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Franklin Resources, Inc. (BEN) Q3 2018 Earnings Conference Call Transcript


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Franklin Resources, Inc. (NYSE: BEN)
Q3 2018 Earnings Conference Call
July 27, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Unidentified Speaker

Good morning and welcome to Franklin Resources earnings conference call for the quarter ended March 31st, 2018. Statements made in this conference call regarding Franklin Resources, Inc. which are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve a number of known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties, and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the risk factors and MDNA sections of Franklin's most recent Form 10-K and 10-Q filings.

Operator

Good morning. My name is Omar and I will be your call operator today. At this time, all participants are in a listen-only mode. If you would like to ask a question at that time, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

At this time, I would like to turn the call over to Franklin Resources' Chairman and CEO, Mr. Greg Johnson. Mr. Johnson, you may begin.

Gregory Eugene Johnson -- Chief Executive Officer

Hello and welcome to our third quarter conference call. I'm joined today by Ken Lewis, our CFO. While some clear challenges persisted in the quarter, investment performance within our growth strategies was very strong. Net flows into our US equity and hybrid products improved. US equity sales reached the highest level in three years driven by demand for a number of our growth funds within the category.

Additionally, we continued to make progress with several strategic initiatives to offer lower-cost options to investors, notably in the DCIO space. Importantly, operating results remain strong with over $503 million of operating income generated on $1.6 billion of revenue in the quarter. We continue to prioritize capital return with elevated share repurchase activity in the quarter and a $0.23 per share regular quarterly dividend.

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We'd now like to open the line to your questions.

Questions and Answers:

Operator

Our first question comes from Craig Siegenthaler, Credit Suisse. Please proceed with your question.

Craig Siegenthaler -- Credit Suisse -- Managing Director

Thanks. Good morning. On page four of the prepared remarks, I see you adjusted fee structures in your A share. I'm just wondering is this A share from AUM base standpoint and also what's the estimated economic impact in terms of EPS or revenues or earnings?

Gregory Eugene Johnson -- Chief Executive Officer

Yeah. I don't think we have a number. I think I would say it would be nominal, any impact is really just adjusting the payout schedule to be more competitive on the break point schedules. We think the real impact would be in the lower duration kind of products, where we've seen a lot of over $1 million sales being competitive on the brokerage side of those still selling A share assets. So, I just don't think it is a number that would adjust anything at this stage. Hopefully it will and we get strong sales.

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

Right. We think it will increase sales and if it does increase sales, then it would see the sales distribution revenue and expense line increase.

Craig Siegenthaler -- Credit Suisse -- Managing Director

And then just as my follow-up, I don't know if you guys did this intentionally, but it looks like you pulled the text and commentary around the pipeline in the prepared remarks. I'm just wondering how did the institutional one but not yet funded pipeline trend from last quarter?

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

Well, I think that the -- was the question how the pipeline related back to last quarter?

Craig Siegenthaler -- Credit Suisse -- Managing Director

Yeah. How did the institutional pipeline of one not yet funded mandates trend right now versus three months ago?

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

Yeah. I think, for example, the big win for our local asset management in the UK, I don't think we noted that last quarter. So, that was an upside surprise. For the rest the pipeline, it came in pretty much as we expected.

Craig Siegenthaler -- Credit Suisse -- Managing Director

Thank you.

Operator

Our next question comes from Bill Katz, Citi. You may proceed with your question.

William Katz -- Citigroup -- Analyst

Thank you very much. Good morning, guys. The first question is just on expenses, appreciate that you -- hold on one second. Sorry, just some background noise. I appreciate the guidance as it relates to the fourth quarter on the G&A side. I guess the first part of the question is where is the spend? It sounds like there's a little lumpiness. Now that you're so close to the end of the year, how are you thinking about growth next year relative to the growth rate you articulated for this year?

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

Right. There were a few one-time charges in the G&A, but there was a bit of expense trends going on in there as well. That's why we gave the guidance. Some of it relates to sub-advisory expense. So, you're seeing an offset to that in revenue as well, but I think that's probably the biggest driver there. So, that's why we're giving that guidance for the fourth quarter. It's early in the budget process for us looking forward to next year, but our target is to try to keep the expenses under 3% growth rate next year, year over year, '19 versus '18.

William Katz -- Citigroup -- Analyst

Okay. That's helpful. Then just stepping back, you mentioned your priority is cap return. Where are you in terms of the buyback versus the stepped up repurchase you announced more recently and going forward from here, is buyback still the priority use for that within the overall capital plan?

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

I would broaden the answer and just say that returning capital to shareholders continues to be a priority. Part of that is share repurchases. I would point out this quarter, you know how we like to be opportunistic with our share repurchases. This quarter, there were a couple of factors that elevated the share repurchases compared to the previous quarter. One of them was a pretty big spike up in volume during the quarter. Also, we repurchased shares to cover any share issuances that we had related to M&A. So, a little elevated this quarter, but it continues to be a priority.

William Katz -- Citigroup -- Analyst

Okay. Thank you.

Operator

Our next question comes from Ken Worthington, J.P. Morgan. Please proceed with your question.

Ken Worthington -- J.P. Morgan -- Analyst

Hi, good morning. To follow-up on the capital return conversation, you're clearly returning a bunch to investors, but at the same time, the business is under tremendous pressure and you've got a tremendous amount of cash. It gives you the opportunity to redirect the business or buy your way into better growth. You've done acquisitions, but nothing that I would consider transformational.

How serious are conversations in the boardroom about leveraging the cash for more than just buybacks and dividends and if the opportunity arose to do something truly transformational for what has been a struggling business?

Gregory Eugene Johnson -- Chief Executive Officer

I think you're dead on. I was going to add that to Ken's response to Bill's question. When you look at capital, M&A is still the priority for the use of that capital on the balance sheet. I think the challenges that you mentioned and we all know, whether it's fee pressure, passive, or just the move to advisory from brokerage will continue to put pressure on organic growth rate. So, we are, as we said in past calls, very active in looking.

That still will be the number one priority to invest the capital into growth channels and not make the priority just buybacks and dividends. Those board discussions are ongoing, looking at all aspects and all channels of growth, and are much more interested in that discussion than the level of buybacks.

Ken Worthington -- J.P. Morgan -- Analyst

Evidenced by what you guys have been doing, you guys have done a number of smaller deals, but they've been smaller deals and not big transformational deals. If the right opportunity arose, is transformation something that would be under serious consideration or with is the better approach, do you think, to continue to nudge the battleship and maybe transform the business longer-term using smaller transactions. It's been so long since -- Franklin has done big transformational deals in the past, but it's been a long, long time since you guys have taken that approach.

Gregory Eugene Johnson -- Chief Executive Officer

Well, and also very different organizations from Franklin Templeton to where we are today as far as the breadth of what we offer in as many places. So, I think the answer is that we continue doing bolt-on, developing products, whether it's alternatives and we're building out businesses like private equity, we want to continue to scale up the high-net worth business. We've said that in the past.

Define transformational, but I think they're harder to do. Of course, we are open to that, but I think combining with a company of this size is very challenging to maintain who we are as an organization. But I think those discussions, again, are ones we are open to, but more probably, you'll see continued investment in those other categories that can't be duplicated by passive strategies as a priority and just, again, scaling up the businesses that we're in, we'll continue to do that.

I think as far as a transformation, whether it's two huge organizations combining, I think that's more difficult, but we can certainly still do something in between that that would absolutely change the organization in a significant way. Those are all things we're looking at.

Ken Worthington -- J.P. Morgan -- Analyst

Thank you very much.

Operator

Our next question comes from Michael Carrier, Bank of America Merrill Lynch. Please proceed with your question.

Michael Carrier -- Bank of America Merrill Lynch -- Managing Director

Thanks a lot. First, just on the fee rate, it seems like there was a little bit more pressure in this quarter. I just wanted to get some sense -- were there any other changes that were made in the quarter on pricing or was it more, whether it's product vehicle shift, that was just playing into that?

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

I think one of the factors was just simply that there were some one-offs last quarter that didn't happen this quarter, but we're not really seeing any major shifts in fee reductions in any of the major retail products. I think some of the institutional accounts coming in, there's some fee pressure on that we're seeing for new accounts, but nothing significant.

Gregory Eugene Johnson -- Chief Executive Officer

I would just add to the mix, and if you look at emerging markets, they were down 8% for the quarter. That probably counts as two or three times per dollar of assets. That kind of move can have an impact on that line as well.

Michael Carrier -- Bank of America Merrill Lynch -- Managing Director

Right. That makes sense. Just on the investments and on the M&A front, I think you guys have said in the past that you look at a lot of opportunities, it's also from a time in the cycle, like pricing or valuations are a bit tougher. I just wanted to get your sense -- when you guys go through that map and the calculations, how much do you focus on the price being paid versus maybe the longer-term consequence of not pursuing those with the outflows continuing and the cashflow deteriorating? I just wanted to get your perspective on how does the current or maybe decay rate factor into potentially doing something?

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

I think every target, if you will, every potential acquisition is bespoke. I don't think we look at it and say we can improve aggregate net flows, but we look at the opportunity set, that the potential M&A target presents. Of course, that would include where we think it will be improved flows in a certain sector and all that or improve our investment capabilities, etc. So, I think I don't know if that answers your question, but basically, it's a case-by-case analysis.

Gregory Eugene Johnson -- Chief Executive Officer

I would just say that first and foremost, we think our stock is probably still the best buy out there. So, we'll continue to that. I think we don't think the pressure that we're undergoing, I think, in a rising rate environment, different kind of market, the value growth cycle, the 30-year spread of where we are of value versus growth, the strength of the dollar, all these things can mitigate some of the pressures that we're seeing on the current flows. So, I think we don't think that's forever. So, let's start there that we have to change the business.

To your question on how we look at acquisition and pricing, obviously, a smaller one, you can pay a higher multiple to get exposure to an area you can grow quickly. I think it gets more difficult when you're looking at larger deals at very high multiples and then the market becomes such a factor in how that works out in the next few years.

So, we're willing to pay up for talent and people and we recognize it's expensive, but also at times when things are expensive, that's when you have opportunities to purchase quality organization. I think we're certainly open, if we think it's a business that can scale to pay above market multiples.

Michael Carrier -- Bank of America Merrill Lynch -- Managing Director

Okay. Thanks a lot.

Operator

Our next question comes from Dan Fannon, Jefferies. Please proceed with your question.

Dan Fannon -- Jefferies -- Managing Director

Thanks. I guess a little bit more on the areas you're spending in opportunities for growth -- headcount, if I just look at some of the numbers, went up 3.5% sequentially. I assume part of that is the deal. I guess can you talk about, as you look into next year with 3% growth and we know is happening in the fourth quarter, like where those dollars are going, what areas you're investing in the most in terms of, I assume, for future growth.

Gregory Eugene Johnson -- Chief Executive Officer

I think the key areas that are new channels for us and new products would first be the ETFs. That has been a build organically and grow and if we find the right acquisition to bolt on that, that's something we'd certainly do, but we've done significant headcount in the ETF business as well as separate distribution there has increased the headcount line overall.

Solutions is another area that we've talked about, having tactical asset allocation, having multi-asset products, and having better retirement target date glide path funds is a priority for us. We've added quite a bit of talent there. The institutional side has been a priority to grow that part of the business.

We've added headcount in the institutional side and just the changing distribution landscape in the US, switching from your brokerage selling product to more of the consultative planning side. We've really revamped and reconfigured what was our retail distribution and have a New York Stock Exchange channelization focusing on the traditional wire houses with more of a planning approach. That has required all additional resources.

So, I think there's been a lot of areas where we've spent and invested incremental dollars. Hopefully, we can find savings in other areas, but that's really the three or four areas where we've added headcount at more of the higher cost type of headcount.

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

This is Ken. I'd add across the enterprise, as we forecasted years ago, we've been increasing our investment in technology and you're seeing that come through the numbers.

Dan Fannon -- Jefferies -- Managing Director

Got it. Then just a follow-up from the prepared comments from the 28 recommended list placements across the broker dealer channels this year in Fiscal '18. Can you give us some context? Where was it a year ago? What's the bogey that you're trying to get to. It's hard to get a sense of what that means on a stand-alone basis.

Gregory Eugene Johnson -- Chief Executive Officer

I don't really have those numbers to give you that context. We try to set specific goals and targets and that was one of our targets to get that product placement. I think it really speaks to, again, some of the investment that we made in that side bringing in more consultants and building better relationships in the home office.

We all know that getting the product placed doesn't necessarily mean you suddenly get flows coming in your funds, but what it means is you'll have that pipeline when the market does turn and when people are looking for whether it's value or other styles that could be out of favor right now, we want to be on that platform. It also helps you retain assets when assets are moving from brokerage to the fee base, you need to be on that plan or on that platform.

I don't really have a number to give you in terms of how many platforms. It was a goal that we set, a metric that we set out there for that team and for them, they hit it three-quarters of the way through the year.

Dan Fannon -- Jefferies -- Managing Director

Okay. Thank you.

Operator

Our next question comes from Brian Bedell, Deutsche Bank. Please proceed with your question.

Brian Bedell -- Deutsche Bank -- Analyst

Great. Thanks very much. Good morning. Greg, if you could, talk a little bit about the broad strategy and global equities in the Templeton franchise with the acquisition of Edinburgh Partners, does this change how you're think about how you're managing the Templeton global equity franchise or delivering the product?

Gregory Eugene Johnson -- Chief Executive Officer

No. It really doesn't. It allows us a little bit more flexibility with pricing, where Edinburgh has done a good job building sub-advisory relationships that Templeton wouldn't be able to price to with the existing assets in 40 act funds. That gives us a new channel to distribute the value side. I think having the resource of Sandy Nairn, who is a highly respected person in the industry, one that we know well, we think can only be helpful on the overall Templeton side.

There are no plans to do any combination. We think the benefit of accessing a growing distribution channel on the sub-advisory side that we can leverage our distribution to do that. I don't think there's any other plans other than having the stand-alone entities with the benefit of Sandy there helping with the Templeton side.

Brian Bedell -- Deutsche Bank -- Analyst

More of a bolt-on in leveraging extra capabilities rather than any kind of transformational moves.

Gregory Eugene Johnson -- Chief Executive Officer

Exactly.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. Then just Ken, I just wanted to make sure I had this correct -- I think the top of the expense growth guidance for this fiscal year, if I'm correct, is about 7.5% and that was an expense base of $2.0 billion, am I correct on that?

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

You are.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. Great. Thank you.

Operator

Our next question comes from Chris Harris of Wells Fargo. Please proceed with your question.

Chris Harris -- Wells Fargo -- Analyst

Thanks. Can you guys talk about the trends you're seeing in Asia? That's been the one region for you guys that's been growing the fastest, at least on an AUM basis. Maybe you can elaborate on what you're seeing. Then also related to that, is China loosening up their restrictions an opportunity for Franklin down the road?

Gregory Eugene Johnson -- Chief Executive Officer

First of all, I think if you look at our distribution around the world, Asia continues to be the areas that are still having net inflows in a tough environment for our traditional strength. I think that markets like Taiwan and India continue to grow and are generating positive sales. I think the China question, they have announced the intention to allow the minority owner in your GB to become a majority owner. We don't have exact clarity on when that will happen.

We are having discussions with our partners and that's always been our intent to do that. I think once you have control of that, that enables you to put further resources in building out distribution there. I think everything is in a little bit of a holding pattern with some of the trade issues on giving clarity around that. I don't expect to see that. But from everything we've heard, we expect that to be within 12 months that we'd be able to do that.

Chris Harris -- Wells Fargo -- Analyst

Thank you.

Operator

Our next question comes from Robert Lee, KBW. Please proceed with your question.

Robert Lee -- KBW -- Managing Director

Good morning, everyone. Maybe following up a little bit on capital management and deals, some of your competitors have made investments and acquired various types of digital -- have a digital strategy for distribution and otherwise. You've talked in the past a little bit about some strategic investments, small but strategic investments you've made in different companies. Can you maybe update us on how you're thinking of -- do you see a place for the digital strategy at Franklin? Is that a possible path you can go down for future M&A?

Gregory Eugene Johnson -- Chief Executive Officer

I think it's absolutely a path that we're continuing to develop a strategy on. We're doing direct in some of the markets around the world and are doing it in a very efficient way in a market like India, where it's probably a quarter of our business there direct, so we've been building that out. I think the robo piece is fairly simple. I don't think we need M&A to do that on top of it. The digital tool capabilities and customizing service levels, those are all things we've got people working on actively.

As we said before, we have an investment in some different robos around the world, different companies like advisor that do financial tools that our high net worth fiduciary trust is looking at leveraging there. We are experimenting with it on various channels and developing -- at this stage, we still have a lot of accounts that are direct, some that came through mutual series. It would be a better way to service those accounts where you could have $30 billion or so of no advisor record accounts and think a robo, some type of service there makes sense.

So, I think like most firms, we think first and foremost that technology is going to help distribution, help partner with the advisor, provide better tools for them to more efficiently serve more clients. That's the first goal. Then we're thinking longer-term about how we can also service those direct accounts as well, whether it's in the US or other markets, we'll be thoughtful about how we roll that out.

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

I would just add that that is an area that we've been increasing expenses in and investing in. That's been part of the expense growth.

Robert Lee -- KBW -- Managing Director

Then as my follow-up -- can you update us on your ETF initiative? Where the spend now? Now that you've been at it for a while, do you feel like it's meeting your expectations, particularly with the low-cost, country-specific strategy that you started with? Just kind of progress update.

Gregory Eugene Johnson -- Chief Executive Officer

I think it's moving along. It's probably in the range of $2.5 billion roughly today. We are still early in rolling out many of these strategies in terms of distribution. Our goal has been to get on platforms. We continue to make progress there. It seems like every month or quarter we're being approved on new platforms. Some just may take three years to get on, but others we can get on a little bit faster. So, I think the progress has been good to date and one that we just recognize will take a little bit of time and actually sales support to grow, but we are seeing decent growth at this stage.

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

In June, we had a targeted campaign to grow awareness at the RA channel institution and also we're marketing ETFs through print ads and digital and conference advertisements, etc. We launched three active ETFs last quarter.

Operator

Our next question comes from Alex Blostein, Goldman Sachs. Please proceed with your question.

Alex Blostein -- Goldman Sachs -- Analyst

Hey, guys. Good morning. Question for you regarding non-US retail distribution broadly, specifically focused on the UK market. I know it's been area where you haven't had a lot of presence in the past, I don't know if that number changes materially, but given some of the more structural changes unfolding in the UK or retail market, is it still a priority for you guys to try to extend there or not as much.

Gregory Eugene Johnson -- Chief Executive Officer

I would say it's a priority and one that we have identified as a market that I think in the past, we felt that our core strengths around global equities, there were plenty of global equities in that market, so it's one that we didn't put a lot of resources in, but I think now, what's changed is we look at the size of the market and the potential still for us. So, it is a market that we've made a strong higher to run that effort there and we're putting more resources into that market.

I think despite some of the changes that one could argue make the retail sales a little bit more difficult, it's too big of a market for us to ignore. So, we are building that and we've been very successful with our local manager there and have very strong performance in UK equities and just in the last quarter, as we mentioned, we got an institutional win, over $1 billion, which, again, validates the strength of that local team.

Alex Blostein -- Goldman Sachs -- Analyst

Just a follow-up questions around the expenses -- I heard your comments in the near-term as you start think about '19, but in the event of a downturn, can you help us think through what you would be able to scale back on, granted you're obviously trying to pivot the business toward faster-grown areas? Where would be the flexibility in the expense base and what are some things you would need to pull back from if we see more of a prolonged period of tougher markets?

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

Yeah. I'll address that in two ways. One, we've had these downturns in the past and you can see how it reacted. There is that level of flexibility if we needed to do it. We don't want to do it, but if we had to do it, we'd have that flexibility. Part of the process that we're talking about and part of being incorporated into trying to keep the expense growth minimal next year is to look at investments that we've made in the past that maybe aren't panning out and call operations that we don't see the benefit in performing a certain service in all that.

We're looking at all of the areas to see where can we create savings that we can reinvest? We do want the actual incremental growth into new things to be above the 3% that I gave you. We also want to fund that through some savings from outdated processes and services.

Alex Blostein -- Goldman Sachs -- Analyst

Great. Thanks for that.

Operator

Our next question comes from Michael Cyprys, Morgan Stanley. Please proceed with your question.

Michael Cyprys -- Morgan Stanley-- Analyst

Good morning. Thanks for taking the question. I just wanted to follow-up with M&A -- as you think about the opportunities out there, what is sort of a hold back or hesitation on some of the larger-sized acquisitions at this point? Have you gotten close on anything? If so, what's happened? As you think about any hesitation, is it price of view on the cycle in terms of where we are? Does that factor into consideration? Is there a view to maybe be a bit more patient on M&A, wait for a turn in the cycle and then get a better price? How do you balance the near-term versus more medium-term of a better purchase price?

Gregory Eugene Johnson -- Chief Executive Officer

Well, I think first of all, we did close two deals last quarter. So, it's not like we're not doing anything, although obviously not at the scale you're talking about. I think we have been as active as we can be in looking at multiple deals. You only have so much capacity for working on even if it's a number of partners, that's going to take resources and tie you up for a bit to close that. So, I don't think it's -- price is always a consideration, of course. That's always going to be one. It could be what we think is not the right fit, not the right culture. We're controlled about where we are in the cycle of a business, but not any one stands out. As I said in an earlier answer, it's an area that we think we need to be in and we have an opportunity to bring in a quality organization, we're going to pay up for that. We don't have any set number that says it has to be accretive in year old. Those are factors that we're going to thank long-term and try to bring the best in at what hopefully isn't overpaying too much.

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

As Greg mentioned, price is always a factor, but that's the benefit of having a strong balance sheet. If we see an opportunity that we think makes strategic sense, we can just get it.

Michael Cyprys -- Morgan Stanley-- Analyst

Okay. Great. Just as a quick follow-up, I think I may have heard you, you were building out a private equity business. If you could just talk a little bit more about that and some of the capabilities that you're building or organically how that's progressing, what we can see next there?

Gregory Eugene Johnson -- Chief Executive Officer

Yeah. I think for us, we've been in private equity in other areas with Templeton for a while. It's really the US side that we've developed. Part of it is growth of the private markets, having analysts that have built strong relationships here in Silicon Valley and seeing a lot of opportunities on the private side. That's one that we just said it made sense to start a business.

I think the fund is not a big first fund, but $50 million. It has significant outside investors that recognize our access and strengths on the analyst side here in the Valley, that that made sense. We're also looking at AI and big data and have some partners there that we're bringing in to do that. I think we're trying to take advantage of our location and the strength of our technology team here in San Mateo.

It's very hard to go out, as you know, to go buy a private equity firm. We've seen that that's extremely difficult. Again, if the right situation came up, we would entertain that, but I think building it organically, taking time there and just building strong records is what we want to do.

The other alternative side, the K2, we didn't talk about that, but it had an extremely strong quarter. Whenever you see the kind of disruption in the market like we did earlier in the quarter, we tend to see a strong interest in the alternative category. They've had very strong results on a relative basis and on a flow basis and had a major win last quarter as well. That's another business within the alternatives that continues to grow.

Then other categories that we're looking at on the M&A side, we'd like to build a larger real estate group within that. So, that's certainly something that we've been looking at deals and recognize that that's going to be an important category.

Michael Cyprys -- Morgan Stanley-- Analyst

Great. Thank you.

Gregory Eugene Johnson -- Chief Executive Officer

Thanks.

Operator

Our next question comes from Brian Bedell, Deutsche Bank. Please proceed with your question.

Brian Bedell -- Deutsche Bank -- Analyst

Thanks for taking my follow-up. I wanted to come back to a couple comments you had made on the balance sheet in terms of M&A, it sounds like you would be looking for doing any deals strictly in cash. So, maybe give us an update on what you view as excess cash on the balance sheet. You mentioned also building the ETF franchise. So, would you consider a large transformative ETF acquisition relative to your current footprint there?

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

I'll do the cash question first. So, net cash net of debt is about $7 billion. We think that as we disclosed, we need about $3.5 billion for regulatory requirements, internal uses. So, that leaves about $3.5 billion. The other question was would we purchase a large transformative ETF.

Gregory Eugene Johnson -- Chief Executive Officer

We would consider it. There's not many of them out there, but we certainly would be open to the idea.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. Also, you mentioned in the deck strategies in the trust area. That is obviously a growing area. Can you size your AUM in the collective trust or at least characterize to what extent you are either transitioning mutual fund assets into collective trust structures or actually just getting new sales with collecting trusts in DCIO?

Gregory Eugene Johnson -- Chief Executive Officer

I think right now we have $6 billion in the collective trusts. I think as you know, the flexibility of what we can do, pricing, it's like an R6 class. So, it's a lower-cost alternative and the pressure on fees within the retirement channel, we just find this to be a very strong vehicle well-suited to do that and also, the flexibility of combining and building within your solutions group using trust, it's more flexible than a 40 act fund.

So, we have seen strong interest there on especially the DCIO channel and have built strategic partnership with another firm that allows us to kind of plug and play those funds into existing platforms. So, I think our retirement group felt like there was $10 billion in the pipeline. I'm not sure about the probability of any of that, but $10 billion they've identified and working on within the DCIO channel, but obviously I think the market itself is like $2 trillion or something like that.

Brian Bedell -- Deutsche Bank -- Analyst

And then the formation of that $6 billion, is that mostly new money to Franklin Templeton or was a good portion of it switches from your mutual fund situation?

Gregory Eugene Johnson -- Chief Executive Officer

Most of it's money that's been there for a while. We use that vehicle for the institutional side with Templeton. Those funds have existed, but where we're seeing the incremental growth now is really what our group is excited about, the opportunity within the DCIO channel to have a more competitive pricing structure and we seem to be getting a lot of interest there.

Brian Bedell -- Deutsche Bank -- Analyst

Can I go one more or should I get back in the queue?

Gregory Eugene Johnson -- Chief Executive Officer

Go one more.

Brian Bedell -- Deutsche Bank -- Analyst

Okay. Maybe if you could characterize the environment in July -- obviously, we've seen the other companies talk about some net outposts. A lot of them have come from lumpy sources, but maybe with the uncertainty in the markets on trade and everything, if you could give us a flavor for what your sales teams are hearing from financial advisors in terms of retail appetite for funds and maybe any kind of early July flow outlook if that's possible.

Gregory Eugene Johnson -- Chief Executive Officer

Yeah. I don't have much color to offer there. I don't think we're seeing any significant shift at this stage, but probably consistent with some of the other remarks that have been made.

Brian Bedell -- Deutsche Bank -- Analyst

Fair enough. Thank you.

Operator

Our next question comes from John Dunn, Evercore ISI. Please proceed with your question.

John Dunn -- Evercore ISI -- Analyst

Thanks. Just going back to the 28 recommended list placements, is that a gross number? On the flip side, can you talk about what you're seeing as far as funds maybe getting consolidated off lists for you guys and the industry in general?

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

Yeah. I think it's probably a gross number as far as new placements and I'm not sure how you would net if you have a new advisory platform that it's really getting on those. I'm not sure we even keep a statistic if you went off one. It's really once you're on it -- most of these are new lists that you could argue if you go from the old open architecture to a new list, are you off that list or on? I don't know how you'd calculate that. Everybody had access before.

It was really when they set up their new advisory platform. You're absolutely right. It's a funnel. It's a narrowing of what's available. That's why it's so important to get on that. If you're on it, the opportunity to get greater share is there because you're not competing with thousands of funds. We all know the downside if you're not on it, the brokerage assets are more vulnerable to redemptions as they move to advisory.

John Dunn -- Evercore ISI -- Analyst

Gotcha. Thanks very much.

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Our next question comes from Bill Katz, Citi. Please proceed with your question.

William Katz -- Citigroup -- Analyst

Thanks as well for taking the follow-up -- so, three-part question, where do you stand right now in terms of remaining A, B, and C share exposure in the US? As you reprice now into the A class share, where are you within some of your peers in terms of that pricing? If you are to be successful and realign yourself so that you are flowing from the brokerage to advisory shift, what is the economic impact on the business as you look ahead? Thanks.

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

First of all, the pricing was to make sure that the pricing was competitive with our competitors. It will be effective next fiscal year. And in terms of the economic impact, it's hard to quantify. Certainly, there's a cost, but there's only a cost if it results in increased sales. So, that's a good thing to have. We'll have increased assets under management. You'll see the sales distribution and expense line go up as a result.

Gregory Eugene Johnson -- Chief Executive Officer

And some of it was just being consistent as they've adopted even their brokerage model or adapted to more trying to get a consistent pricing model. For example, we have a new class that would just make -- we were an outlier with the lower 12b-1 at 15 on some of our funds and we had to move them to 25 because that's the standard pricing for that asset class within certain advisors that had to have that.

So, repricing there doesn't really have that. That won't have an impact financially other than hopefully generating new sales. It's really just some of the tweaks within the payout structures and more flexibility around the $1 million pricing and hopefully that leads to larger tickets and better sales, but we don't have an exact impact number. As I said earlier on the call, I don't think it's going to be material for a while there. I don't think it's a material change in any way.

William Katz -- Citigroup -- Analyst

Thanks.

Gregory Eugene Johnson -- Chief Executive Officer

Thanks.

Operator

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Johnson for closing remarks.

Gregory Eugene Johnson -- Chief Executive Officer

Thank you again for everybody attending today's call and we look forward to speaking next quarter. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for participation.

Duration:46 minutes

Call participants:

Gregory Eugene Johnson -- Chief Executive Officer

Kenneth A. Lewis -- Executive Vice President and Chief Financial Officer

Craig Siegenthaler -- Credit Suisse -- Managing Director

William Katz -- Citigroup -- Analyst

Ken Worthington -- J.P. Morgan -- Analyst

Michael Carrier -- Bank of America Merrill Lynch -- Managing Director

Dan Fannon -- Jefferies -- Managing Director

Brian Bedell -- Deutsche Bank -- Analyst

Chris Harris -- Wells Fargo -- Analyst

Robert Lee -- KBW -- Managing Director

Alex Blostein -- Goldman Sachs -- Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

John Dunn -- Evercore ISI -- Analyst

William Katz -- Citigroup -- Analyst

Craig Siegenthaler -- Credit Suisse -- Managing Director

Alex Blostein -- Goldman Sachs -- Analyst

Ken Worthington -- J.P. Morgan -- Analyst

Dan Fannon -- Jefferies -- Managing Director

Patrick Davitt -- Autonomous Research -- Partner

Michael Cyprys -- Morgan Stanley-- Analyst

Glenn Schorr -- Evercore ISI -- Managing Director

Robert Lee -- KBW -- Managing Director

Brennan Hawken -- UBS-- Analyst

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