Jan 29, 2009
Executives
Al West – Chairman and CEO Dennis McGonigle – CFO and EVP Joe Ujobai – EVP Wayne Withrow – EVP Ed Loughlin – EVP Steve Meyer – EVP Jeff Klauder – EVP and General Counsel Kathy Heilig – Chief Accounting Officer and Controller
Analysts
Tom McCrohan – Janney Montgomery Scott Jeff Hopson – Stifel Nicolaus Murali Gopal – KBW Chris Arndt – Select Equity Group John Britton – Select Equity Group
Operator
Ladies and gentlemen, thank you for standing by and welcome to the SEI fourth quarter earnings conference call. At this time, all lines are in a listen-only mode.
Later, there will be a question-and-answer session and instructions will be given during that time. (Operator instructions) As a reminder, today’s call is being recorded.
At this time then, I’d like to turn the conference over to Chairman and CEO, Mr. Al West.
Please go ahead, sir.
Al West
Thank you. Welcome everybody and good afternoon.
All of our segment leaders are on the call as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller. Now, I'll start by recapping the fourth quarter and the year.
I'll then turn it over to Dennis, first to expand on a few financial matters, including an update on activities around our money market mutual funds. He’ll also remind you of the important characteristics of SEI's business model, and finally he’ll cover LSV and the investment in new business segment.
And after that, each of the business segment leaders will comment on the results of their segments, and then, finally, Kathy Heilig will provide you with some important company-wide statistics. Then, as usual, we will field questions at the end of each report.
So, let me start with the fourth quarter. Fourth quarter earnings fell 82% from a year ago on a revenue decline of 24%.
Diluted earnings per share for the fourth quarter of $0.05 represents an 81% drop from the $0.27 reported for the fourth quarter of 2007. Now for all of 2008, the fourth quarter had a large impact.
Earnings for the year fell 26% on revenues of 9%. Diluted earnings per share for 2008 of $0.71 represents a 45% decrease from the $1.28 recorded for 2007.
Our earnings for the quarter were adversely affected by fourth quarter charge to earnings of $64.3 million or approximately $0.20 per share. This was due to a further drop in the market price of the collateral underlying certain SIVs held in our money market funds.
As you know, this is a continuation of the SIV situation we have been addressing since the third quarter 2007. And Dennis will give you further detailed update of the SIV situation in a few minutes.
Our 24% drop in revenue for the quarter was a result of the impact of rapidly declining capital markets on our assets under management and administration. While we experienced gains in new business during the quarter, these gains were more than offset by weakness in capital markets since a good portion of our revenues are tied directly to assets under management and administration.
Our non-cash asset balances fell by $28.6 billion during the quarter, and SEI's assets under management fell by $15 billion during the quarter, while LSV's assets under management fell by $13.6 billion. For the year 2008, our non-cash asset balances fell by $65.5 billion and SEI’s assets under management fell by $35.6 billion during the year, while LSV's assets under management fell by $29.9 billion.
And also during the fourth quarter, we repurchased 1,110,000 shares of stock at an average price of approximately $15 per share. That translates to $16.6 million of stock repurchases during the quarter.
This repurchase was lower than normal reflecting our increased focus on balance sheet strength. During all of 2008, we repurchased 5,777,000 shares at an average price of $22.4, spending $129.6 million to do so.
The turmoil in capital markets made the fourth quarter and the year 2008 a particularly challenging time. We’re weathering the storm as best we can.
While the capital markets have reduced our revenues and profits significantly, we’re still profitable and generating positive cash flow. Now, we’re working hard to reduce expenses to resize our company to match the new market realities.
We’re also making adjustments to our strategy to concentrate on marketing and sales activities where we are short and intermediate term opportunities for revenue growth. Our segment leaders will talk about this.
We continue to invest in the global wealth platform and its operational infrastructure because the platform is an important part of our future. We just successfully completed and implemented a very large release of the platform, which enhances our capabilities quite a bit.
The release went well and client acceptance to the release was strong. And during the fourth quarter this year, we capitalized 12.5 million of the global wealth platform development and amortized 3.9 million of previously capitalized development.
And with the backdrop of continually troubled equity markets and disruptions in credit markets, 2009 promises to be challenging as well. And as I mentioned earlier, during these times, we'll continue to work hard to reduce and control costs and to continue to execute our strategies.
We are firm in the belief we're going the right path to build a strong growing company. And when the dust clears on this crisis, we feel we'll be well positioned to prosper because crises at times like these are enhancing the value of our business propositions.
Now, this concludes my remarks. So, I'll now ask Dennis McGonigle to cover some company financial issues and give you an update on LSV and the investment in new business segments.
And after that, I'll turn it over to the heads of the other business segments. Dennis?
Dennis McGonigle
Thanks, Al. I will provide an update on our money market funds that we have discussed at length in our prior filings and our past earnings calls.
I also have a few comments on our business as a whole, and I'll briefly cover the fourth quarter results for the investments in new business in LSV segments. During the fourth quarter 2008, as we all know, the capital markets deteriorated rapidly and significantly.
These difficult market conditions negatively impacted the market values of the collateral underlying the money market fund SIV holdings. The reduction in market value resulted in a direct increase in our obligations under the support agreements we have in place and also triggered additional actions.
As you are aware from our prior calls and filings, SEI entered into capital support agreements with three money market mutual funds back in the fourth quarter of 2007. During the fourth quarter of 2008, we extended two of those agreements and allowed the other to lapse.
Among other money market instruments, the funds hold senior notes issued by Structured Investment Vehicles or SIVs which cease making payments on their outstanding notes on our scheduled maturity date. In regards to our two money market funds, I will walk through the two covered funds and provide an update.
The first is the SEIC prime obligation portfolio. SEI has agreed to provide capital support to this fund of up to 100% of the losses incurred on SIVs held in this portfolio.
This fund helps SIV securities with a par value of $258 million on December 31, 2008 down from $274 million at September 30, 2008. During the fourth quarter 2008, SEI incurred non-cash pretax losses of $53.3 million related to the SEIC prime obligation portfolio.
In aggregate, pretax losses related to the SIV holdings in our SEIC prime portfolio are $147 million. This fund continues to maintain a AAA rating by both Moody's and S&P.
The second fund is the SLAT prime obligation portfolio. This fund helps SIV securities with a par value of $68 million on December 31, 2008 down from $74 million on September 30, 2008.
The obligations under the capital support agreement on behalf of this fund resulted in a noncash pretax charge in the fourth quarter of $8.2 million. In aggregate, pretax losses related to the SIV holdings in this fund are $27 million.
In addition to the SIV securities held in our money market funds, we also hold SIV securities directly on our balance sheet. We held SIV securities with a par value of $15 million on December 31, 2008.
Mark-to-market losses on these holdings during the fourth quarter totaled $2.7 million. Aggregate pretax losses on these securities totaled $9.3 million.
To summarize, the aggregate current par value of SIV securities held in our market funds and on our balance sheet totaled $341 million as of December 31, 2008. During the fourth quarter of 2008, we incurred $64.3 million in pretax losses.
The aggregate amount of charges recorded through December 31, 2008 is $183 million. The par value of all SIV holdings as of January 27, 2009 is approximately $340 million.
Given the current market valuations, the first quarter of charges on our SIV securities would be approximately an additional $4.5 million. We have included a schedule with our earnings release that presents the information I just covered.
In addition, I encourage you to review our 10-K filing when made and all past filings for further information. Future losses for our obligations under the capital support agreement will depend upon prevailing conditions in the credit markets as they impact the market value of the collateral underlying our SIV securities.
Continue to rest assured that SEI has managed the situation for the benefit of our clients and ultimately for our shareholders. Our capital strength has allowed us to deal effectively with 100% of the SIV issue.
Our current available cash on hand exceeds $240 million. Our credit facility of $300 million through a syndicate led by JP Morgan and our positive cash flow provides us the capital strength to effectively manage this issue while continuing to do the things necessary to move SEI forward.
In addition to the actions outlined earlier, all of the SEI sponsored money market funds continue to be registered with the US Treasury Department's Temporary Guarantee Program for money market funds. Under this program, Treasury will guarantee the share price of an SEI money market fund held by a shareholder as of September 19, 2008.
While this represents an additional protection to shareholders, it does not replace or supersede SEI's obligations under the capital support agreements. The cost of participation in this program was borne by the funds.
Before I move on to the investments in new business segments, I would like to make a few comments about SEI and how our business is responding to the current market environment. As you know, approximately 70% of our revenue stream is sensitive to market fluctuations.
While this may lead some to categorize us an asset management firm, that does not fully represent the uniqueness of our business. First, our asset management client relationships are typically much broader than your typical asset management firm.
Our clients have selected SEI based on the completeness of our solution, which includes consultative operational and technological elements in support of their business or personal goals. Secondly, unlike many firms that have client relationships built upon a single investment product or style, our clients are typically invested in a globally diversified portfolio made up of multiple asset classes and styles.
This can add a level of stability in markets like these. Finally, we are not a direct to consumer mass marketer of our investment products.
This gives us the stability of clients at emotional times like these. It doesn’t mean our clients serving as intermediaries are not continuing to deal with emotional individual clients, but the fact that they can provide a layer of professional judgment can serve to reduce our volatility.
Just as we are not a typical asset manager, we are not like some of those providing operational outsourcing services. Large competitors like banks carry additional risk with their business that we do not, like commercial lending and commercial banking.
In this environment, we have seen how this continues to add volatility and uncertainty to their business that we do not have. Our operational relationships are also under long-term contracts and the diversity of our client base reduces the risk of client concentration.
The unit heads will discuss this further in the context of their business. I would also like to cover a few key points about our business model, the characteristics of our business model, long-term client relationships, positive cash flow generation, recurring revenue and some expense components that are variable in nature, give us a level of resiliency in markets like these.
In addition, as you all know, we do not take principal risk as investments in commercial banks do, and our cash flow and no direct debt structure enhance the strength of our balance sheet. We continue to be well positioned to capitalize on opportunities when things settle down.
I would now like to cover the investments in new business segment and the LSV segment. Activities in the investments in new business segment are focused on direct marketing to the ultra high net worth investors.
During the quarter, the investments in new business segment generated a loss of $1.6 million. This compares to a loss of $3.2 million for the fourth quarter of 2007.
The efforts in this segment continue to be centered on learning, developing, and delivering our life and wealth services to the ultra high net worth segment and leveraging this learning to other parts of the company. As you know, SEI historically has used the investments in new business segment as an incubator for new initiatives.
We view the losses in this segment as an investment in future opportunities and/or services, and you can expect losses in this segment to continue. I will now turn to LSV.
We continue to earn approximately 43% of LSV asset management. LSV, given market performance, had a challenging quarter of financial performance.
Earnings contribution to SEI from LSV was approximately $16.9 million in the fourth quarter of 2008. This compares to a contribution of $30.6 million in the fourth quarter of 2007 and $23.8 million in the third quarter of 2008.
This year-over-year and quarter-to-quarter decrease was due to a loss of assets from market depreciation and some negative cash flows. During the fourth quarter, LSV’s net assets shrank approximately $13.6 billion.
This was due primarily to market depreciation with some negative cash flow. We expect LSV to continue to be challenged as are all value managers by the volatile markets.
Revenues from LSV for the quarter were approximately $47.8 million. This compares to revenues of $82.2 million in the fourth quarter in 2007 and $64.6 million in the third quarter of 2008.
Revenues were impacted by asset declines as discussed a second ago. On SEI’s balance sheet, of our reported cash and short-term investments of approximately $417 million, $61 million is attributable to LSV at December 31, 2008.
Of our reported receivables of $208 million, $57 million were attributable to LSV. Liabilities are primarily affected by the debt associated with our guarantee to the LSV employee group.
This is reflected in both current liabilities approximately $7 million and long-term debt, approximately $24 million. That concludes my remarks.
Now, we’ll take any questions you have.
Operator
Great, thank you. (Operator instructions) And I’m showing a question from the line of Tom McCrohan with Janney Montgomery.
Please go ahead.
Tom McCrohan – Janney Montgomery Scott
Hi, Dennis. Can you update us what the market value is today for the – or as of December 31, market value for the securities where you gave us the par value for the SIV holdings?
Dennis McGonigle
Well, Tom, it's roughly that you could calculate it based on the losses, net of the par value.
Tom McCrohan – Janney Montgomery Scott
Were there any big maturities this quarter? The par value went down $8 million, so that’s just $8 million of maturities, I guess, in the quarter?
Dennis McGonigle
It's really cash flows off of those structures that we received.
Tom McCrohan – Janney Montgomery Scott
Okay.
Dennis McGonigle
So, it's not like a full structured maturing, it would be underlying collateral thrown off cash flow.
Tom McCrohan – Janney Montgomery Scott
So, in September Q, you published, disclosed that the market value for the SIV holdings was $223 million, about 64% of par. And so you’re saying for this quarter, just subtract from last quarter’s par value the charge that was taken?
Dennis McGonigle
Yes, that will give you a rough estimate, yes.
Tom McCrohan – Janney Montgomery Scott
So that would imply that the value of those SIVs is close to slightly under 30%, does that sound right?
Dennis McGonigle
Yes.
Tom McCrohan – Janney Montgomery Scott
So, given that – recently when Goldman restructured that Cheney Holdings [ph] and called it Griffin [ph], renamed it, and they were offering a price of $0.51 to a dollar, you kind of view that as kind of an unacceptable price or maybe the fund management did and thought it was kind of a firesale price, but now it looks like, maybe that was actually a decent price. I’m just trying to –
Dennis McGonigle
Now, you have to remember that what was embedded in their price was a pretty significant component of cash which we got anyway.
Tom McCrohan – Janney Montgomery Scott
Okay.
Dennis McGonigle
Because the structure had built up cash over the balance of course of a year. So, even though we didn’t – so their price was really in the low 40’s net of the cash because we were getting the cash anyway.
Tom McCrohan – Janney Montgomery Scott
Okay. And yes, they don't follow like (inaudible) and their SIV is like $0.30 range on the dollar.
Do you have any insight into how your – why your valuation is higher than $0.30?
Dennis McGonigle
Well, one insight would be that we might not hold the same SIV securities that they own and that theirs might have a lower value as a result.
Tom McCrohan – Janney Montgomery Scott
There’s a question on LSV, and I don't think that often there's the market probably not very receptive to buying assets like LSV, but you still believe it’s in the best interest of shareholders to own LSV?
Dennis McGonigle
I guess I'd answer it in a couple of ways. One, I'd say that even with the depressed earnings quarter-to-quarter, the significant earnings flow that we’re getting from LSV is still a real positive relative to the level of investment – original investment we’ve ever made, number one.
Number two, I think we’ve talked a little bit in the past that owning 43%, we really try to be as constructive and contributing partners we can be to the entire partnership. So, we really would look to do things that would maximize the value of the entire partnership which would then maximize the value of our 43%.
Tom McCrohan – Janney Montgomery Scott
Okay. Thanks for taking my questions.
Dennis McGonigle
That’s how we see ultimate – continuing to get as much value out of LSV as possible. We think it’s – we got to look at the whole versus just our piece to do that.
Operator
Great, thank you. And we have a question from the line of Jeff Hopson with Stifel Nicolaus.
Please go ahead.
Jeff Hopson – Stifel Nicolaus
Okay, thank you. Dennis, on the tax rate, you’d mentioned that it was at a higher rate.
So, is that a higher rate on the SIV losses and at normal rate on operations, or how do you break that out?
Dennis McGonigle
It's basically at normal federal rate, 35%, and then we had some of the SIV losses, we would not be able to take in the current period. We are at Pennsylvania state tax law, so we went up with a much higher state tax rate, and when you only have the level of earnings we had net of the losses, it just produces a much higher percentage rate.
Some were to do with PA state taxes and really nothing to do with federal tax.
Jeff Hopson – Stifel Nicolaus
But would the higher state rate apply to operational earnings as well?
Dennis McGonigle
It applies to the – yes, it does, because you would be able to take that loss out of operational earnings.
Jeff Hopson – Stifel Nicolaus
I got you.
Dennis McGonigle
So you’re paying a state rate. To simplify, you’re paying a state rate on operational earnings, because of the net and the federal rate is on the net.
Jeff Hopson – Stifel Nicolaus
Got you. Okay, thanks.
Operator
And we do have a question from the line Murali Gopal with KBW.
Murali Gopal – KBW
Hi Dennis.
Dennis McGonigle
Hi Murali.
Murali Gopal – KBW
When you said the structure – the SIV structure had built up cash and net of that, the Goldman price was low 40s or so. Is that something that – the cash that has build up in the structure, has that been distributed or how should I think about it today in terms of the cash?
Dennis McGonigle
It was distributed post the restructuring of that security. Essentially what happens in these restructurings is that, generally, no cash flows exit the fall in structure until it restructures.
Yes, there are exceptions to that but generally that’s the rule. The receiver or the trustee just lets cash build up.
Murali Gopal – KBW
Okay. And when I look at the disclosure in the press release, you have the support amount which is $288 million and then you also show the required collateral, and I’m just trying to understand what is the required collateral?
Dennis McGonigle
Generally, under our support agreements, we are required to set aside specific collateral for those losses, not as they occur but to keep at a level of collateral against those losses. So that assures the rating agencies in particular that if we were to liquidate that security today, there would be the capital available to put into those funds.
So it has more to do with maintaining the AAA rated status of the fund.
Murali Gopal – KBW
Okay, so should we think about it as a more you have some cash set aside as collateral?
Dennis McGonigle
There is some cash but most of that is – the bulk of that is done through letters of credit off of our credit facility.
Murali Gopal – KBW
Okay.
Dennis McGonigle
Okay.
Murali Gopal – KBW
Yes. Thank you.
Dennis McGonigle
You’re welcome.
Operator
Thank you. And we’re showing no further questions in queue for the moment.
Al West
Thank you, Dennis. I’m now going to turn it over to Joe Ujobai to discuss our private banking segment.
Joe?
Joe Ujobai
Thank you, Al. Today, I would like to review our financials, give you an update on our market activity, and discuss our books in private banking going forward.
I will discuss the fourth quarter 2008 as well as give you a full year update. As a financial update for the fourth quarter, revenue of approximately $98 million declined by 1.9% from the third quarter.
During the quarter, we saw significant weakness in our asset management business. Average assets under management for the quarter were $10.9 billion, a decline of 34% from the third quarter.
Approximately 65% of the decline in assets was attributable to market depreciation and currency valuation, and 35% resulted from net client redemptions. Over 90% of the assets in this segment come from our global business.
During the quarter, we experienced a significant increase in our transactional brokerage business which mitigated most of the quarterly decline in our asset management revenue. Profit increased from the third quarter by approximately 9.2% to $22.4 million.
The profit increase was due primarily to one-time gains including the additional brokerage revenue, increased expense control consisting mostly of a decrease in our annual incentive compensation, and other one-time personnel costs. Margin for the quarter was 23%, a slight increase from the third quarter, again due primarily to expense control.
As I always mention, we expect to see continued volatility around our margin as we launch global wealth services in Europe and in the US. Overall margin in the segment is also under increased pressure due to lowered asset management balances and a pullback on wealth processing one-time revenues.
Longer term, we expect stronger margins as we grow and scale our private banking business on the new platform. I would now like to give you a brief financial update for the full year.
Recurring revenue associated with our wealth processing business increased by approximately $9.4 million to $202.4 million. One-time revenue associated with our wealth processing business decreased by $9.5 million to $20.9 million.
This reflected general pullback by our clients' discretionary short-term spending. At this point, I believe that these are delayed opportunities.
For example, for custom work that was pulled back, it may be just deferred, it may not be entirely lost. For the full year, assets under management declined by 50% reflecting a 2008 revenue loss of almost $20 million.
Brokerage revenue increased by 33% or approximately $13 million. Year-over-year, overall expenses decreased by $4 million.
During the year, expenses associated with the buildout and operation of global wealth services increased by approximately $12.6 million. Margin for the year remained roughly the same at 20%.
As an update on market activity, we are actively engaged in the following four areas. The continued rollout of global services.
As Al mentioned, we successfully converted HSBC's private bank in the UK to a significant upgrade of the platform in mid-January. This release had an additional core infrastructure functionality and the launch of our discretionary investment management capabilities.
We’re on target to convert Towry Law at the end of the second quarter. Number two, the buildout of our pipeline focused on the UK and the US opportunities.
In the UK, we continue to sharpen our focus on the non-bank wealth management segment, while staying close to our larger banking prospects as they sort out the market conditions. The non-bank or independent wealth advisor segment has been listing towards model state discretionary investment solutions, so the business models line up nicely with the strategic functionality of the global platform.
Although our selling activity is brisk, the market uncertainty has slowed decisions at all wealth managers, both banks and non-banks. The third, a renewed focus on the US opportunity based on current market conditions.
As the US banking industry reacts to the uncertainty of the marketplace, we are prepared to help our clients succeed on a number of fronts. For example, community banks.
In 2008, we sold six new community bank wealth processing relationships with asset management potential in most of these organizations. Community banks see a renewed opportunity to grow their business as larger regional or national banks and other wealth managers face growing challenges.
Secondly, efficiency and focus. Most of our clients are rethinking their current business model which could lead towards more outsourcing opportunities for SEI.
We have a renewed focus on identifying these types of opportunities which should support our strategic transition to global wealth services. And finally, mergers and acquisitions.
We have a long and successful track record of helping our clients acquire and consolidate large books of wealth management business. M&A activity presents both an opportunity and a risk for us.
Finally, we’re focusing our distribution footprint. Although market volatility has significantly reversed cash flow, we continue to support investment management distribution relationships in select markets, which I believe will position us to take advantage of the eventual change in the investor sentiment.
This year's [ph] focus include the US community banks, Canadian and UK distributors, as well as our global relationship with HSBC private bank. In conclusion, I expect the foreseeable future to be challenging, given our declining assets under management and general market conditions, which see our customers and prospects putting off decisions and commitments in reaction to current market uncertainties.
We believe though that in time the compelling value proposition offer will win out and we will again see positive sales activity in the private banking business. SEI’s long-term strategy, our outsourced business solutions, and our substantial investment in the future will help our clients and SEI succeed.
In the meantime, we will carefully monitor expenses, continue to invest in the launch of our new solution, and sharpen our market focus. Are there any questions?
Operator
(Operator instructions) And we are showing a question from the line of Murali Gopal with KBW. Please go ahead.
Murali Gopal – KBW
Good afternoon, Joe. A quick question, I know the revenue sequentially in the private bank declined only about 2% and I know you kind of mentioned, but I just want to make sure I understand this completely.
I think you mentioned something about transaction based and brokerage revenues being raised upon. Is that accurate?
Joe Ujobai
That’s correct. We really have three leverage of revenue in this segment.
We have the traditional revenue associated with our US wealth processing business which is generally accounts based. We have our asset management revenue which grew fairly substantially for the last couple of years, but we’ve been obviously given (inaudible) taking a bit of a beating in that area, and the third area is a brokerage transaction business traditionally with the clients that use Trust 3000 where we help facilitate trading activity.
And in the fourth quarter, we had an exceptionally strong quarter. We had a very exceptionally strong December.
Murali Gopal – KBW
But this is in general that trading activity of trust alliance in your – who use your Trust 3000.
Joe Ujobai
That’s correct.
Murali Gopal – KBW
Okay. And also just in terms of what’s going on in the US banking industry, there is a lot of acquisitions and divestitures, and you see that in community banks and regional banks and super regional banks, and can you just kind of frame – provide us a framework of in terms of your clients and what – you may have some large clients impacted with what’s going on, can you talk a little bit about that?
And just in terms of net-net, are you coming out in a better or the tall [ph] merges and acquisitions, you generally seem to be losing out on some of your clients?
Joe Ujobai
If we look back historically, when there has been a merger or an acquisition, historically if our clients acquire somebody else, we have traditionally been able to retain the client and actually add more business. If one of our clients was acquired, traditionally we would lose that business.
And I recently looked back, in over the last five or six years or even probably a longer period of time, it’s usually 50/50. We usually – with 50%, we usually win more business, retain to win more business; and with 50%, we usually lose some business.
So, I think over time, mergers and acquisitions present both an opportunity for us and a risk. We did see obviously some activity last year, obviously some of the US banks were acquired that sort of stock after the TARP program was put in place.
So in the last couple of months, there has been that much M&A activity. So we view it as an opportunity to go back to our current clients and talk to them about ways to run their operations more efficiently.
And we’re trying to rethink our strategy and spend more time with our clients as they are trying to survive in these tough conditions.
Murali Gopal – KBW
Okay. And if you don’t mind, could you refresh my memory just in terms of the couple of large deals that have happened in terms of Wealth Wachovia and WaMu JPM, which side of the deal if you were and any color on that?
Joe Ujobai
At Wealth Wachovia, we've had a long-term relationship with Wealth and we have not – we do not currently have a relationship with Wachovia, although some of (inaudible) bank of Wachovia over the years have been clients. And at PNC and National City Bank, we have a relationship with National City Bank, we do not have relationship with PNC.
Murali Gopal – KBW
Okay, great. Thanks.
Operator
Thank you. And we’re showing no further questions in queue.
I’m sorry we do have question that just queued up from Chris Arndt with Select Equity Group. Please go ahead.
Chris Arndt – Select Equity Group
Joe, could you in terms of the three segments processing, asset management and brokerage, could you give us a sense of how large each one of those are approximately?
Joe Ujobai
Yes. We break this out in the detailed filing, but let me – you want it for the year?
Chris Arndt – Select Equity Group
For the quarter would be more helpful actually.
Joe Ujobai
Okay. For the quarter – so brokerage is about 20%, asset management is about 18%, and the rest is – sorry, asset management including liquidity is probably closer to 25% and the other 55% is more closely tied to the processing business.
Chris Arndt – Select Equity Group
Okay. And is it fair to say the gain in brokerage was pretty much offset the decline in asset management with the processing of approximately flat with the previous year or was processing actually up?
Joe Ujobai
Processing was roughly – to the previous year, hold on a second, as I mentioned earlier, processing recurring revenue was actually up about $9.5 million, one time was down so processing was generally flat. And for the quarter, brokerage made up most of the loss for asset management and for the year, it made up about two-thirds of the loss for asset management.
Chris Arndt – Select Equity Group
And for the quarter, that was a gain of $13 million is what you said, right?
Joe Ujobai
For the year, it was $13 million more than the previous year. And for the quarter, it was –
Chris Arndt – Select Equity Group
And for the quarter, what was it?
Joe Ujobai
For the quarter, it was approximately $19.5 million, which was $8 million more than the previous quarter.
Chris Arndt – Select Equity Group
And I expect that that would be – the previous quarter meaning the previous year?
Joe Ujobai
No, the third quarter.
Chris Arndt – Select Equity Group
Okay. So sequentially up $8 million and probably a lot of that is tax-related selling that you don’t expect to recur going forward or at least the first year of the year.
Joe Ujobai
Yes, I think that there was some tax selling and there was a fair amount of activity towards the end of the year.
Chris Arndt – Select Equity Group
Okay, thanks.
Joe Ujobai
Thank you.
Operator
Thank you, and we now have no further questions. Thank you.
Al West
Thank you, Joe. Our next segment is investment advisors, and Wayne Withrow will cover this segment.
Wayne.
Wayne Withrow
Thanks Al. The close tie between market evaluations and the advisor segment's revenue compounded by the close tie between consumer confidence and our daily cash flow created a challenging environment of historical proportions for the advisor network.
Given the magnitude of the turmoil in financial markets during the fourth quarter, I will direct my comments towards what has changed since the third quarter and what we may expect in 2009. For comparison to last year’s fourth quarter, I would ask that you review our press release.
Revenues for the fourth quarter decreased almost $17 million or 29% from the third quarter. The primary cause of this decline was a $7.6 billion decrease in our average assets under management.
Unlike the past periods, however, we also experienced a significant decline in the average basis points earned on fund balances. Over the past few years, we have enjoyed significant operating scale as our fund balances grew but the large decline in balances had somewhat diminished this scale.
A shift to money market funds was also a significant factor in this decline. As a point of reference, money market funds represent 11.5% of our average AUM in the fourth quarter while they represented only 7.3% during the third quarter.
As much as this hurts right now, this does present significant upside margin opportunity when the capital markets eventually recover. Our fourth quarter decline in average assets under management also reflects $964 million in net negative cash flow.
Both declining receipts and increasing redemptions contributed to this decline with redemptions being the biggest culprit. For the year, our redemption rate was 27.5% with a large percentage of these redemptions occurring during the volatile fourth quarter.
To put this in perspective, our redemption rate last year was slightly less than 18%. While it is not possible to completely quantify fourth quarter redemptions reflected not only a lack of consumer confidence but also a fair amount of tax loss harvesting.
Profits for the quarter were $14.7 million lower than our profits from the third quarter. This reflects a $16.9 million decrease in revenues, slightly offset by $2 million in expense reductions.
Reduced direct costs due to lower asset balances and reduced discretionary compensation expenses were both major components of our expense savings. While the headline for our existing advisors is that receipts are down and redemptions are up, the headline for new advisors is that our recruiting efforts are generating good results.
For the year 2008, we recruited 175 new advisors and our pipeline contains many high quality new advisors. While we have experienced much financial pain in these turbulent times, others are experiencing even greater pain and this presents an opportunity for firms like FTI that have a solid financial position and a strong value proposition.
To help capture this opportunity, we have recently redirected the existing resources to increase the size of our new advisor sales team and this will be a point of emphasis during 2009. We will do this while simultaneously reinforcing the value of our outsourcing solution for our existing advisors especially in an environment where they are seeing declining revenues in their practices.
In summary, declining market valuations and eroding investor confidence have had a negative impact in our fourth quarter financial results. Near-term revenue growth may be challenging until we see a recovery in at least one of these market conditions but we intend to aggressively manage our expenses during this time.
Just as these markets present strong near-term challenges, they present even stronger long-term opportunities and serve as a case study for the value of our outsourcing solution. I will now entertain questions.
Operator
Thank you. (Operator instructions) And we’re showing a question from the line of Jeff Hopson with Stifel Nicolaus.
Please go ahead.
Jeff Hopson – Stifel Nicolaus
Okay, thank you. Wayne, on the expense side, how much managing can you do from here off the fourth quarter level?
Wayne Withrow
Well Jeff, we’re going to – as I said, we’re going to aggressively manage the expenses and I think we’re going to do whatever we need to do to maintain profitability in this segment.
Jeff Hopson – Stifel Nicolaus
Okay, thank you.
Operator
Thank you, and we have a question then from the line of Murali Gopal with KBW. Please go ahead.
Murali Gopal – KBW
Wayne, just following up on the last question, would you say the fixed expense component in your segment is materially or meaningfully higher than the other segments, because all these segments did have downward pressure on the top line. But the operating margin, if I look at at least a couple of other segments, the operating side, operating income and operating margin did not decline by quite as much and I’m thinking how much of this has to do with you having a higher fixed expense component in your expense base?
Wayne Withrow
I don’t attribute it to a high fixed expense component. When I look at it, our profits are very highly leveraged to our revenue line and the market decline was swift and steepened.
And I think that when you look at it in a high leverage model like we have, we saw that reflected in the bottom line and we need to react in the expense side in this market.
Murali Gopal – KBW
Are you saying there’s probably some lag in terms of how rapidly the revenue environment changes to adjust the expenses to the revenue environment, there is a leg, some kind of a lag?
Wayne Withrow
I think that’s a true statement.
Murali Gopal – KBW
Okay, thank you.
Operator
Thanks. And we have a question then from the line of Tom McCrohan from Janney Montgomery.
Please go ahead.
Tom McCrohan – Janney Montgomery
Hi, Wayne. I just wanted to confirm, did you say that the decline in assets under management triggered lower pricing tiers, is that what was driving the revenue yields being down a little bit?
Wayne Withrow
It’s not so much the revenue tiers, within the funds themselves, there was fixed expenses. We had to share the fixed expenses over a lower revenue base and it’s a combination of that and a shift towards money market balances which are a much lower basis point fee.
The two of them together.
Tom McCrohan – Janney Montgomery
Okay, thank you.
Operator
Thanks. And we have a question from the line of Chris Arndt with Select Equity Group.
Please go ahead.
John Britton – Select Equity Group
Actually it’s John Britton, I was actually wondering about that fee dynamic also, Wayne. So if we – by my calculation, it comes out about 52 basis points for the quarter as opposed to an average of around 65, something like that, 67.
Is this lower fee level going to persist as long as markets basically stay around these levels? Without a rebound, should we not expect an improvement in the effective fee?
Wayne Withrow
Well, without doing the accounting, I think the average basis point collectively of the quarter was closer to 55 and I think for the year, it was closer to around 59. What I would say is, without an increase in the balances and/or a shift from lower fee money market fund into higher yielding permanent assets, fixed income or equity, this is the level you should expect, yes.
John Britton – Select Equity Group
What is the fee difference between your money funds and your equities, the higher fee? Is it really a dramatic fee difference?
Wayne Withrow
I’d say 20 basis points.
John Britton – Select Equity Group
Okay, because the shift from 7% to 11% in terms of money market funds is not that material.
Wayne Withrow
Pardon me?
John Britton – Select Equity Group
The shift going from 7% to 11% in money market funds is not that big a deal. I mean it’s some but it’s not as dramatic as you have a market sell off comparable to what we had, and it wouldn’t surprise me to see that go to 20%.
Wayne Withrow
Was it a question?
John Britton – Select Equity Group
I guess the question related to that would be, are there other – was there a trend in place in terms of the shift from the higher fee assets over to money funds such that we should expect the money fund asset could actually be higher for this coming quarter or is that impossible to gauge?
Wayne Withrow
I think it’s a reflection of the – I can’t tell what the end investor is going to do, but I would say that it’s not really news that the end investor is very skittish right now and that across United States, you are seeing a shift out of equities and into cash being on the sidelines.
John Britton – Select Equity Group
All right.
Wayne Withrow
And then that’s all this is.
John Britton – Select Equity Group
Okay. And so on the expense side, is what you’re saying that basically this happened so abruptly that you couldn’t put in place the full scope of these cost reductions that you intend to put in place by the end of the first quarter?
Wayne Withrow
We’re mixing apples and oranges here. We’re talking about the basis point, that’s the expenses embedded in the funds.
John Britton – Select Equity Group
No, no, sorry. I’m not talking about that any longer.
I’m talking about the – related to the margin in the business in investment advisor segment for the quarter and your cost reduction efforts, setting aside the yield or the average fee realization, I guess I’m wondering in terms of your ability to control costs, what you did in the fourth quarter versus what you’re planning to do in the coming quarters, was it just that the market deteriorated so fast that you couldn’t get ahead of that? I’m trying to gauge how much more cost you can take out of the business to improve the margin even if we don’t get a market rebound.
Wayne Withrow
I think that’s a fair comment. If you look at it, the market in October/November dropped to unprecedented levels and we can’t react that quickly.
John Britton – Select Equity Group
And what kind of costs can you address? Is this a headcount issue or are there other types of costs that are relatively easy to get at or it doesn’t seem obvious what costs you could go after?
Wayne Withrow
I think we have all the costs that you see associated with the business. So I think headcount is clearly one of them, I think we have re-investments in projects that occur in the business and reinvestment in the product.
Now as you can well imagine, if you have a project under way, you certainly can’t stop it tomorrow, especially if you have some type of commitment to complete the project. So it runs the full gamut.
It’s not one or another, but all the expenses you associate with the business.
John Britton – Select Equity Group
Okay, thank you.
Operator
Thanks. And we have a question from the line of Tom McCrohan with Janney Montgomery.
Please go ahead.
Tom McCrohan – Janney Montgomery
Hey Wayne, I just have a follow up on the fee realization rate. The trend that you saw this quarter obviously was just really amplified, but you had a similar trend in Q3 where assets were down, people were shifting more into liquid assets and assets under management during [ph] Q3 was down 20%, but on a sequential basis, the fee realization rate went up in Q3.
So what was materially different this quarter versus Q3 that would have the fee realization rate going down?
Wayne Withrow
Sometime during the second quarter, near the end of the second quarter, we had a slight basis point increase in a few of our funds. I believe it’s a 3 basis point fee increase.
We’re seeing the full impact of that in the third quarter if you look at it sequentially, that’s what I would attribute it to.
Operator
Any further questions, sir?
Tom McCrohan – Janney Montgomery
No, that’s it. Thank you.
Operator
All right. We have no further questions in queue at this time.
Al West
Thank you, Wayne. Our next segment is institutional investor segment and I’m going to turn it over to Ed Loughlin to discuss this segment.
Ed.
Ed Loughlin
Thanks Al. Good afternoon everyone.
As you’re already probably tired of hearing, the severe decline in the global capital markets during the fourth quarter significantly impacted both revenues and profits. For the institutional segment, record new sales of $7.2 billion and $5.2 billion of net new client funding for the full year helped to dampen but did not eliminate the negative revenue and profit impact of the capital markets.
The fourth quarter results compared to fourth quarter of 2007 are in the earnings release and I’m happy to answer questions about them, but due to the unusual nature of the fourth quarter and the large impact it placed both on the annual results and the segment going forward, I’m going to focus most of my comments on comparing the fourth quarter of 2008 to the third quarter of 2008. Revenues approaching $44 million for the fourth quarter decreased 18% compared to the third quarter and profits declined 8% to $20.5 million versus the third quarter.
Revenues and profits were negatively impacted both by the drop in the capital markets and also the strengthening of the US dollar. Reduced direct costs that are related to asset balances and reduced discretionary incentive comp expenses contributed positively to the profits for the quarter and also for the year.
Margins will continue to be volatile until the asset base revenue stabilizes. Asset balances decreased by over $8 billion during the year totaling $40.5 billion at year end.
During the fourth quarter, net new client funding was $1.7 billion and our backlog of committed but unfunded assets at the end of the year was $625 million. Sales momentum continued during the fourth quarter with $1.6 billion in new client sales for the quarter.
New client sales of $7.2 billion for the entire year was a record high for this segment. A key driver for institutional sales growth is the continued global adoption of SEI’s integrated pension and endowment solutions in our six target markets.
New clients were globally diversified by geographic market and represent a healthy mix of retirement assets, endowed assets and healthcare operating pools. We are pleased with our sales results for the year and optimistic about the opportunities in our target markets.
Institutional decision-making has slowed down due to the market environment, but the value of our business proposition integrating both pension finance and corporate finance with goals-based investing will be more evident to institutional decision-makers as the markets start to normalize. Rest assured that we continue to initiate discussions with new prospects around the world to provide a pipeline for future growth.
Thank you very much and I’m happy to entertain any questions.
Operator
Thank you. (Operator instructions) And we are showing a question from the line of Jeff Hopson with Stifel Nicolaus.
Please go ahead.
Jeff Hopson – Stifel Nicolaus
Okay, thank you. Ed, obviously there’s a huge pension underfunding issue that’s developing, so can you put that into context of the opportunity for you guys in helping clients to deal with that?
Ed Loughlin
Sure. Just generally, I think that that is a trend that’s probably unfavorable for corporations, okay, but it’s favorable for our business because of the fact that – I think it’s become evident that corporations need to have other goals other than just beating market benchmarks.
Beating market benchmarks doesn’t necessarily help them to improve their funded status or to better control pension expense. So I think we’ve seen a lot of traction over the last couple of years since we’ve done this work with modeling both corporate finance, pension finance and the liabilities and bringing that all together into an effective strategy.
And so I think that generally that unfortunate situation, I think, can be a positive for our business.
Jeff Hopson – Stifel Nicolaus
Okay. I’m sorry, I was distracted.
Could you give us the new business metrics again?
Ed Loughlin
Well, new business for the entire year was $7.2 billion of total assets and in the fourth quarter, it was $1.6 billion.
Jeff Hopson – Stifel Nicolaus
Okay, great. Thank you.
Ed Loughlin
Sure.
Operator
Thanks. At this time, I’m showing no further questions.
Al West
Our final segment today is investment managers and I’m going to turn it over to Steve Meyer to discuss this segment.
Steve Meyer
Thanks, Al. Good afternoon everyone.
As all my colleagues have previously mentioned and I would feel remiss if I did not also mention, the severe downturn in the capital markets in the fourth quarter did have a negative impact on the financial results of the investment manager segment. So with that out of the way, I will briefly cover the financials for this segment for the fourth quarter of 2008 and then focus my remarks on our pipeline, the market and our focus as we enter 2009.
The investment manager segment financial results for the fourth quarter 2008 are as follows: Revenues for the segment totaled $36 million or a 5.9% decrease compared to the third quarter of 2008. This decline was primarily a result of the asset declines in the funds of our existing client base due to market conditions.
Our quarterly profit for the segment of $12.4 million was up 6.8% from the third quarter of 2008. This increase in profit from the third quarter of 2008 was due to the reduction of certain expenses, including a reduction in incentive compensation in the quarter, as well as the timing of certain other expenses.
Our third-party asset balances at the end of the fourth quarter of 2008 were $234.6 billion or $21.9 billion lower than at the end of the third quarter of 2008. Approximately $800 million of this decrease is attributable to negative net client fundings and net paid-in capital and $22.7 billion in market depreciation.
The drivers of this downturn in assets were decreased performance combined with increased redemptions due to market conditions. During the fourth quarter of 2008, the segment had new business sales events totaling $6.1 million in annualized revenue.
While this quarter was not a record in new sales events, I view it as very strong in light of the market crisis and the uncertainty in the market. In addition, four key clients were re-contracted during the fourth quarter which represented $15.6 million in annualized revenue.
Despite the challenging markets, our pipeline continues to remain strong and active. While the market conditions continue to slow decisions and delay some firms in their plans, we still feel there is strong opportunity for long-term future growth.
From a market standpoint, these continue to be challenging and uncertain times. This unprecedented market continues to put pressure on our investment manager clients.
This resulted in many managers having to focus internally and navigate the short term. Continued pressure on performance and increases in redemptions in the industry makes decision making difficult and slowed in this environment.
However, this market is also making managers realize the benefits of focusing on their core value and expertise. Additionally, fundamental changes are predicted to come out of this market that will change the requirements to compete in this business.
Dealing with the anticipated increased regulation, improving transparency, supporting custom client reporting and scalability will no longer be optional. They will be a requirement for investment mangers to compete in the future.
As you know, this is where we have focused on and built out world-class solutions that we believe will provide a strong foundation and infrastructure for investment managers as they navigate this new reality. We will balance this opportunity with short-term economic realities that are affecting our top and bottom line growth.
We are focused on expense management and well-balanced growth going forward. For example, while we will continue to develop our solutions and that’s in our business, we will direct our spend to the items that have the greatest market need and impact, while delaying others.
We are focused on areas where we can become more efficient and achieve greater productivity in the delivery of our solutions. As always, this aligns with the needs of our clients and target market.
So while the market will continue with great challenges to our near-term revenue growth and underlying margin, we have a clear and sharp focus for 2009. We will continue in our path and focus on our strategic plan while navigating the economic pressures and realities that this market is creating.
I will now turn it over for any questions you have.
Operator
Thank you. (Operator instructions) And we are showing a question from the line of Murali Gopal with KBW, please go ahead.
Murali Gopal – KBW
Thanks, Steve. A quick question, when I look at to your assets in administration, it was down in the quarter, but I guess a little less – I would assume a little less than half of your assets under administration, the segment, is primarily alternative assets, probably mostly related to hedge funds and given everything that we have seen in the hedge fund industry and the turmoil there and the rapidly shrinking size of the industry as such, given that backdrop, the administration level seems to have held up pretty well.
Could you talk a little bit in terms of what you saw in that industry and what you saw in specific de-opt [ph] lines and why you may not have seen as much of a slowdown or a shrinkage in your assets?
Steve Meyer
Sure. Well I think what you are seeing is, it is approximately down 8% dip in our assets quarter over quarter, but again that is a net number.
If you are to break out the hedge fund or alternative assets only, that number is higher but I think it is a testament to the business we are focused on and how we built the business. We have a very good diversified base of business and clients.
So while we did see shrinkage in one portion of our business, primarily the alternative side, a lot of those assets went into or we saw an influx of assets into other products from our traditional managers as well into their cash components of their funds, as well as liquidity and stable value products. So that’s – and although those products might be lower fee products, it still made up for the decline in assets.
Across the industry, I do think also it is a testament we have built a very good and solid core of clients across all of our different solutions, including the hedge side, and while all of them or most of them are under pressure and declines, a lot of these firms have been around for a long time and we are able to stabilize I think more than others. It still remains challenging times for them.
I think we still see redemptions in the industry but I think as everyone have seen, most managers each days are finding ways to gate those redemptions and try to delay them over a period of time.
Murali Gopal – KBW
Okay. I know you said it is higher than 8%.
Could you share with us what the number was?
Steve Meyer
Just for the hedge fund side?
Murali Gopal –KBW
Right.
Steve Meyer
Probably more closer to 15%.
Murali Gopal –KBW
Okay, great. Thanks.
Steve Meyer
Sure.
Operator
Thank you. We have a question from the line of Jeff Hopson with Stifel Nicolaus.
Please go ahead.
Jeff Hopson – Stifel Nicolaus
Okay, thanks. So could you characterized the new business that you brought in, any change in where that is coming from in terms of a point I guess or geography?
Steve Meyer
Jeff, you are asking specifically for fourth quarter?
Jeff Hopson – Stifel Nicolaus
Yes.
Steve Meyer
So fourth quarter again was a good mix. There was a portion of it, I would say a little less than half, from our alternative side and half of it from our traditional including some picked up in our global non-US managers.
So again, one of our focuses that we talked about in the beginning of 2008 that we stayed true to and continue is to really build out the business on a diversified path and to expand our non-US presence and I think the quarter was also a sign of that.
Jeff Hopson – Stifel Nicolaus
Okay. And then if we assume that in the next six months, say that things stabilize, in particular on the hedge side, I mean, is this sell off and challenge a reason why you can go in on the specific things that you can go in and sell just because of kind of the environment and what’s happened and how it can improve going from here.
Is there any hope? Is there an offensive strategy kind of in response to what’s happened?
Steve Meyer
I would say the answer is twofold. One, there is really no change in our core strategy because what we are delivering today I think still holds the same value proposition.
I think it is actually – it is highly even more in these difficult times where managers are faced with the realities of they are going to have to have a new business model for at least the short term and most likely the long term. So with that side, I think they are looking for other avenues to support their infrastructure and that is somewhere we play very well.
In response to is there is offensive strategy, absolutely, we are definitely focused on not just staying within our long-term strategic value and our value proposition, but we clearly see some short-term pressure on managers around certain components of their business and that depends literally on the type of manager, their mix of business, but for example, a lot of managers have built plate [ph] complex internal infrastructures around the reconciliations, around the reporting, and while I think they are very focused and resonate with our long-term valued proposition, they need help right now, some of these specific components within their operations, and we are very focused on how we can go in and help them in the short term and then transform long term into a core value proposition.
Jeff Hopson – Stifel Nicolaus
Okay, great. Thank you.
Operator
Tom McCrohan – Janney Montgomery Scott
,
Steve Meyer
I'd say they are both primary objectives. We do believe with our existing clients, there still remains opportunity for us to grow our wallet share, but we also feel very strongly, and based on the response to my last question, there is immediate opportunity for us to grow our new business, especially with a short-term offensive but in line with our long-term value proposition.
Tom McCrohan – Janney Montgomery Scott
And given some of – like one major competitors, State Street has had a pretty rough goal this quarter. Some concerns about their capital level.
Are you starting to see any increase in business from – as a direct result of that particular bank, maybe customers getting a little concerned about what is going on there in that institution?
Steve Meyer
I would rather not speak specific to institutions but what I would say is our strength, our current strength of capital, the fact that we have not been tied to some of these riskier businesses at some of the larger banks who also do processing is clearly something that is resonating in the market and is clearly seen as a strength right now.
Tom McCrohan – Janney Montgomery Scott
Great. Thank you.
Steve Meyer
Sure.
Operator
We have no further questions in queue. Please continue.
Jeff Klauder
Thank you, Steve. I would like now to turn it over to Kathy Heilig to give you a few company-wise statistics.
Kathy Heilig
Thanks, Jeff. Good afternoon everyone.
I have some additional corporate information about this quarter. Fourth quarter cash flow from operations was $74.4 million or $0.39 per share.
Year-to-date cash flow from operations $284.7 million or $0.46 per share, and fourth quarter free cash flow $53.7 million or $0.28 per share. Fourth quarter capital expenditures were $2.6 million.
Year-to-date capital expenditures $26.3 million, which did include $2.6 million towards new facilities. We apparently put the new facilities on hold for 2009.
Capital expenditures for 2009 excluding capitalized software and assuming no facility expansion are expected to be about $15 million. The tax rate for the fourth quarter was 50.4% which compares to the third quarter tax rate of 36.5% and an annual 2008 tax rate of 38.1%.
As mentioned earlier, the fourth quarter effective tax rate was affected by handling usual state tax rate of 14% and this was due to the uncertainty of the future use of the Fed [ph] losses for Pennsylvania State Tax purposes because of net operating loss carry-forward limitations imposed by the state. The accounts payable balance at December 31st was $12.3 million.
For next year, for 2009, we would expect the tax rate to be between 36% and 38%, but it will vary by quarter. And finally, we would like to remind you that many of our comments are forward-looking statements are based upon assumptions that involved 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 or a description of various risks and uncertainties that could affect our future financial results. And now, feel free to ask any other questions that you may have.
Operation
From the line of Murali Gopal with KBW. Please go ahead.
Murali Gopal – KBW
Yes. Sorry, I do not mean to beat a dead horse here, but I’m just trying to understand what may be unique or unusual about the cost structure in the advisor segment vis-à-vis the other segments.
My understanding is obviously comp is a large part of it and large part of their comp is flexible. So if you could – maybe Dennis could compare and contrast the cost structure of advisor segment vis-à-vis some of the other segments, that will be very helpful in understanding how it works?
Dennis McGonigle
Sure, Murali. Thanks for directing that question to me.
I guess that suggests to me that Wayne didn't quite get there.
Murali Gopal – KBW
I thought you will have a better view of all these segments, not just advisor, so that’s the reason.
Dennis McGonigle
Thank you very much. Thanks for that compliment.
I did not think you were taking a shot at Wayne there.
Unidentified Participant
Wayne is leaving the room.
Dennis McGonigle
I think one difference not too much in – certainly not the invested manager segment but somewhat in banking and somewhat in institutional, they do have some direct cost that directly correlate to revenue around sub advisor piece in our non-US products. Because in those markets, the sub advisors are paid outside of the funds if you will versus – so we book a gross revenue and then pay the advisors and then they get the net revenue whereas in Wayne’s segment where all of his business is US based, for the most part, his US based business, his revenue stream is net of advisor fees coming out of the funds.
I mean that’s how we adjust revenues streams. He does have sub advisor fees correlated to revenue but that’s only in the separately managed account program assets.
So that’s one difference. The other though I would say back to Wayne’s point about another – the rapid declines that really began I’d say more towards to the latter part of September and then October and then November, so it really wasn’t early in third quarter if you will, so we could have started to kind of a quick reaction for it stand, but rather it happened late in the third quarter and then in the fourth quarter, it just happened so fast that Wayne’s ability and our ability to look at across the board cost, particularly work force, operational-type costs, costs unrelated to – not work-force related, it just wasn't there.
As Wayne mentioned, everything’s being evaluated as we are across the entire the company around expenses and we’ll make decisions that we think are smart in the short term but also don’t get in the way of what we think are important things for us long term. The other thing I'd point out – I’d say it is probably more acute in Wayne’s business than others is that the level of transaction volume that occurred during the fourth quarter with client activity in our operation we felt was certainly the most important thing for us to deal with.
So rather than look at how can we reduce cost, our number one priority frankly was to make sure we were satisfying clients and servicing clients as effectively as possible and also maintaining the quality levels in our operations that we expect because given market volatility, if you make a mistake in the back office in this type of market volatility, it will cost you a lot more than in a normal market, I’d say not of Wayne would agree with this, I think he would, but the last thing we wanted to do is make rash decisions or quick decisions that would have affected the quality of service we expect of ourselves at delivering to clients. Especially when transaction volumes frankly were up probably close to 300% towards the end of the year.
Steve Meyer
(inaudible) we had record transaction volumes and record call volumes during the third quarter and I think that was primarily the result of the turmoil in the markets.
Murali Gopal – KBW
Great. Thank you very much.
Steve Meyer
In fact, that may resolve the expense increases if necessary.
Dennis McGonigle
Right.
Murali Gopal – KBW
That’s helpful, thanks.
Steve Meyer
All right, Murali. Thanks.
Operator
Next we go to line of Tom McCrohan with Janney Montgomery. Please go ahead.
Tom McCrohan – Janney Montgomery Scott
Just quickly, Kathy, can you restate the free cash flow, I just didn't capture that? Thank you.
Kathy Heilig
Free cash flow for the year is $184 million.
Tom McCrohan – Janney Montgomery Scott
Thank you.
Operator
Next, we will go to the line of Christ Arndt with Select Equity Group. Please go ahead.
Chris Arndt – Select Equity Group
Yes. Kathy, I think you mentioned $15 million of CapEx is your forecast for 2009 and if I understood that correctly, that excludes a capitalization on software development cost.
At this point, do you have an estimate of how large those capitalized development cost would be, as well as I assume the depreciation is going to continue to step up or amortization of past development and so how does that compare with what you anticipate capitalizing?
Dennis McGonigle
This is Dennis. On the capitalization side, we'll see kind of levels of capitalization somewhat consistent with fourth quarter for this year might come down a little bit as we continue to make progress.
And on the amortization, it steps up based on new releases they go out, so we just had a new release, so you will see a slight step up in amortization cost in the first quarter versus fourth quarter, but it wouldn’t be significantly material, Chris.
Chris Arndt – Select Equity Group
Okay, thanks. Could you remind me what did you capitalize in the fourth quarter?
Dennis McGonigle
It was about $12.5 million.
Chris Arndt – Select Equity Group
Okay. And you are not going to continue to add materially?
Meaning –
Dennis McGonigle
I would say, at this point, I’d say no.
Chris Arndt – Select Equity Group
Thanks.
Dennis McGonigle
You’re welcome.
Operator
So at this time no other further question is in queue. Please continue.
Al West
Thank you, Ken. So, ladies and gentleman, despite the continuing fall of capital markets and its impact on our results, the strength of our company is loud enough to stay the course.
We are continuing our strategic transformation. Now, while we have a lot left to accomplish, we are making important strides and definitely feel our efforts will be eventually be rewarded.
And as I mentioned before right these times like this underscore how valuable our business propositions are. And so, with that, I will close the meeting and if there is any lingering questions, now would be a good time to ask them.
Operator
At this time no questions have come into queue, sir.
Al West
Well, thank you for your attendance and patience, and have a good afternoon. Thank you.
Operator
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