Earnings Call Transcript - SEIC Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Chairman and CEO, Al West. Please, go ahead.

Al West, Chairman and CEO

Thank you for joining us today. All of our segment leaders are present, along with our CFO, Dennis McGonigle, and our Controller, Kathy Heilig. I will begin by summarizing our current situation and the third quarter results for 2020. Then, I will hand it over to Dennis to discuss LSV and our investment in the new business segment. Each segment leader will later share insights on their results, and finally, Kathy will provide key company-wide statistics. We will take questions at the end. Before discussing the third quarter results, I want to address the circumstances we are facing. We are still navigating the COVID pandemic worldwide. Since the onset of this health crisis, our top priority has been the safety and health of our employees and their families, alongside ensuring we continue to provide seamless service to our clients. I am extremely thankful to our workforce for their adaptability in moving between workplace and home, while supporting our clients and each other in our communities. Our strength at SEI is most evident in challenging times. We pride ourselves on long-term investments, backed by proven business models developed over the last 50 years. These are the foundation that allows us to endure uncertainties and emerge from today’s crisis even stronger and better positioned for future opportunities. Our formula for success is clear: focus on workforce health and productivity, invest in our leading technology, innovate constantly, and provide world-class service to our clients. We will persistently pursue our strategic vision and launch initiatives that will be central to our future achievements. We are eager to share our progress with you. Now, let's turn to the financial results from the third quarter of 2020. Earnings fell by 16% year-over-year, with diluted earnings per share at $0.75, down 13% from the $0.86 reported in the second quarter of 2019. However, revenue increased by 2% from the third quarter of 2019 to this year. These results benefited from a rebound in capital markets, with our non-cash asset balances growing by nearly $10 billion due to cash flows and market appreciation. LSV's balances increased by almost $1 billion during the quarter. We also repurchased around 2.1 million shares of SEI stock at an average price of $51.54, totaling approximately $109 million for the quarter. Additionally, we continued investing in our growth initiatives, including One SEI, a key part of our growth strategy that integrates existing and new SEI platforms for all client types and markets. From this investment suite in the third quarter, we capitalized about $6.1 million in development costs and amortized approximately $12.2 million of previously capitalized development. We have not yet capitalized any work from One SEI. Regarding revenue production, the third quarter sales events, net of client losses, amounted to about $28 million, expected to yield approximately $15 million in annualized recurring revenues. We are encouraged by this year's sales performance, which reflect the success of our entrepreneurial sales teams. Our unit heads will detail their specific sales results. We have set three business objectives: to ensure smooth and safe operations, to grow our business by aiding our clients in their growth, and to foster continuous innovation for future expansion. We recognize that the landscape has changed, and we have been adjusting our approaches accordingly. We feel prepared to seize the opportunities that arise from this significant change. This wraps up my formal comments. I will now hand it over to Dennis for an update on LSV and our new business segment investment. Dennis?

Dennis McGonigle, CFO

Thanks, Al. Good afternoon, everyone. I will cover the third quarter results for the investments in the new business segment and discuss the results of LSV Asset Management. During the third quarter 2020, the investments in the new business segment continued its focus on the ultra-high-net-worth investor segment through our private wealth management group and additional business and research initiatives, including those related to our IT services business opportunity and the modularization of larger technology platforms into standalone components for the wealth management and investment processing space to deliver on our One SEI strategy. During the quarter, the investments in new business segment incurred a loss of $9.8 million, which compared to a loss of $4.5 million during the third quarter of 2019. This increased loss reflects an increase in investments, specifically related to our One SEI strategy, which we have discussed in the prior couple of quarters. Of our expenses in this segment, approximately $8 million is tied to that effort. The One SEI strategy is a company-wide initiative to open business opportunities across our entire company, as well as creating new business lines. Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the third quarter. LSV contributed $28.3 million in income to SEI during the third quarter of 2020. This compares to a contribution of $37.6 million in income during the third quarter of 2019. Assets during the second quarter grew approximately $1 billion. LSV experienced net negative cash flow during the quarter of approximately $2.2 billion, offsetting market appreciation of approximately $3.2 billion. Revenue was approximately $94.9 million for the quarter with no performance fees. Since I know the question is coming on expenses, I thought I would address that. Expenses grew approximately $13 million, or 4% from second quarter 2020 to third quarter 2020. Just under one-half of this expense growth, approximately $6 million relates to salary adjustments we made at the beginning of the quarter consistent with our annual compensation process for most of our workforce as well as continued hiring in areas of growth. In addition, approximately 20% or $3 million was due to a spike in health insurance costs during the quarter, which are not predictable and driven by actual experience since we are generally self-insured. The final 30%, or approximately $4.5 million is essentially one-time in nature related to some severance expense and professional services fees and costs associated with trade corrections as a result of a couple of incidents disclosed in our second quarter 10-Q. These costs are spread across our segments as well as general and administrative. I hope that breakdown helps. Finally, our effective tax rate for the quarter was 21.4%. I will now take any questions you have.

Operator, Operator

Thank you. And now we will go to the first line of Ryan Kenny with Morgan Stanley. Please go ahead.

Ryan Kenny, Analyst

Hey, Dennis, how are you?

Dennis McGonigle, CFO

Hey, Ryan. Good. Welcome onboard.

Ryan Kenny, Analyst

Thank you. Just want to get a sense of how you're thinking about the trajectory of One SEI spend. Do you still think that it's something that peaks this year and in 2021 should more or less resemble 4Q 2019 or is there more to do next year?

Dennis McGonigle, CFO

Yeah. There's – as I think, we said on the last call, there's still more to do in the early part of the year, but it'll start to come down over the course of the first half of the year and then certainly into the second half of the year. So we're – as we said in the past, it's a project, and it'll take the trajectory more of a project than a sustainable platform build.

Ryan Kenny, Analyst

Thanks.

Dennis McGonigle, CFO

You’re welcome.

Operator, Operator

Thank you. Next we’ll go to the line of Robert Lee with KBW. Please go ahead.

Robert Lee, Analyst

Great. Hi. Thanks, Dennis. So far all is well with you.

Dennis McGonigle, CFO

Yeah. Thanks, Rob. You too.

Robert Lee, Analyst

Thank you, on the hear. Two quick questions. I guess, just with LSV, I mean, obviously they've been struggling with flows and I mean assets down a bunch year-to-date like 24%. I mean, I don't know if there's any color insight you may have into kind of it’s known – if they have anything in terms of known redemptions that we should be thinking about as we look ahead? Or any reason to think that this – there could be some change in the near-term trends over the coming quarters?

Dennis McGonigle, CFO

The trends are clearly not favorable, particularly for value investing, and since LSV focuses on that market segment, they are affected as well. There isn't much predictability from quarter to quarter. In the last quarter, around half of the negative flows came from clients who left and the other half from existing clients who were simply reallocating. If the outlook for value investing improves, we might see a turnaround as more capital returns to that part of the equity markets. However, it's really unpredictable. A couple of quarters ago, they had positive movements, which adds to the uncertainty. So we're just...

Robert Lee, Analyst

Sure.

Dennis McGonigle, CFO

We expressed strong confidence during the last call about what we're doing and the value we provide. Our team understands their strengths well. The department has faced challenges like this before, although this particular situation is more extended than past experiences. Historically, when conditions change, they tend to shift significantly in our favor.

Robert Lee, Analyst

Great, I appreciate it. As a follow-up, I'm curious if the $4.5 million you mentioned includes any expenses related to the ransomware attack on one of your vendors at the end of July, which exposed some client data. Have you experienced any financial impact from that? Additionally, has this incident affected your approach to working with outside vendors?

Dennis McGonigle, CFO

No. There is a part of the $4.5 million expense related to that event, and we do not expect it to happen again. Some of that cost was incurred to ensure we managed that particular vendor effectively. We are always striving for constant improvement, and vendor management is an area where, regardless of this incident, we would maintain our consistent approach to risk management. This situation highlights that our vendor program would have identified those issues even if they had existed beforehand. We are reviewing everything related to this matter. I will defer any follow-up questions to Steve as they pertain more to end-market elements. However, we believe that, from a market perspective, this incident is behind us, and our focus is on assessing our situation and enhancing our processes moving forward.

Robert Lee, Analyst

I mean, should we expect that there may be at least for a couple of quarters a little bit more kind of trailing expenses related to this or that it's pretty much behind you?

Dennis McGonigle, CFO

Yes, I would say they are incrementally looking at this. Given what we expensed in the third quarter, I don't see anything additional beyond that; it will probably decrease slightly. The only area where we might have some out-of-pocket expenditures will be on professional services, like consultants and others. However, I wouldn't characterize it as being greater than what we incurred in the third quarter.

Robert Lee, Analyst

Okay. Great. Thank you for taking my questions, Dennis.

Dennis McGonigle, CFO

No problem. Thank you.

Operator, Operator

Thank you. Next we'll go to the line of Chris Shutler with William Blair. Please go ahead.

Chris Shutler, Analyst

Hi, Dennis, good afternoon.

Dennis McGonigle, CFO

Hi, Chris.

Chris Shutler, Analyst

So let's see. I guess, first, I want to ask about the One SEI just to reiterate. So you said about $8 million of expense in the new business segment was One SEI?

Dennis McGonigle, CFO

Yes. That's consistent with second quarter as well.

Chris Shutler, Analyst

Yes. In terms of our outlook going forward, we plan to maintain the expense level of approximately $8 million per quarter into early next year, after which we anticipate it will start to decrease. How much do you expect it to decline as you move through 2021?

Dennis McGonigle, CFO

Yes. I expect it to be gradual in the first quarter, slightly more in the second quarter, and then significantly more in the third quarter, hopefully leading to it being mostly resolved by the end of the year.

Chris Shutler, Analyst

Okay. Great. Can you quickly explain the healthcare cost item you mentioned? Just to confirm, is the $3 million an ongoing expense?

Dennis McGonigle, CFO

No, there are several factors at play. First, we are self-insured for healthcare, which means we have catastrophic coverage but generally we pay as we go. In the third quarter, we noticed a significant increase in healthcare usage as many people who had deferred their medical appointments and treatments due to COVID in the second quarter returned for care. This led to a catch-up effect in healthcare usage. Additionally, we faced one particularly significant individual health case that contributed to our expenses. I do not anticipate this situation recurring in the fourth quarter, although there may still be some catch-up, but things should return to normal.

Chris Shutler, Analyst

Thanks for the information. Could you clarify the one-time expenses you mentioned, totaling $4.5 million? Were there any segments where these expenses were more significant than others?

Dennis McGonigle, CFO

It was likely a mix of general and administrative expenses, with some linked to investment managers and severance costs in the institution, along with a small amount in banking. Overall, the costs were fairly widespread.

Chris Shutler, Analyst

Okay. All right. Thanks a lot, guys.

Dennis McGonigle, CFO

So its pretty good by the way.

Chris Shutler, Analyst

Okay. Make sense. Thank you.

Operator, Operator

And I do have a question from Owen Lau with Oppenheimer. Please go ahead.

Owen Lau, Analyst

Thank you for taking my question, Dennis. So some companies started to talk about upside and downside of working from home. Could you please give us an updated view of SEI's operating model going into 2021? And how should we think of maybe the T&E save any potential, would that say save or any other additional G&A spend going into 2021? Thank you.

Dennis McGonigle, CFO

Sure. Currently, we have about 250 employees in our offices, primarily in Pennsylvania. We've recently informed our workforce that we will not be bringing back a significant number of employees until at least March 1. A few months ago, we were optimistic that the pandemic would have progressed more, allowing us to bring back more employees by now. Alongside this announcement, we reminded our team that there could be situations where some employees might need to come into the office for specific job functions, especially as we approach year-end processing. Regarding costs or adjustments, I don't anticipate any significant changes over the next quarter. We're mindful of ensuring that our employees have a comfortable work-from-home experience, and we've already implemented many measures in that area. We also recognize the challenges faced by working parents, particularly those with school-aged or younger children, and have made some adjustments to provide support. As for travel and entertainment, I don't expect any changes in the upcoming quarter. We do not plan any major client events or celebrations. Travel and movement of our workforce into the field, as well as client visits to our campus, are happening but on a very limited basis. I expect this to gradually increase over time, but it won't return to what one might consider normal for some time. This is mainly because we are cautious regarding our employees' safety and also because clients are not keen on having many visitors. We are prepared for safe campus visits and have established protocols for employees who need to travel, whether by client demand or willingly, but I do not see significant changes in travel and entertainment.

Owen Lau, Analyst

Thanks very helpful. Thank you.

Dennis McGonigle, CFO

Welcome. Thank you.

Operator, Operator

Thank you. Next we go to the line of Robert Lee with KBW. Please go ahead.

Robert Lee, Analyst

Great. Thanks. Just a tax follow-up maybe 2. I know it's always hard to predict just given moves around with option exercises and what not. But any venture where you sit now, what you're kind of thinking of that as a kind of tax rate going forward?

Dennis McGonigle, CFO

Yes. I think it will be in this range. In the third quarter, we receive a slight tax benefit from certain expiring elements, and for the most part, it should be in a similar range in the fourth quarter as it was in the third quarter.

Robert Lee, Analyst

Great. And perhaps one last thing regarding a few straightforward patients. I know discussing hypotheticals is not ideal, but if we were to face higher corporate tax rates in the future, do you expect that a 700 basis point increase would represent the full impact on your operations? Or do you believe it could potentially affect foreign-sourced income differently, resulting in a lesser impact? I'm trying to understand your perspective on this.

Dennis McGonigle, CFO

Hypothetically, I think we would have to prepare for any, I would say flat direct increase in the statutory rate without any other elements of adjustment. It will probably hit us pretty directly.

Robert Lee, Analyst

Okay. Thank you for taking my hypothetically.

Dennis McGonigle, CFO

Yes, and I don't know if you recall when the tax cut occurred, we got pretty much full benefit from that as well.

Robert Lee, Analyst

Right.

Dennis McGonigle, CFO

And there's also this little thing on most companies' balance sheet called deferred tax assets or liabilities. Those have to adjust as well. So you get these one-quarter anomalies on that, and we all have that. We don't have it probably as much as most companies something to watch out for hypothetically, hypothetically.

Robert Lee, Analyst

Hypothetically. Thank you. Appreciate it.

Operator, Operator

Thank you. And I have no further questions in queue at this time.

Dennis McGonigle, CFO

All right. With that, I'll now pass it on to Steve to talk about the Private Banking segment. Steve?

Steve Meyer, Segment Leader

Thanks, Dennis. Good afternoon everyone. For the third quarter of 2020, revenues for the segment totaled $114.8 million, which was down 2.1% from the third quarter 2019, which was due primarily to previously announced client losses and a decrease in our asset management revenues. In comparison to the second quarter of 2020, revenues for the segment were up 6.6% for the third quarter, which was due primarily to one-time revenues tied to implementation activities. For the third quarter of 2020, quarterly profit for the segment was down $4.7 million from the third quarter of 2019. This year-over-year decrease was primarily driven by previously announced client losses and a decline in our asset management business. Quarterly profit was up about $1.7 million from the second quarter of 2020, mainly driven by our increase in one-time revenues. Turning to sales activity. For the quarter, we closed $29.8 million of gross recurring sales events and recontracted 8 clients for another $22.6 million in revenue, which in total solidified $52.4 million of recurring revenue and resulted in approximately $600,000 of net recurring events for the investment processing business, offset by a negative $1.3 million in asset management events. This offset brought our total net recurring events for the quarter to a negative $700,000 for the segment. The difference between our gross events and the net events was primarily due to a small net down in one of our deals signed for the quarter. The average term for our recontracts this quarter was 3.9 years. And also in the quarter we closed $11 million on one-time sales. I'm pleased to announce that during the quarter, we signed an agreement with one of our largest and longest-running client partners U.S. Bank to adopt the SEI Wealth Platform. U.S. Bank, the fifth largest bank in the nation, has been a client of SEI since 1977 and will join over 50 other signed clients committed to utilizing SWP as the core technology and infrastructure to grow and modernize their wealth management business. In July, U.S. Bank signed this long-term SWP contract and implementation agreement. U.S. Bank selected the SEI Wealth Platform to fuel their global growth strategic initiatives and to take advantage of an upgraded technology and infrastructure solution set that will power the future of their wealth management and investment services business. U.S. Bank will consume SWP in a Software as a Service model. As this is a large-scale implementation, we expect a multi-phase multi-year conversion. In the interim, U.S. Bank will remain on our TRUST 3000 platform. We have started implementation activities with U.S. Bank. This event is significant for us for several reasons. First, it validates our One SEI strategy, as we are able to modularize our platform and approach to offer only core-to-core back-office for SWP and move this agenda faster finalizing it during the pandemic. Second, it allows us to land SWP with U.S. Bank and then provides us the opportunity to expand our additional SWP front-office capabilities to U.S. Bank. Third, this is a large-scale SaaS adoption of SWP, further validating the broad capabilities of SEI's Wealth Platform. And finally, this will allow us to support U.S. Bank's continued global growth in a more meaningful way. We have enjoyed many milestones as long-time partners with U.S. Bank in this industry, and we are thrilled to be able to continue our long-term partnership as well as to expand our relationship. Also during the quarter, we signed an agreement with a new client to SEI, Pacific Premier Trust, a division of Pacific Premier Bank. We won this business in a competitive process and we expect Pacific Premier Trust to migrate to SWP from a competitor platform in the first half of 2021. We look forward to welcoming them to the SEI family and supporting their future growth initiatives. From a U.K. perspective, we continue to see – continue expansion and growth from the Fusion/Schroders migration and continue progression with the HSBC implementation. As an update on our backlog, our total signed but not installed backlog is approximately $73.1 million in net new recurring revenue. Turning to implementation activity. In the third quarter we successfully converted two clients to the SEI Wealth platform: Choate, Hall & Stewart LLP in Boston Massachusetts; and Legacy Trust Company in Houston Texas, both existing TRUST 3000 clients. Both clients were successfully brought live on SWP in a 100% remote environment. While others in the industry are experiencing implementation delays, we continue to install clients on time and on budget. Throughout the quarter, SEI and our client partner teams continue to successfully operate in a virtual environment and met all milestones and live dates to avoid any disruption to our clients' business. The teams have enhanced our remote training and implementation capabilities and the continued success of these conversions will ensure our ongoing ability to bring clients live under unforeseen circumstances. This capability to finalize these implementations during these disruptive times is a testament to our clients, our workforce and bodes well for the future. From an asset management standpoint, total assets under management ended the period at $23.5 billion, representing a 2% increase from the second quarter of 2020. Our AUM increase was due to market appreciation. Our cash flow for the third quarter 2020 was a negative $314 million. Turning to the business environment. Despite the ongoing pandemic and the challenges that has brought, we continue to operate as business as usual and our workforce continues to rise to the occasion. And across our company we have executed extremely well finding new ways to engage clients and prospects. I'm encouraged by the continued strong market activity we are seeing and the growth opportunities in front of us. I am further encouraged by the execution of our One SEI strategy and the investments we are making in our platforms and business to drive sustainable growth. Our people, our culture and our technology are differentiators, and I feel well positioned due to them. That concludes my prepared remarks and I'll now turn it over to any questions you may have.

Operator, Operator

And we'll take our next question from Ryan Kenny at Morgan Stanley. Please proceed.

Ryan Kenny, Analyst

Just a question on the fee rate. So, if I look at investment managers' revenues over your average assets under administration and management it looks like the fee rate came down a bit this quarter. I just want to check is that because of pricing pressure? Or is it asset appreciation and onboarding coming in at the end so the fee rate should then roll forward? Thanks.

Steve Meyer, Segment Leader

Yeah. I think it's more of the latter. And if you think of this quarter our new events and even looking at the new events that funded a lot of it is with existing clients. Many of those clients might be reaching higher tiers or lower tiers of their breakpoints et cetera. So I would say, it's more a function of that as well as, as we look for some of our products and solutions they're less tied to assets and more tied to a platform fee and some other volume increases. But I'd say, the primary for the quarter is more of the type of business that came in from clients.

Ryan Kenny, Analyst

Thanks. That's helpful.

Operator, Operator

Thank you. And next over to the line of Robert Lee with KBW. Please go ahead.

Robert Lee, Analyst

Hi, again, Steve. You can probably predict my first question.

Steve Meyer, Segment Leader

Backlog.

Robert Lee, Analyst

Yeah.

Steve Meyer, Segment Leader

I leave it out, so you can ask me for it. It's $36.9 million at the end of the quarter.

Robert Lee, Analyst

Great. Thanks. Regarding the recontracting, it seems to be $9 million. Can you provide some insight into what you observed this quarter or perhaps the last, and what you anticipate? Are you recontracting at a similar revenue level while adding some additional services? I'm trying to understand the details better.

Steve Meyer, Segment Leader

Yeah. So, every – Rob, every client is a little different. Some clients have – depending on the segment, some clients have had a rough year, and maybe their assets have dropped. And certainly, we're a good partner, and we'll lean in to help them as we recontract and look for the future and potentially to sell them other business. But I think, mostly for this quarter, we saw recontracting at the same fee level and just a continuation and expansion of years and in some case an expansion of services and uptick, because of the expansion of those services.

Operator, Operator

Next we go to the line of Owen Lau with Oppenheimer.

Owen Lau, Analyst

Steve just a quick modeling question. For the $5 million uptick in expense line item, was there any one-time consulting expenses related to investigation of compliance? Or this incremental expense would stay there because of the personnel expense you mentioned? Thank you.

Steve Meyer, Segment Leader

In this segment, I would attribute about half of the increase to personnel changes. This increase stems from our midyear salary adjustments and promotions, along with hiring new employees for new business opportunities, which is a positive development. Our investments increased by approximately 20%. Additionally, there were some related expenses in consulting and professional services, as Dennis pointed out, tied to professional fees and costs from various situations we encountered earlier this year. Overall, we aim to manage expenses carefully. While we expect some personnel-related increases, we are focused on generating new revenue and business at a modest pace.

Owen Lau, Analyst

Got it. Thank you, Steve.

Steve Meyer, Segment Leader

Sure.

Operator, Operator

Thank you. I have no further questions in queue at this time.

Steve Meyer, Segment Leader

Okay. Thank you. If there's no other questions, I will turn it over to Wayne Withrow to go over the adviser segment. Wayne?

Wayne Withrow, Segment Leader

Thanks, Steve. During the third quarter of 2020, we progressed with our business strategy in a virtual environment. Although we made strides, we are continuously refining our virtual model and believe we are well-positioned to capitalize on this new reality. Third-quarter revenues reached $103 million, which was flat compared to the same quarter last year. While revenues remained unchanged, our asset balances grew year-over-year; however, the mix of assets led to this growth not translating into revenue increases. The positive aspect is that these assets are on our platform, and we anticipate receiving higher fees as they transition into equity and fixed income products. Similar to revenues, expenses were flat compared to last year’s third quarter. The overall increases discussed by Dennis and the rise in sub-advisory expenses driven by our SMA program were largely offset by savings in various areas, including travel and sales compensation. Our profits remained constant compared to last year’s third quarter. At the end of the third quarter, our assets under management stood at $69.4 billion, which represents an increase of approximately 2.5% from September 30, 2019. Our average assets under management during the quarter also rose by a similar percentage compared to last year. Positive market conditions and strong cash flow from sales contributed to overall asset growth, but portfolio repositioning into money market products hindered revenue growth. The net cash flow for the quarter was $140 million, net of $158 million in advisory fees received by our advisers. Moving forward, I plan to report cash flow before these advisory fees since they are not generated from sales activity. Excluding these fees, the cash flow for the quarter was $272 million. Additionally, we saw $250 million in cash flow into non-managed assets on our platform. We added 56 new advisers during the quarter. As mentioned in SEI's second quarter call, our investment management unit is now selecting products managed by third-party asset managers, leading to growth in these curated products. In summary, we continue to experience strong momentum in the business and among our client base. This year has had its challenges, and I am incredibly proud of our workforce, who are key to our ongoing success. Their determination and resilience in confronting these challenges have been truly remarkable, and our clients have taken notice and appreciate this effort. As we approach the end of 2020, we will keep focusing on growth opportunities and investing in our overall platform, including the front-end platform, which we believe has significant growth potential for us. That concludes my prepared remarks, and I will now hand it over for any questions you may have.

Operator, Operator

Thank you. Now we will move to Ryan Kenny from Morgan Stanley. Please proceed.

Ryan Kenny, Analyst

Can you hear me?

Wayne Withrow, Segment Leader

I can, Ryan. Hi.

Ryan Kenny, Analyst

Hi. Just want to see if you could give us an update on the competitive environment, specifically in the turnkey asset management program what you're seeing there and how we should think about any pricing pressure going forward? Thanks.

Wayne Withrow, Segment Leader

Yes. I mean, I think the competition in the turnkey space is fierce, and it's other turnkey providers and it's also competition from the internally managed broker-dealer platforms. And I think you will continue to see pricing pressure in those markets. However, I mean, I would say that if you look at the leverage inherent in our business model, I think we are really well positioned in a fee compression world right now.

Ryan Kenny, Analyst

Thanks. And has the remote working environment impacted demand for your platforms at all?

Wayne Withrow, Segment Leader

I can't say for sure if it has increased demand for our platform. However, in a remote setting, the functionality and ease of processing on our platform have allowed us to succeed. I believe people are now more open to outsourcing than they were before. Ultimately, the platform is a significant enabler, and it performs just as effectively in a virtual environment as it does in person.

Ryan Kenny, Analyst

Thanks.

Operator, Operator

Thank you. Next we go to the line of Robert Lee with KBW. Please go ahead.

Robert Lee, Analyst

Thank you. Hi, Wayne.

Wayne Withrow, Segment Leader

I'm great, Rob, and I don't have a backlog to talk to you about.

Robert Lee, Analyst

I just want to clarify your comments regarding the net cash flows and the changes starting this quarter. Could you go through that again and explain why it's changing?

Wayne Withrow, Segment Leader

Yes. Every quarter, our advisers withdraw their advisory fees from the investment accounts. Traditionally, we have counted these withdrawals as negative cash flow, similar to redemptions used to pay the advisory fees in our cash flow figures. However, if you consider cash flow as an indicator of sales activity, this really does not reflect that. As our business has expanded, this amount has become more significant. As I mentioned last quarter, $160 million was allocated just to cover the advisory fees for advisers. Therefore, we will now classify this amount under market appreciation and depreciation, as it is more relevant to that category. It is not a direct or indirect effect of sales activity.

Robert Lee, Analyst

Okay. I see. So it's kind of like you'll report AUM net as opposed to gross, but gross to be kind of grossed up so same dollars...

Wayne Withrow, Segment Leader

We report AUM and AUA net. I'm just saying that in the net calculation, we're not going to include the fees paid to advisers.

Robert Lee, Analyst

Okay. Great. I think I understand. You mentioned the $250 million of cash flows related to non-managed assets, which is becoming increasingly important. I was trying to clarify what your assets under administration or your non-managed assets on the platform are today.

Wayne Withrow, Segment Leader

Yes, I would say it's over $10 billion. However, the AUA, which is mainly focused on pure custody, isn't a significant revenue generator; instead, it allows us to collect assets on our platform. This approach is part of our strategy to expand gradually, as Steve mentioned. It helps us serve our existing clients better, addressing their growing or diverse needs with additional products.

Robert Lee, Analyst

Thanks, Wayne.

Operator, Operator

Thank you. And I have no further questions in queue at this time.

Wayne Withrow, Segment Leader

Okay. With that, I will turn it over to Paul, who will discuss our Institutional segment.