not we see any competition that surfaces as a result. In the U.S., it's really still the traditional players.
We haven't seen an emerging player. I think on the lower end of the market, you do start to see some of the advisory platforms, the more scaled down advisory platforms play a role but generally speaking, the competitive landscape is unchanged, I'd say.
Operator
And we will open the line of Robert Lee with KBW.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
A couple of questions. First is, can you maybe give us some color on the recontracting, just kind of what you're seeing kind of pricing-wise?
Was it -- was there any kind of pricing concessions? Are you being able to get a little bit of increase or kind of stable?
Any color around that would be helpful.
Dennis J. McGonigle
I'd say on a general note, we generally have slight net downs in these recontracts on an apples-to-apples basis. There are occasions where the client will buy an additional service that results in neutralizing that net down.
But generally, we're trading off these longer-terms in these contracts, extending the life of the relationship to line it up with the Wealth Platform rollout. And there's a little give on the revenue side associated with that.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
All right, great. And maybe talk a little bit about the backlog.
If I had it right, I think you mentioned there's about $4.5 million of revenue backlog to install over the coming year on the platform. But can you maybe update us in size, kind of the total revenue backlog that is contractually obligated to install over the next couple of years?
Dennis J. McGonigle
Yes, I don't know if I have that number right in front of me. I would say that based on where we are with our client base, we're still on track for that $45 million revenue commitment from the installed client base that we have talked about in the past.
And I'd say the $4.5 million really represents the newer clients we've signed this year, some of those are on the U.S. side of the ledger that are -- we will convert over the course of the next 12 months, so that would be additive.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
All right, great. And then the last question is I'm just curious what Joe is going to owe you for taking his spot for...
Dennis J. McGonigle
That's one thing that will not show up in any of our regulatory filings. It's immaterial.
Operator
And we will open the line of Glenn Greene with Oppenheimer.
Glenn Greene - Oppenheimer & Co. Inc., Research Division
I guess, the question is, what sort of the pushbacks you're getting from the larger prospects at this point? What does it going to sort of take to get over the goal line.
And if I recall back from the Analyst Day in June, I think the presentations were pretty optimistic, you'd have some large signings by the end of the year. I don't know if that's still on the table.
Dennis J. McGonigle
I would say we're equally optimistic about our opportunities. Timing is always -- is a challenge.
But the pushback is not so much around our -- and really not around our service offering, and the value we can deliver to the clients in the sales process. The pushback, we just get caught up in the bureaucracy of these larger institutions.
The level of sign-off on these types of transactions, which are fairly sizable for many of the institutions we're talking to, outsourcing particularly in this particular area of the institution is new. It hasn't been done before even though it might have been done in other parts of the bank.
So the bureaucracy to get people bought into not only working with SEI but the notion of outsourcing to anyone, let alone SEI. And then third, these larger institution has -- so really been driven more by kind of the risk management cultures that have grown up over the years, particularly driven by the regulatory landscape around vendor management, the purchasing departments having to be involved, the contracting process just taking a long time.
So there's just a lot more layers to it than kind of a smaller, more nimble, I'll call it, say, more entrepreneurial type institution that we'd run up -- that we actually run up with in the IWA segment in the U.K. for example, where we didn't see this complexity in the kind of in the deal -- pulling the deal together process.
That's how I would characterize it. And that's also true of U.S.
institutions as well. The larger you get, the larger the institution, it's just the more layers of -- that you have to peel off to get to a final conclusion.
Glenn Greene - Oppenheimer & Co. Inc., Research Division
Is that the same -- it sounds like that may make some sense for new prospects that haven't been SEI clients before, but how about thinking about existing Trust 3000 clients that ideally you'd like to convert over?
Dennis J. McGonigle
Yes, that, we'd certainly expect to move quicker, but also remember that part of our strategy with existing Trust 3000 clients, particularly the larger ones, we're trying to sell the books of business we don't have versus the book of business we do have. And that involves new players, other parts of the bank and leads to just a little bit of an extension in time horizon just selling larger type clients.
That's the other...
Glenn Greene - Oppenheimer & Co. Inc., Research Division
Okay. Have you -- are you still -- is your pricing strategy as it revolves around SWP consistent?
Any changes there? Is that any part of the issue from a client perspective?
Dennis J. McGonigle
No, that's pretty consistent market to market. As much as we try to convince the U.S.
clients that we're well established and our U.S. banks do look at us as -- the first one looks at us as the first one to pick at the larger ones so they might negotiate more for first mover.
But that will play itself out as we make progress. But the pricing model, if you will, holds up.
Operator
There are no other questions at this time. Please continue.
Alfred P. West
Thank you, Dennis. And our next segment is Investment Advisors and Wayne Withrow will [indiscernible].
Wayne Montgomery Withrow
Thanks, Al. During the third quarter, we continued good cash flow momentum and had another solid quarter of new advisor recruiting.
Assets under management were $39 billion at September 30, a 17.8% improvement from a year ago. During the quarter, we had approximately $800 million of positive net cash flow, bringing our net cash flow for the year up to $2.7 billion.
Roughly 2/3 of this cash flow is from advisors we have recruited during the last 2 years. Revenues for the quarter were $61.4 million.
This compares to $51.4 million for the third quarter of last year. Expenses increased during the quarter primarily due to the increase in option expense we discussed on the second quarter call, and increasing direct cost tied to our revenue increase and the cost of increased sales and operational personnel hired to handle our new business.
Despite these expense increases, our margins still improved to 45%, which is a 50-basis point improvement from the second quarter of this year, and a 360-basis point improvement from the third quarter of last year. On the new business front, we signed 156 new advisors during the quarter, which is in line with the number we signed last quarter.
Our pipeline of prospects remains very strong. Moving onto the status of the SEI Wealth Platform, we continue to work with our early adopters to solicit valuable feedback which can be incorporated into the platform.
An early result of this feedback was that new advisor desktop, which had its first release go into production in the second quarter. In the third quarter, a further release of the desktop went into production, and we have just gone into beta with the early version of our iPad application.
The more general release of the platform to our client base remains on track for the first half of next year. In summary, net cash flow and new advisor recruiting were very positive for the quarter.
Momentum remains strong and the wealth platform rollout is on the horizon. I now welcome any questions you may have.
Operator
We'll open the line of Chris Donat from Sandler O'Neill.
Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division
So I wanted to ask one question on the competitive landscape. Just given how long it's taken for us to be developed.
I thought it was interesting this summer where you saw Bloomberg Black launch and then get pulled back, and LPL had their NestWise initiative that they also pulled back on. I'm sure you're not going to comment too much directly on those, but just in general, how do you feel about the competitive position with advisors and what alternatives they have out there?
Do you think your moat is deep and getting deeper or do you think that competitors are closing in on you?
Wayne Montgomery Withrow
I guess, I'd -- the way I'd answer the question is if you look at the component parts of the SEI Wealth Platform, so rebalancing, aggregation, advanced customer reporting, core custody functionality. In each one of those silos, there are competitors out there or competitors that maybe have combined some of those components.
But I really don't see anyone who have sort of integrated the end-to-end solution the way we've done. So I think we really are differentiated, and I think it's a pretty aggressive technology strategy, which will be tough to attack from the get-go.
Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division
Okay. And then just on the iPad that you put into beta, I'm curious what your early adopters have said about iPad.
Is that the must-have or a nice-to-have? Where does it sort of rank on the need for advisors?
Wayne Montgomery Withrow
I guess, I'd answer the question as -- it's a great thing to have right now but the question is where it's going to be in a year or 2, and I just think it's coming at us just like a train.
Operator
I have no other questions at this time.
Alfred P. West
Thank you, Wayne. Our next segment is the Institutional Investors segment.
I'm going to turn it over to Ed Loughlin to discuss this segment. Ed?
Edward Doyle Loughlin
Thanks, Al. Good afternoon, everyone.
I'm going to start with the financials for the quarter, and then discuss sales activity. Revenues of $63 million for the third quarter increased 9% compared to the year-ago period.
New client funding and market appreciation during the period contributed to these increases. Quarterly profits of $30 million increased 7% compared to the third quarter of 2012.
Margins were 48% for the period. Ending asset balances approaching $68 billion on September 30 increased 4% for the quarter.
And net new client assets funded during the quarter was $305 million. And the backlog of committed but unfunded assets at quarter end was $1.3 billion.
New client sales closed during the quarter were $1.4 billion, and new client adoption continues to be well diversified by both market segment and also geography. We're especially pleased with the growing acceptance of our Fiduciary Management solution by the U.K.
Investment -- institutional community. SEI has a long track record serving clients as a discretionary fiduciary manager.
We consistently enhanced our solution to support the increasing client needs. We're well positioned to differentiate our offering from increased competition.
We enjoy a strong pipeline and remain optimistic about the growth opportunities for this segment. Thank you very much.
And I'm happy to entertain any questions you may have.
Operator
And we'll open the line of Robert Lee with KBW.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
Two questions. I apologize, I think I missed this when you said it upfront, the -- your net cash flows for the quarter.
Edward Doyle Loughlin
$305 million.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
$305 million. Now it's a $1.3 billion backlog?
Edward Doyle Loughlin
Correct.
Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division
Okay, great. Just curious, I mean, this business continues to grow at steady clip.
And while the operating margin is very high running around 48%, it's been kind of, I guess, I'll use the word kind of stagnant, so to speak, in that 48% range give or take, high end, low end. And kind of -- I mean, do you see room to continue to scale this as you grow assets at a steady rate?
I mean, how -- because if you can grow -- I guess, revenues grew about 9% year-over-year, something like that, so you can grow this at a high-single or low-double digit rate. I mean, do you see additional ability to improve margins there or do feel like they're kind of topped out?
Edward Doyle Loughlin
You seemed to break up on me when you said stagnant. The answer to your question, I mean, we continue to really try to manage the business starting from the perspective of, we want to grow our client base, we want to get more revenue.
So I think that that's really kind of a driving factor. I mean, the margin just kind of falls out of that.
We do manage the expenses. So I think with a push towards larger clients, like most of the other business units, we should see the unit sale, the revenue associated with that should be larger.
So I think that, that could certainly help to move us in a different direction than stagnated. Hopefully that answers your question.
Operator
And we will open the line of Chris Donat.
Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division
Ed, 2 questions on the expense side. First, was there anything in the quarter from the options expense that also showed up in your segment?
And then secondly, you announced that at least 2 hires with press releases in Defined Contribution and health care. I'm just wondering, too, if that's -- as you grow into new segments, I'm assuming these are new -- kind of new people, not replacements of people who left.
But is that also a little bit of headwind on the expense side if you're expanding?
Edward Doyle Loughlin
Yes, certainly. I mean, from the option standpoint, I mean our business was impacted just like the other businesses during the quarter and also for the first 3 quarters of the year.
So the option expense for the first 3 quarters was like $800,000. So it was pretty significant.
The 2 new hires, one would be something we discussed at the Analyst Day where we want to put an increased focus on the Defined Contribution area. So we have hired someone to head up that business.
And I think that's a worthwhile investment. The expense is not that significant for this quarter because the person really just started, and the same with the health care area.
Health care has been an interesting segment for us. We have a nice market share.
But we want to stay ahead of the kind of client needs by having the right resources to support that market.
Operator
And we will open the line of Glenn Greene with Oppenheimer.
Glenn Greene - Oppenheimer & Co. Inc., Research Division
Similar question, but is sort of your increased investment, is it sales force driven? I mean, outside of the 2 sort of high level hires, have you sort of had to or have you attempted to sort of increase the sales force, is that part of the investment spending here?
And is it a different focus as you go up to larger prospects?
Edward Doyle Loughlin
It's not sales force related. I mean, there is another expense, which is more of an allocated expense.
So we have continued to grow in the alternative investment area. That certainly is a big asset class for many of our clients.
So we have a larger team in our investment unit, and that expense is really passed through to the market unit.
Glenn Greene - Oppenheimer & Co. Inc., Research Division
Okay. And then you did mention the Defined Contribution opportunity, which I think you first highlighted it back in June at the analyst event.
Is it too early to sort of talk about prospects or traction there?
Edward Doyle Loughlin
Yes.
Operator
And there are no other questions at this time.
Alfred P. West
Thank you, Ed. My final segment today is investment managers, and Steve Meyer will discuss this segment.
Stephen G. Meyer
Thanks, Al. Good afternoon, everyone.
For the third quarter of 2013, revenues for the segment totaled $57.3 million, which was $8 million or 16.1% higher than our revenue for the third quarter of 2012. Our quarterly profit for the segment of $19.5 million was approximately $2.3 million or 13.5% higher than the third quarter of 2012.
This increase in profit was largely due to the increase in our revenue for the quarter, offset by an increase in our investment and ongoing operational expenses, as well as the increase in stock option expense. As mentioned previously, our expenses are trending higher as we continue to invest in our solutions, as well as build out our infrastructure ahead of new business.
Third-party asset balances at the end of the third quarter of 2013 were $296 billion, approximately $6.2 billion or 2.1% higher as compared to our asset balances at the end of the prior quarter. The increase in assets was due to net positive cash flows of $1.6 billion enhanced by market appreciation of $4.6 billion.
New sales momentum continued into the third quarter of 2013. Net new business sales events totaled $8 million in annualized revenue during the quarter and were well diversified among our solutions and of equal importance, the majority came from expanding relationships with existing clients.
We continue to see strong activity in all areas of the market. We feel well positioned to continue to execute on these opportunities.
That concludes my prepared remarks, and I will now turn it over for any questions you may have.
Operator
And we open the line of Tom McCrohan.
Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division
Can you remind us of kind of the average wallet share you have in the existing clients? It seems like expanding relationships with your basic clients is a big growth opportunity for you folks.
Just trying to figure how to track that.
Stephen G. Meyer
It is, and it is an average, Tom, so it's somewhat skewed. There are clients we have 100% of their business, the smaller boutique.
But when we look at it across our client base, it's now hovering around 26%, 27% but that is up probably 4 or 5 percentage points over the past several years.
Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division
And when about the unit growth and your projected growth on your own internal budgets for the next couple of years,. How -- what proportion of growth is going to come from increasing wallet share?
Half? More than half?
Just trying to get a sense of that.
Stephen G. Meyer
I would say, a little more -- what I would like to see is a little bit more than half. We've always talked about in the past we were kind of in this mode of doing things the hard way, where when I would announce new sales events, 90% of them were from new clients, which it's great to have new clients, but we have this captive group of clients that we have good relationships with.
And our plan has been to expand that percentage. So over the past 2 years, this quarter particular, 60% -- so I used to announce 90% was from new, 10% existing, this quarter 60% from existing, 40% new.
Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division
That probably bodes well for client retention, and can you just remind us what your retention rates are?
Stephen G. Meyer
Retentions are in the high 90s.
Operator
There are no other questions at this time.
Alfred P. West
Thank you, Steve. And I'd like to turn it over to Kathy Heilig to give you a few company-wide statistics.
Kathy?
Kathy C. Heilig
Thanks, Al. Good afternoon, everyone.
I had some additional corporate information about this quarter. The third quarter cash flow from operations was $117 million or $0.66 per share.
Year-to-date cash flow from operations, $240 million or $1.37 per share. Free cash flow for the quarter was $101 million or $0.57 per share, and year-to-date free cash flow is $199 million or $1.13 per share.
Capital expenditures, excluding capitalized software for the quarter, were about $5 million. Year-to-date capital expenditures were $8.6 million.
Capital expenditures for the next quarter expected to be about $6 million. That does exclude the capitalized software.
Now next year, we expect an increase totaling around $25 million to $30 million because included in this expenditures is a new building at our campus. We expect that to be completed mid next year.
The tax rate for the third quarter was 28.5%. That was due to a Pennsylvania tax law change, which reduced the apportionment of net income that we will have to attribute to Pennsylvania going forward.
We had reserves build up on our balance sheet for Pennsylvania taxes that we were then able to reverse in this quarter. The tax rate, although for the year is expected to be about 34% to 35% impacted by this change in the Pennsylvania law.
Next year, we would expect the tax rate to be around 36%. Accounts payable balance at September 30 was $7.3 million.
And we also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks, and that the financial information presented in our release and on this call is unaudited. Future revenues and income could differ from expected results.
We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for a description of various risks and uncertainties that could affect our future financial results.
And now at this time, please feel free to ask any other additional questions that you may have.
Operator
And we'll open the line of Glenn Greene.
Glenn Greene - Oppenheimer & Co. Inc., Research Division
For Dennis, it's kind of my new recurring question recorder at this point. Reconciling the recurring sales of the $18 million sort of going through.
I've got $8 million from investment managers, $2.5 million private banking and trust, and it's not always clear to me on the investment advisors and institutional side how I reconcile to that $18 million in total.
Dennis J. McGonigle
It's a case net cash flow generated during the quarter times earnings rate on that cash flow. The basis points he earns on assets under management, which is in that 50 to 53 range.
And then Ed is similar. It's kind of his net sales times his earnings rate, which he never tells us.
Glenn Greene - Oppenheimer & Co. Inc., Research Division
So just simplistically, do you have those specific numbers that gets me to that $18 million or no?
Dennis J. McGonigle
I do. Please hold on one second.
Glenn Greene - Oppenheimer & Co. Inc., Research Division
Sure.
Dennis J. McGonigle
In Institutional, it's about $3 million; in Advisors, about $4.6 million; in Banking, you have that number and Investment Managers, you have that number. That's a net recurring.
Operator
There are no other questions at this time.
Alfred P. West
Thank you. So, ladies and gentlemen, we continue to focus our efforts on maintaining highly satisfied clients, growing our -- the new business events, gaining operational scale and investing in projects critical to our future.
I'm very pleased with our increased momentum in all of our markets and our goal of delivering consistently growing profits to our shareholder is -- unwavering. That concludes today.
If you want to take one more shot at a question, now would be a good time.
Operator
There are no questions queuing up.
Alfred P. West
Okay. Thank you, and thank you, all, for your attention and let's end this.
Have a great day.
Operator
Thank you. Ladies and gentlemen, that does conclude your conference for today.
Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.