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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by and welcome to the AllianceBernstein Third Quarter 2018 earnings review. At this time, all participants are in a listen-only mode. After the remarks, there will be a question-and-answer session and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be available for replay for one week.
I would now like to turn the call over to the host for this call, the Director of Investor Relations for AB, Ms. Andrea Prochniak. Please go ahead.
Thank you, Jack. Good morning, everyone and welcome to our third quarter 2018 earnings review. This conference call is being webcast and accompanied by a slide presentation that's posted in the investor relations section of our website, www.alliancebernstein.com. Seth Bernstein, our President and CEO, John Weisenseel, our CFO and Jim Gingrich, our COO, will present our results and take questions after our prepared remarks.
Some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I would like to point out the Safe Harbor language on slide one of our presentation. You can also find our Safe Harbor language in the MD&A of our third quarter 10-Q, which we filed this morning.
Under Regulation FD, management may only address questions of a material nature from the investment community in a public forum. So please ask all such questions during this call. We are also live tweeting today's earnings call. You can follow us on Twitter using our handle @AB_insights.
Now, I’ll turn it over to Seth.
Thank you, Andrea. Good morning. Our third quarter performance demonstrated once again that our relentless focus on long term growth strategy is paying off. We’re maintaining strong momentum with clients across our business, which is translating to organic growth in both our fee rate and assets. Our portfolio fee rate increased by nearly 2% year-on-year, thanks largely to continued growth in higher fee alternatives and active equities. And equity net flows of 2.9 billion drove our total active net inflows of 2.5 billion.
Essentially, flat active -- essentially flat active fixed income net flows during the quarter represented a $5.5 billion improvement from the prior quarter. These are very strong results in challenging times. Let's get into the specifics.
Starting with a firm wide overview on slide 3. Gross sales of 19.3 billion in the third quarter were down slightly year-on-year and up slightly sequentially. Client activity remained robust in active equities and alternatives and taxable fixed income sales improved markedly in both institutional and retail. Firm wide net inflows were 1.3 billion due to the strength in both retail and institutional active equities.
Total active inflows of $2.5 billion well exceeded passive outflows of 1.2 billion. Both quarter end and average assets under management were up sequentially and year-on-year in the third quarter. Sequential growth came from both net inflows and markets, while the year-on-year increase was from markets alone.
Slide 4 gives more detail on our flows by channel. Here, you can see the sequential improvement in our flows, especially in institutional where we had one large second quarter redemption. We returned to positive net flows in our retail business and we logged our seventh straight net flow positive quarter in private client where gross sales have been consistently strong and our asset redemption rate remains at a 20-year low.
Let's turn to investment performance, beginning on slide 5. In fixed income, our percentage of outperforming assets for the one year period improved sequentially, but remains low relative to history. We invested in emerging markets across our fixed income portfolio, including several of our largest strategies. So we've been adversely affected by the challenges in many emerging markets that are persisted throughout the year.
Our three and five year track records remain quite strong with 91% of our assets outperforming in each period. In equities, we're also experiencing near term challenges in emerging markets and more persistent weakness in some of our larger growth and value strategies. This has led to a decline in our performing assets across time periods.
We provide more insight on retail fixed income and equity performance on slides 6 and 7. The fixed income performance slide on slide 6 reflects the broad impact of our emerging market exposure on one year performance, EM debt and high yield were most effective. The long term track records remain in the top two quartiles. Our income portfolios are holding up well. European income is top quartile across time periods. Mortgage income is first percentile for the one year and 17th for the three year and AB Income is top decile for the three and five year periods.
Slide 7 reveals pockets of weakness in areas like emerging markets, concentrated growth in international value equities. Yet, overall investment performance remains quite strong across time periods for many of our active equity funds. Five funds in the table ranked top docile for multiple time periods. US Thematic, Global Low Vol, Global Core, European Equity and Discovery Growth. And our five year performance is particularly strong. Of the 13 funds shown that qualified for this time period, four are top decile and six are quartile. These solid long term track records have been a major driver of our outstanding year-to-date active equity flows.
Let's move on to our client channels, beginning with retail on slide 8. This quarter, we experienced both ongoing momentum across a diverse array of our retail funds and improved bulk flow trends in Asia ex-Japan fixed income. Our third quarter gross sales of $12.6 billion were up 9% sequentially on increases in Asia ex-Japan, Japan and US retail. On an asset class basis, equity gross sales were up 74% year-on-year and 13% sequentially and represented more than half of total gross sales.
While still depressed versus prior year levels, taxable fixed income sales increased 5% on a sequential basis. This strength across asset classes is having a dramatic impact on our business mix, as you can see in the top left box – chart. Since 2016, equity, multi asset and alts have grown from 26% of total retail gross sales to 56% for 2018 to date.
In Asia ex-Japan, where we've worked hard to reduce our dependence on volatile high yield market, equity, multi-asset and alts were more than half of the year-to-date 2018 gross sales, up from just 11% in 2016, driven largely by strong regional sales of our emerging markets multi asset or MF funds and dramatic growth in our onshore Taiwan discretionary investment management business.
The bottom left chart shows both the diversity of our year-to-date flows and the strength of our active equity franchise. Of the 23 AB funds of net sales of $100 million or more year-to-day, 14 of them are equity funds. Retail active equity net flows have been positive for us for the past six quarters and we've attracted $6.2 billion in net inflows year-to-date. US Large Cap growth is our biggest seller by far. Year-to-date net sales total 4.4 billion, helped by very strong third quarter sales in Japan.
Now, I'll talk about institutional on slide 9. Here, as in retail, we’re experiencing continued momentum in active equities, strong improvement in fixed income and diver sales and new business wins. Third quarter institutional active equity gross sales of $1.1 billion were 30% of the channel total and represented our fifth billion dollar plus quarter. The top left chart shows dramatic ramp up in our active equity flows.
Year-to-date gross sales of $6 billion compared with just 2.2 billion for the same period last year and a mere $700 million in 2016. Year to date net inflows of $3.5 billion compared with net outflows of 500 million and 1.2 billion for the two prior comparable periods. At the same time, global fixed income gross sales bounced back nicely, totaling $2.5 billion across diverse services like Global, Canadian bond, investment grade, and EM debt.
Strong long term track records and active equity services continued to win over consultants. 70% of our year-to-date fundings have been linked to consultants at 13 different firms. Our year-to-date equity RFPs are up 34% and our alternatives RFPs have more than tripled year-on-year. As you can see from the bottom left pie chart, alternatives in equities represent more than half of our pipeline and it's nearly evenly split between US and non-US clients.
Just a few years ago, fixed income and CRS dominated our pipeline and our business was concentrated in US. The mix shift we’re experiencing in both sales and awarded mandates is driving stronger revenues on our current and future business. Our third quarter gross sales revenue was 32% higher than our 2017 quarterly average. And excluding CRS, new additions to our pipeline carry a fee rate of more than 1.5 times the rate of our current business.
Moving to private wealth management on slide 10, our strong momentum continues in this channel as well, particularly among our highest network clients. Gross sales of $9.1 billion are our highest for year-to-date in ten years and our asset retention rate is at a 20-year high. What's more? Third quarter net inflows of 300 million were positive for the seventh consecutive quarter. We’re especially pleased to see that our fastest organic growth among our clients with assets of 20 million or more with us.
As you can see from the top left chart, year-to-date 2018 annualized organic growth rate of 6.2% is nearly triple that of our overall channel and has more than doubled versus 2017. Our traction comes largely from strong client take-up of our alternative and focused equity services. We have 15 services today with $8.4 billion in deployed and committed assets, up from three services that totaled $2 billion four years ago. That's the bottom left chart.
Advisor productivity continues to rise as well. The number of advisors that are on track to exceed $200 million in annual production is up 66% so far this year versus 2017 to date. And I'm excited that we're beginning to grow our advisor base again. Net advisor headcount is up 7% year-to-date, after flat to negative growth in the past two years.
I’ll finish our business overview with the sell side on slide 11. Bernstein Research third quarter revenues of $103 million declined 5% year-on-year and 3% sequentially. The bottom left chart shows how both US market volatility and volumes continued to drop in the third quarter. However, our results have been resilient so far, considering the ongoing challenges in US markets and the lagged effect of MiFID II implementation on our research payments.
Year-to-date revenues of $324 million are down less than 2%. We're confident that our position as the industry leader in both research and trading quality will continue to serve us well, as the industry evolves. The fact is active managers and there are so many of them need unique and differentiated research now more than ever and MiFID II implementation has shown that as institutions assess the quality of their service providers, Bernstein consistently rises to the top.
This further validates our long term strategy of investing for global growth in both research and trading. We once again turned in a strong showing in the 2018 Institutional Investor All America Research Team Survey, moving to a number five weighted ranking from number 6 last year, with number 1 rankings in seven sectors. We’re helping clients adapt to new liquidity landscape in Europe with new trading tools and expanding our global reach as well.
Of the 27 new stocks we launched coverage on in the third quarter, 23 were outside the United States. I’ll finish with a brief MiFID II update. Unbundling of our research payments has resulted in delayed revenue recognition that we estimate will reduce full-year revenues by 2% to 4%. Otherwise, the process has been smooth and our relationships with clients are as strong as ever.
Finally, slide 12 highlights key accomplishments for the quarter. While our short term track record has been disappointing, our long term investment performance continues to demonstrate our ability to deliver the idiosyncratic stock specific returns teams or clients want and can't replicate themselves. And strong growth in areas we've worked to evolve, develop and scale, like active equities and alternatives is creating positive sales revenue and fee trends, which combined with prudent expense management is driving sustained improvement in our financial results.
Now, John will take you through the specifics.
Thank you, Seth. Let's start with the GAAP income statement on slide 14. Third quarter GAAP net revenues of 850 million increased 5% from the prior year period. Operating income of 214 million increased 32% and the 25.1% operating margin increased by 720 basis points. Operating expenses in the prior year period were negatively impacted by a non-recurring charge to terminate an outsourcing vendor contract and real estate write-offs.
GAAP EPU of $0.68 compared to $0.46 in the third quarter of 2017. As always, I’ll focus our remarks from here on our adjusted results, which remove the effect of certain items that are not considered part of our core operating business. We base our distribution to unit holders upon our adjusted results, which provide in addition to and not a substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in presentation’s appendix, press release and 10-Q.
Our adjusted financial highlights are included on slide 15. Third quarter revenues of 727 million, operating income of 216 million and our margin of 29.7% all increased both sequentially and year-on-year. We earned or distribute to our unit holders $0.69 per unit compared to $0.51 for last year's third quarter. Higher base and performance fees combined with lower non-compensation expenses in the third quarter this year primarily drove the improvement versus both prior periods.
Lower compensation expenses also contributed to the sequential improvement in results. We delve into these items in more detail on our adjusted income statement on slide 16. Beginning with revenues, third quarter net revenues of 727 million increased 10% year-on-year. Third quarter base fees increased 6% from the same prior period due to higher average AUM across the retail and private wealth distribution channels and higher fee rate realization, reflecting a mix shift from lower to higher fee products.
Compared to the third quarter of 2017, total average AUM increased 3.8% and the portfolio fee rate increased 1.7% to 41.5 basis points. Approximately 9 million or 29% of the 31 million total increase in third quarter 2018 base fees came from higher fee rate utilization. Third quarter performance fees of 41 million compared to 5 million in the same prior year period and include 22 million earned on our financial services opportunity fund one and 13 million for our real estate equity fund one.
As discussed on prior quarter's earning calls, we're currently in the process of liquidating investments in both of these funds, which was also the recognition of performance fees. Third quarter revenues for Bernstein Research Services decreased 5% year-on-year on lower revenues in the US and Asia, partially offset by higher European revenues. Total Bernstein revenues were adversely affected by a stronger US dollar and lower fee realization, due to the delay in revenue recognition, resulting from the unbundling of research payments from training commissions and a shift to lower fee electronic trading.
Second quarter net distribution expenses decreased 2 million year-on-year, due primarily to lower amortization of deferred sales commissions. Other revenues increased 3 million compared to the same prior period, because of higher dividends and interest earned on broker dealer investments, which were partially offset by lower dividends and interest earned on our seed investment balances. Third quarter interest expense increased 7 million year-on-year from higher interest paid on broker dealer customer balances, primarily as a result of higher interest rate increases.
Moving to adjusted expenses, all in, our total third quarter operating expenses of 511 million increased 3% year-on-year. Total compensation and benefits increased 8% year-on-year on higher base incentive compensation and commission accruals. We accrued compensation at 47.5% of adjusted net revenues for the third quarter this year, compared to 48.5% for the two prior comparable quarters. With year-to-date adjusted revenues up 15%, we believed it was appropriate to reduce the comp ratio in the third quarter. The 100 basis point reduction added approximately $0.03 to our third quarter EPU.
We plan to revisit our comp ratio and adjust accordingly, as we gain further clarity as to the full year’s revenue and compensation requirements for our business. Given current market conditions, we do not expect the fourth quarter comp ratio to exceed 47.5%. Third quarter promotion servicing was flat versus the same prior year period and decreased 16% sequentially due to lower seasonal T&E, marketing and trade execution expenses. This year’s second quarter expenses included marketing spend for annual Bernstein Research Strategic Decisions Conference and for international advertising programs.
Third quarter G&A decreased 12% year-on-year due to lower occupancy expense and other G&A, which more than offset higher professional fees. The prior year period included a $15 million net non-recurring charge, the net of a 20 million outsourcing contract termination charge and a 5 million Asia VAT refund credit. Third quarter operating income of 216 million increased 30% from the prior year, as revenue growth outpaced expense growth.
The third quarter incremental margin was 78%. Excluding last year's 15 million net non-recurring charge, the incremental margin was 55%, demonstrating the operating leverage of our business and our continued diligent expense management. Third quarter operating margin of 29.7% increased 470 basis points year-on-year and 240 basis points sequentially. Our third quarter adjusted EPU was $0.01 higher than our GAAP EPU and our adjusted operating income was 2 million higher than our GAAP operating income.
This is primarily due to the following two items we excluded from our adjusted results because they're not part of our core or recurring business operations. Firs, we reclassified 2 million of distributions paid related to deferred compensation from partner’s capital to compensation expense as required by GAAP reporting, because the deferred compensation was subsequently forfeited. Second, we recorded a $1 million reduction in the fair value of our investment in a third party provider of financial market data and training tools.
We acquired this investment last year through the exchange of software technology we developed for an ownership stake in this company. All of the non-GAAP adjustments are outlined in the appendix of this presentation. The third quarter effective tax rate for AllianceBernstein LP was 4.4% and includes the benefit of the reversal of a $5 million FIN 48 reserve that is no longer required.
We currently expect the effective tax rate for full year 2018 to be slightly above 5%. I’ll finish with an update on our planned corporate headquarters relocation to Nashville. Our timing and estimates for the related transitional costs and ongoing annual expense savings are on track so far. Year-to-date, we have incurred 5 million of net transitional costs. Nearly all our employee related and are included in the comp ratio calculation and the compensation accrual.
Of the 5 million year-to-date transitional cost, approximately 4 million was recorded in the third quarter. As discussed on last quarter's earnings call, we currently estimate that we will incur total transition costs of approximately $125 million to $135 million for the period 2018 through 2024 when our New York City building lease expires. These costs include employee relocation, severance, recruitment and overlapping compensation and occupancy costs.
Over the same period, we expect to realize total expense savings of about $150 million to $160 million, which exceed the total transition costs. However, we will incur transition costs prior to the realization of expense savings. We currently anticipate that the largest reduction in EPU during the transition period could be approximately $0.04 in 2018. We expect to achieve breakeven or possibly a slight increase in EPU by 2021 and then EPU accretion for each year thereafter.
Beginning in 2025, once the transition period has been completed, we estimate ongoing annual expenses savings of approximately $70 million, the result of a combination of occupancy, compensation, fringe benefit and consulting related savings. Our estimates for both the transition cost and the corresponding expense savings are based on our best current assumptions of employee relocation costs, severance, recruitment and overlapping compensation and occupancy costs.
Our estimates for both the timing of incurring transition costs and realizing the related expense savings are based on our current relocation implementation plan and the timing for the execution of each phase. The actual total charges eventually recorded and the related expense savings realized and the timing of the EPU impact are likely to differ from our current estimates, as we implement each phase of our headquarters relocation.
And with that, Seth, Jim and I are pleased to answer your questions.
[Operator Instructions] Your first question comes from the line of Michael Carrier with Bank of America.
It’s actually [indiscernible] filling for Mike. Just wanted a quick question on the active equity inflows. Obviously, very strong and particularly really shrunk compared to your competitors. So just given some of the slippage in the performance of the volatile markets and kind of maybe what you're seeing in 4Q, do you think this pace of inflows we’re seeing in the active equity is sustainable?
Look, it's always hard to forecast flows. I think that one of the things that we find really encouraging is the breadth of flows. I mean Seth mention that a good chunk of it was coming from large cap growth, but there are another eight services, where we saw net flows greater than 100 million during the quarter. So, performance certainly does have an impact on flows. There's no doubt about that, as do capital markets.
That said, the long term track records remain really solid. The support that we have from consultants is terrific and the breadth that we're seeing in terms of the momentum is very encouraging. So, I'll leave it at that.
And then maybe just one on the $0.04 for 2018, the headwind on EPU due to the transition costs. Just, how much of that was in 3Q. I know, you mentioned 4 million. So I guess, just trying to figure out how much is left up for the $0.04 for the fourth quarter?
Well, I can let you calculate that, but you should assume it's probably more than double what we've booked to date and it makes sense because a lot of that transition cost is actually over a lot being comped and so we started staffing up in Nashville in July and so that really just got underway during the third quarter. So right now, we have -- you can see our headcount is up year-to-date and most of that is due to this overlapping compensation of headcount. And so, we're going to have a full quarter impact of that now in the fourth quarter, where in the third quarter, it was only a partial quarter.
Your next question comes from the line of Bill Katz with Citi.
So one of your peers has announced a relatively sizable transaction. As you think about your business model, it certainly seems like on a de novo basis, there's a ton of momentum, but how are you thinking about sort of maybe capital allocation from here. Do you need to scale a bit more or is it just sort of stay focused on the core business, so your thoughts on the implications of what sort of learning early [indiscernible].
I think it's fair to say that we like the cards we have. We think that the pace in the underlying business is strong. And we don't feel that we need additional scale to have penetration with the distributors who are critical to our success. Our acquisition criteria has, I think, been quite consistent. We look all the time. We want -- we look at something complimentary to our existing business. We want to plug new products and services into our global distribution network and scale it.
We're looking for a firm or a team we want to look and identify one where the culture and investment philosophy align with our own. We want to make sure that the deal is structured to align with the interests of the people who are joining with the people who are here and our unit holders and we look forward to be accretive fairly quickly. So I don't feel that we have any pressing need from a competitive position to change our path and so we -- while we continue to be opportunistic, I don't think anything has changed in that regard.
Okay. And as my follow-up question is just to come back to the question on equity, is maybe setting back more broadly, the industry itself is really struggling for unit growth. Yet, you’re one of the more of the refreshing stories in the space. It might be too hard to simplify across geographies and distribution challenge, but is there any commonality here of why you’re being so successful in terms of both the gross and net sales, particularly in higher impact active equity and alternative, particularly with the active equity with the industry really struggles overall.
I think, look, because you follow this for a long time, we set out with respect to equities to build a very differentiated and diverse platform. I think that's why per my earlier comment, you're seeing pretty broad based momentum. Similarly, if I think about the overall platform, we’ve said about to diversify that as well. So you're seeing strength across a range of our alternative products as well from a momentum standpoint. Then it feels to replicate because you look at it and the strength is pretty broad based geographically. You saw that -- certainly if you look at our Asia Pacific flows, they're much more diverse today than they were several years ago. So this I think is a result of things we've been talking about for a long time.
Your next question comes from the line of Robert Lee with KBW.
I'm just curious, I mean, would it be possible to translate the kind of the organic growth into kind of more of an organic revenue growth. Obviously, better fee rate, growing higher fee services faster, but if we were to look at this quarter, would we be thinking that the organic revenue growth rate was closer to 1% or 2% or how would you frame that?
I think you think about it as John mentioned that the fee rate growth is about 2% year-on-year and then you had about 2.5 billion in active equity flows offset by some passive outflows and just do the arithmetic on that, because the revenue growth is ultimately going to be a function of what’s happening with both fee rate and your net flows.
Great. And then maybe a follow up question on the private wealth business, you highlighted that you’re starting to see some growth in advisor headcount or stopped shrinking and have third class I guess for this year. I know, it usually takes several years to get new relationship managers, kind of up to production so to speak or relatively full or production. So, is there any kind of sense as you’ve started this over the last couple of years that if we look ahead to like, you'd expect come 2020, 2021 that you'd start having a broader range of relationship managers hitting kind of their -- starting to their stride and that could kind of at least sustain or maybe enhance the growth of that business?
Well, that's certainly our hope and expectation. We hire dedicated recruiters into our private client area and have revamped our training programs and development programs within it in order to make it a more appealing career path and it's early days and look, I'm really delighted with the 7% growth that I think we're posting this year. But, as you pointed out, Rob, it's kind of a three or five year, really, five year kind of period of time before people hit their stride and so for this to have a really meaningful impact, it's going to take time.
Your next question comes from line of Dan Fannon with Jefferies.
Yeah. Hi. This is James Steele filling in for Dan Fannon. Thanks for taking my question. I saw that the flexi funds are getting some industry recognition, specifically the wealth management award. Just curious if this has translated into any broader industry adoption and then maybe just a general update on how efforts are coming along there.
Yeah. I mean, it's continuing to grow at the pace we hoped it would. We are -- we have a large number of distributors now out there supporting it and we were really appreciative of the recognition, but as I think we've said before, this will take years to develop and mature, but we're happy with the pace that we have experienced so far.
Your next question comes from the line of Craig Siegenthaler with Credit Suisse.
Given KKR’s recent success, I just wanted to see if the firm has taken a look at converting to C-Corp and I wanted to see if you have an estimate of what tax leakage would be to our conversion?
Sure. Craig, it’s John. We definitely have taken a good look at this and at the current time, we've decided that we have no plans to move forward with converting and really for a number of reasons. One, with our current partnership structure, we actually have a payout ratio of over 100% in terms of, we pay out all of our earnings as well as we buy back the units that we issued to employees for stock-based compensation. The combined effective tax rate of both the private partnership and the public partnership is way below 10% compared to the corporate rate of 21%.
And once you convert to a C-Corp, you can't go back. So if rates change, obviously, you could be in a precarious position. It's not clear to me either that if you convert that it necessarily increases liquidity of the stock as well, because we have a limited float outstanding, we have a large majority owner and we have high employee ownership as well. And similarly too, if there is leakage in this, if you do convert and the multiple expansion that would be required would be quite high just to avoid destroying shareholder value. So we'll continue to monitor it, but right now, we don't plan to convert.
And then just as my follow-up, in Europe, where research and trading are now unbundled. How has the trading operation been performing on a standalone basis and is your agency trading operation profitable at this point?
So in answer to the last question, trading for us is quite profitable. Look, I think, we are fortunate, not just in Europe, but throughout the world to have a very robust and well regarded trading operation, particularly on the electronic side, but also in iTouch. So as you know, many counterparties that we deal with want to deal with people on a global basis. And the fact that we have that global footprint I think has benefited us, including in Europe. So, the growth on the electronics side is quite good and iTouch is hanging in there as well. And we've seen that post MiFID. Yeah.
[Operator Instructions] Your next question comes from line of Bill Katz with Citi.
Thank you for taking the follow-up questions. Just a couple of them. John, you just mentioned the charges associated with the headquarters migration, is that a GAAP number or is that a non-GAAP number. I just want to refresh my memory. And then will you continue to break that out, so we can sort of see what the core trends are?
Sure. Bill, the answer to your second question is yes. We will continue to break it out and supply to all of you each quarter and keep you abreast of our progress. The first question is, it's treated both the same for GAAP and adjusted. So, it's a charge for both the GAAP results and the adjusted results.
Okay. And then couple of broader questions, if I could still take some time. So staying with the Bernstein business for a moment, now, you had mentioned a 2% to 4% drop this year versus last year due to timing recognition of revenues. Is that just what it is, so we would expect that could bounce back some time in ’19 and then the broader question is, there's been some discussion about potentially scaling that business more, so if you feel like you were at scale, in the sell side business, as you are in the asset management business or with acquisitions be something of consideration as well?
Why don’t -- this is John. I'll take the first question and I'll leave the second question to either Jim or Seth. But in terms of what's happening here with the unbundling of the research payments, it's actually, for most of us, we're getting paid in arrears. So it's just -- it's pushing out the revenue recognition and that's our estimate as far as the impact on this year, 2% to 4% decline. But I think we have to get through a full cycle of this before we can see, if there's any impact on the business besides that.
With respect to the sell side overall, I think consistent with all of our businesses, we continue to invest in sell side and see opportunities, particularly in Asia. We're in the process of opening an office in India and so, look, we will be selective in terms of our investments, but where we see opportunity, we’ll continue to pursue them as we have in the past.
And just one final one, thanks for your patience for taking all of them this morning. Just in high net worth, you were considering to call out the high net worth within the private wealth overall and sort of private kind of role. I was wondering if you could just sort of expand on the focus on that element of the business. Is it just more profitable, faster growth, higher fees, just trying to get a sense of the magnitude and the focus on it?
Well, it has been much faster growth for us. As we indicated, it's tripled the growth rate of the rest of business. They've also, as a group, been much more open to the targeted services that we've offered up, whether it was alts or in equities. So their willingness or ability to understand and the size of their appetite has been very appealing in terms of expanding those relationships. A lot of clients with that kind of money have a manager already and so it is a really powerful way of entering into new relationships, when you're offering a service that they haven't seen before or works within the portfolio that they've created.
The fee rates are certainly not higher at the larger size, but it has been a particularly productive area for us and one that we want to pursue, because obviously it has a greater scaling opportunity.
I think, if you look at the industry, it's no secret that the ultra-high net worth part of the market is the faster growing part of the market and in addition to the investments that we've made in alternatives and focused equities, which are particularly relevant for that part of the market, it also dovetails nicely with what we've done in terms of wealth planning, wealth transfer, charitable giving, things of that sort where we have an opportunity to build a relationship with the family that is truly broad based and that's why I think, you see not only our success in bringing those types of families into the firm but also keeping them in the firm as well.
There are no further questions at this time. I would now like to turn the call back over to Andrea Prochniak for closing remarks.
Thank you, everyone for participating in our conference call today. Investor Relations is available all day should you have any follow-up. Thanks and have a great day.