Gregory Johnson - Chairman and Chief Executive Officer Kenneth Lewis - Executive Vice President and Chief Financial Officer Tom Regner - Head of our U.S. Advisory Services.

Michael Carrier - Bank of America Merrill Lynch Daniel Fannon - Jefferies LLC Kenneth Worthington - JPMorgan William Katz - Citigroup Global Markets, Inc. Alexander Blostein - Goldman Sachs & Co. Kenneth Hill - Barclays Capital, Inc. Patrick Davitt - Autonomous Research US LP Robert Lee - Keefe, Bruyette & Woods, Inc.

Brennan McHugh Hawken - UBS Securities LLC John Dunn - Evercore ISI Brian Bedell - Deutsche Bank Securities, Inc. Christopher Harris - Wells Fargo Securities LLC Craig Siegenthaler - Credit Suisse Michael Cyprys - Morgan Stanley & Co. LLC.

Good morning and welcome to Franklin Resources Earnings Conference Call for the Quarter and Fiscal Year-Ended September 30, 2016. Please note that the financial results to be presented in this commentary or preliminary.

Statements made in this commentary 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 MD&A sections of Franklin's most recent Form 10-K and 10-Q filings..

Good morning. My name is Brandon, and I'll be your operator today. At this time, all participants are in a listen-only mode. A question-and-answer will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. And at this time, I'd like to turn the call over to Franklin Resources' Chairman and CEO, Mr.

Greg Johnson. Mr. Johnson, you may begin..

Well, hello and thank you for joining us this morning. In addition to Ken Lewis and myself we have Tom Regner with us today. And Tom is the Head of our U.S. Advisory Services responsible for both the retail and institutional business in the U.S.

The fiscal 2016 was challenging in many respects as performance headwinds led elevated outflows, but expense management capital return were clearly positives. I'm encouraged by improving performance trends with several flagship funds as I mentioned in my comments this morning.

Franklin Income Fund was ranked in the top decile of its peer group on a one-year basis and we saw improvements in all major asset classes overall primary timeframes this quarter.

Furthermore the global bond fund has had significant outperformance in the month of October month-to-date returning over 5% through the 25th beating its benchmark by over 800 basis points in its peer group by more than 600 basis points. I'd like to now open it up for your questions. Thank you..

Thank you. Our first question comes from the line of Michael Carrier with Bank of America. Please go ahead with your questions..

All right. Thanks guys. Hey Greg maybe first for you just on the department labor you mentioned you know on the previous quarter call, that you guys in the industry are focused on you know some strategies around the DOL. I mean I think you said two you know potential you know kind of past.

Just wanted to sitting and provide more color, the likely options and any update on your exposure in the retirement channel and maybe how you know this uncertainty has been weighing you know on flows so whether it's the sales or the pickup in redemptions?.

I mean I think it's tough to really estimate what effect it could have on sales, but I think it clearly has been very disruptive, to the advisors business right now and sorting out, what is going to happen. I think from the last call you know we continue to make a lot of progress a lot of work being done.

On getting ready for April I think you know the good news is that there seems you know our concerns always been that it's not workable to come out with a different pricing structure for every broker dealer out there and we seem to be narrowing those options down to hopefully two.

And then you saw the recent you know announcement around a plain share class or super class or whatever you want to call them and you know having more of a stripped down version available at some point in the future that that could be an option as well where you have you know the pricing handled at the broker dealer level.

All of that you know I think is happening the question about what effect will it have I think you know the net effect there was some surveys done that said one said you'll have 10% to 15% less advisors out there. I think that some would retire the transition is going to be very difficult to go to the new model.

So I you know I think that that can be disruptive as well. And I just think overall you know our sense is once we get past this you’ll get to a more normalized environment but right now it is a very disruptive force for the advisor you know last Tom Regner who's been involved more day-to-day if he has anything to add..

So we’re spending a lot of time getting ready for next April.

On the retail side, we’re doing a lot of training and kicking off some internal training for both the internal team and the external sales team because we’re moving towards an advisory business, which is really selling funds within a portfolio of context, which is different than we have and our competitors have been doing that so.

We’re getting ready as fast as we can for that change..

Okay, got it. And then just as a follow-up, I guess just on the cash. Do you guys have been active this year with buyback and dividend, but for the non-U.S. cash, if we do get repatriation holiday next year or the year after.

And this is I guess for Greg or Ken, just what would be the plan or the options with that cash? And then if not, how you thought about ways that you can maybe create some value with that non-U.S.

cash, given that you don’t tend to get much credit for it sitting outside the U.S.?.

I guess by the way I would answer this question is it’s hard to say exactly what we do, because we would have to see what the new rules are if and when they come out, but I just point back to what we did in the last time, which was probably over 10 years ago now, we repatriated the cash, and I’d like to pay the special dividend.

So those are all the options, but we would definitely try to take advantage of whatever was in the best interest of shareholders based on the law..

And I would just add I mean how we think about it, I mean I think we all would maybe agree now that the probability is higher as we get past the election on having some form of repatriation and you look at that offshore cash and you could discount it, well it would be probably a 20% haircut or so if you take it back to the U.S.

So I think as far as how the board and management think about it, if you have an opportunity offshore, it’s 20% cheaper than one onshore. So we continue to look at anything that would be accretive and additive to our lineup offshore first..

Okay, thanks a lot..

Thank you. Our next question is coming from the line of Dan Fannon with Jefferies. Please go ahead with your question..

Thanks. Good morning. I guess Greg, you highlighted the variable annuity outflows that have been occurring in our – I guess slated to occur over the next couple quarters.

Can you talk a bit about why that’s occurring again just to refresh us and if it’s DOL related and then ultimately what’s the AUM left in those buckets that maybe longer-term might be a risk?.

Yes, I’ll start and again I have Tom, because we figure those questions would come up today the DOL and specifically VA. And have a very strong business in that area sub-advising as well as separate funds that are for the annuity business.

And really many of the large players that we grew I think at a high of about $70 billion in assets in that category.

Many of the big names have gotten out of that business and as they wind down the assets, many are going to in-house and passive or low volatility strategies and we’re trying to capture as much as that transition is possible, but it has put a large block of business in transition at risk.

I think for next quarter, we’re estimating another $2.6 billion in outflows and today we’re at $35 billion approximately in assets that are remaining. And I’ll let Tom, if you have anything to add on the business itself..

Yes, Greg covered what’s going on well. What we’re doing in response is we have established dedicated insurance solutions group within our overall solutions portfolio approach and where we’re developing portfolios that have less basis risk.

I mean one of the issues is with the insurance companies that there was a high basis risk in some of their underlying portfolios for the VA contracts. So we’re working on reducing that.

I think you’ll see in the next four or five days, one of the top five insurance companies by sales is going to be announcing a new VA living benefit that’s backed by a customized Franklin Templeton portfolio. So we’re working very hard to make sure that we stay relevant with the firms that are staying in the business..

And as of quarter end, we had $46 billion remaining in VA assets..

Great. And then just a follow-up I guess maybe Tom for you on the DOL. It seems as if the industry is facing a growth sales issue today because of the uncertainty.

I guess as you kind of – we get closer to the implementation date are you guys assuming or as you talk to advisors as their assumption, is there going to be a step function higher in terms of assets in motion whether that – whether we see redemptions pick up or obviously gross sales could pick up as well.

But I guess, where are we – you think in this transition phase for advice or behavior at this point?.

Yes. I don’t think that you’re going to see a pickup in redemptions. There are some awfully attractive living benefits out there historically, which frankly hurt some of the insurance companies.

I think what you’re going to see though is initially there’s going to be a slowdown in sales within the VA business because the commissions are coming down, there is no question about that, there’s going to be shorter surrender time.

So the VA business is going to be in a state of flex, but we know from working with our clients that we work with the top five in the industry that they’re not standing still, right. So they are coming out and will be coming out with new products to stay relevant in the new – with the new DOL legislation..

I guess my comment was just on mutual fund sales, not on the VA.

So just generally in terms of the advisor behavior broadly not just with VA?.

No, I mean I don’t know that there’s going to be I mean look people still need to invest, they still need to retire they still need to provide for college education. As Greg mentioned that it’s going to be difficult for some advisors because a lot of the business is going advisory.

I think that the number is you need to have about $30 million as an advisor of assets under management to have a viable business. So it’s going to be hard for some people to stay in business if they don’t have a sizable book. So there will be some transition in the advisors themselves, but there’s still a very, very strong demand that’s not changing..

And I just think it’s still early to kind of forecast there’s a lot of people that would argue that the amount of money in motion. It could slow down because the tax considerations to that if you have taxable gains and one you can’t take and move it to another and this obviously outside of the retirement world.

And then how the incentives line up post this changed as well and then that could affect behavior on how assets moves and just stay old versus new, if just would all move at once..

Okay. Thank you..

Thank you. Our next question comes from the line of Ken Worthington with JPMorgan. Please go ahead with your question..

Hi, good morning. Greg I think earlier this year you called out that you thought the institutional business have a lot of promise. I think particularly when it came to effect exposure management. Each quarter we tend to hear about these big, big outflows and it seems like there is broader base sort of institutional redemptions.

So I guess the question is help us understand what’s going on in the institutional side of the business and maybe characterize how you see the outlook?.

Well, I think it’s been as you know I mean challenging with Templeton and a deep value philosophy I mean that cycle has – the timing and the market’s been working against getting new mandates.

So the good news is that we’ve seen things switching – moving in the right direction there for performance, so hopefully that’s historically has been our area where we had the strongest institutional business and still have large facet, so it’s been more defense and offence as far as wins.

I think the opportunities we’re seeing in local debt around the globe especially in Asia, we continue to work hard on those and have – I think a lot of opportunities that are still there in the pipeline.

We’ve gotten feel, but we still think that that will be the strongest area of growth and Tom if you want to add any…?.

Yes. I mean what we’re seeing in the U.S. is a re-risking of portfolios if you look at the public pension plans that are severely under funded, they need higher return. So they’re starting to look at portfolios or asset classes that provide a high risk adjusted return.

So I think that speaks well for some of the capabilities that we have on a global basis in fixed income and as Greg pointed out with value coming back that that speaks well for Templeton group too. But they have to re-risk those portfolios and we want to participate. .

Great. And then I think just to follow-up on Mike’s question earlier on repatriation.

How much time do you think it will take to evaluate the chances of repatriation or repatriation holiday after elections? Is this something that you think is sort of apparent pretty quickly or is this going to take two or three years and if it does take two or three years as long as the chances of a repatriation holiday [aren't zero].

Do you think it's just best to sit on the cash and way or do you start to get frustrated and make it a priority to maybe better utilize the cash?.

Yes. This is Ken. As Greg mentioned, we are always looking for opportunities to grow the business and that won't change internationally. Greg mentioned that all things being equal and acquisition is cheaper if we use on for cash.

And so that it's not that we're sitting and we're not doing anything else waiting for repatriation, I do want to make that clear. We are looking for opportunities and so that's one of the strategic advantages of having all that cash would be able to move on something if the opportunity presented itself.

But regarding the timeline for repatriation, there has been a lot of momentum and we feel like it's gaining momentum. Congress is working on the issue. We feel like when they come back in session, January is something they might be talking about it.

Our advisors remind us all the time that four of the last five presidents enact a tax reform by August of the first year. So we are optimistic about it, and but we're also looking for other ways to use that cash..

Great, thank you very much..

Thank you. Our next question comes from the line of William Katz with Citigroup. Please go ahead with your question..

Okay, thanks so much. Ken, one for you to get started. You gave some guidance on expenses for fiscal 2017 and 2016, so thank you for that. Within that construct, you also talked little bit about some investments being pick up on the tech line.

Stepping back more broadly, if you would have to sort of replicate 2016 and 2017 we're sort of defined by choppy markets and some sluggish organic growth.

How much expense flexibility do you have at this point? I guess the question we're really asking is, are you sort of reaching the point now where you get a little more limited on expenses absent eating some maybe the revenue generating part of the company?.

I think there's still flexibility on the quality expenses, but having said that I do think we're in a phase where those opportunities are take longer to execute. They tend to be more linked with strategic initiatives. So we continue to look at all that, is the business the right size et cetera, are we leveraging technology the best way we can.

So I do think there's opportunities, but I don't think there's a lot of quick hits that would move the dial..

Okay. And then Greg, so curious, it’s been some merger of equals between [Janssen and Henderson] businesses and I think you go up again in various geographies around the world.

Does that transaction in and itself for the implication of that transaction, does that shift the mindset a little bit and could you maybe move that in with the allocation within repatriation between acquisition versus buyback versus dividends?.

No, I mean I don't think it changes the mindset. I think in that case there was a clear benefit for the two firms to get into two different markets and leverage the distribution of each side to do that.

I think the consensus out there of consolidation does create a wave of consolidation that obviously this is a slower growth business, it's a more mature business and one way to gain efficiency is through consolidation. So I think companies as I've said before are going to be much more open to looking at that avenue to create value..

Okay. Thank you..

Our next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead with your question..

Hey, good morning. Thank you. First follow-up on the I guess evolution of the distribution channel and that potential implications for you guys. I heard you on the prepared remarks around potentially launching your share class and that's something you guys talked about in the past as well.

But any thoughts around the implications for management fees for you specifically in the industry broadly as we go through this adjustment in the distribution channel?.

Yes, I mean I think as far as the preparation and effect, I mean management fees is something that again, I mean this is a extremely competitive business, we all see the battle versus passive every day. So the pressure on management fees is there regardless of DOL or not.

I think the question around your product lineup and it's something that maybe Ken touched on a little bit on just where do we see potential savings and streamlining and what is DOL I think probably for us pushes us further down that path of trying to simplify the lineup and rationalize funds that may in a post DOL world may not fit neatly into more of an advisory model versus the traditional brokerage model, those are the debates we’re having internally now and that could create some efficiencies.

But I think from a cost side this is a business that every basis points going to matter and I think the good news and some outcomes of the DOLs as you are going to have a lower front end sales charge that will help with some of your relative rankings.

And then as we said I think in our announcement that Morningstar, is now on the A shares is not going to use the maximum charge because most of it's done it at net asset value and that's going to make us more competitive where we see a lot of our funds will increase its star rating.

So I think those are very positive outcomes and I think our concern of having 35 share classes at least now we feel like we will only have to add a few..

Got it. And then my second question along the similar lines I guess but historically you guys were very successful kind of keeping more assets within the Franklin fund family in the broker channel, partially because I guess waived commission. Once the client already paid that commission on one fund moving to another.

As you migrate over to the advisor channel can you help us understand how that could impact asset retention and maybe just from a historical perspective kind of like what sort of the percentage of the gross sales that has come from kind of folks switching from one fund to another?.

Yes, I don't have that number I think anytime you go to more of the advisor type gatekeeper driven model the pros and cons I mean you can get significant assets quickly and you can lose significant assets quickly I think that's the net effect I think the advantage of the transition.

It's like a funnel where there's going to be less funds available in the new model, but if you have large assets a probability of your fund being included even in a period of underperformance it's highly unlikely that it's going to be eliminated from that lineup.

So I think size matters quite a bit as far as continue to get shelf space in the new model, but you know it is a higher risk from a retention standpoint than your traditional brokerage model where it’s more a one on one relationship here it's more of a gatekeeper consultant driven more institutional type relationship and we've transitioned our model to I think adapt to that and have more people you know with consulting experience at that point of contact with the home offices..

Yes, great. Thank you very much..

Thanks..

Thank you and our next question comes from the line Ken Hill with Barclays. Please go ahead with your question..

Hi, good morning. I just wanted to follow-up on something from earlier in the call you mentioned looking at the opportunities you continue to do that but it’s kind of pretty consistent with how you've talked about that in past quarters.

I'm just curious how you're evaluating some of those opportunities and these related to the cash you guys have and maybe what criteria or metrics you might look at to base a decision on to essentially grow something versus look to M&A that jump start some activity there?.

I think in previous calls.

We've talked about the share volume of things that we look at every year and you know that continues and you know that we - I would say the criteria that we use is a lot of it's qualitative you know we focus on the institutional process, institutionalize investment process can be repeatable key man risk all of that because this is a people business and cultural fit and that quickly eliminates a lot of perspectives.

But so that that really hasn't changed and Greg touched on what's - some of the criteria that we might look at. So I think you know no change to what we said in the past..

Okay. Thanks for taking my question..

Thank you. Our next question comes from the line of Patrick Davitt with Autonomous. Please proceed with your question..

Hi, good morning, thanks.

First, I just wanted to clarify the $46 billion of VA is that before or after the $7.4 billion of outflow you talked about it in the previous quarters call?.

That’s before..

Okay. And then, the other question I have is on first liquidity rule and then broader regulatory concerns, one, do you have any initial thoughts on the expense associated with compliance with the rule and/or potential performance impacts on your funds that invest in more liquid assets.

And more broadly does your expense guidance for 2017 include any associated expense for becoming complying with that rule?.

Yes, I mean I think it’s probably early to answer any cost associated with the rule. I mean I think it hasn’t been out very long, you have two years to comply my understanding.

I think it’s a much better rule than it was first discussed as far as something that appears to be workable for us and I don’t think we have any major concerns on at this stage. I mean, we’re still studying it, but our first reaction was that it is – would not create issues on the portfolio management side for any of our funds.

But again it’s – we’re studying the rule like most right now, but I think it’s a better outcome than what was first discussed. And I think liquidity is something that we manage very carefully with our boards and I feel like that’s one of the most important parts of our business is managing liquidity, especially in the open-end 40 Act type funds..

Thank you..

Thanks..

Thank you. Our next question is coming from the line of Robert Lee with KBW. Please go ahead with your question..

Great, thank you and thanks for taking my questions. Just going back to the DOL and just maybe kind of feels like beating a dead horse a little bit, but you talk a lot about the impact on the fund business, but if there’s going to be a movement to advisory, presumably that should increase demand for the SMA business.

So I mean that’s not a part of the business that I think in the past you’ve talked about much.

Can you maybe update us on how you feel your position maybe with – in the SMA part of the retail world and that’s a place where you feel like maybe you need – also need to make some changes or some investment?.

Yes, this is Tom. So that’s a good observation. We’ve actually added to the SMA business. It had been kind of a – if you will a quiet part of the retail business, but we’ve added to it over the last two years. We’ve moved into our private wealth division because we think that there is a big role for that in the high net worth part of our business.

And we’re working on adding some ESG screens to that part of the business as well, because we’re seeing that as a kind of an increasing demand in the high net worth business. So good observation, we’re building it up..

Okay.

And then also sticking to the DOL, I mean I hear different things from different advisors and different managers, obviously you’re going to have to have a level field setting and for doing it back and all that, but one of the things that seems to people different pains on is what [indiscernible] things like platform fees inside the revenue share I mean.

So what’s your current thought, do you think that in many cases distributors won’t be able to charge platform fees or some argue it’s going to go up others just going argue it’s going to away.

So what do you kind of hear?.

All of the above. Yes. That’s why I really – it’s almost daily on some of different opinions on whether how do you retain it or how do you have a level platform fee across different groups that have different perspectives with different levels and different asset levels and how do you include or exclude the ETF that wouldn’t have that ability.

There’s all kinds of issues that are still being worked through between and that’s why I had to sit and say well it could cost us more, it could cost us less. I would answer, yes, because I’m not really sure at this stage, we’re working through it.

Tom, do you have anything to add?.

I mean that’s a great point. We have one very large client, so they are not going to take any revenue sharing post at April and any new assets they put in the books. And we have another large clients that now they’re going to continue to look at revenue share as part of the business. So we’ll see how it plays out..

All right, great. And if I could just maybe one more quick question. On the ETF business, I mean you’ve been investing in it and you’ve touched on I think in the prerecorded call about it, another place you want to continue to invest.

So how are you – from outside looking in how are you think about ultimately what kind of landmarks that we should look for success in that. I mean do you kind of feel like to you this is – we think we can really scale this quickly or that it’s kind of a slow build and it’s hopefully five plus years when you’ll see an impact.

I mean how are you thinking about whether you’re going to be successful or not over the next couple of years..

I think it is a slow build, I think part of it was just getting in the business understanding the business and getting the right people that can operate a very different product in a very different skill set then what we traditionally have.

I think that has been we would call that a success of having a very strong team in place and it’s really building from here and recognizing any new funds or ETFs that we rollout will take time.

So it’s really about building shelf space awareness and I think we continue to do that, and Tom, if you want to add any thoughts on that?.

Yes. So to Greg’s point, we’ve added significantly to the ETF distribution team and they’re working with our 100 or 90 to 100 wholesalers to leverage up them as subject matter expert, so that's on the building brand part of the business.

But we’re quite excited to be able to have – you will hear them we are going to be building out more of our strategic beta platform because we want an advisor to be able to come to Franklin Templeton and we want to be able to build a portfolio that is either fully active or is partially strategic beta, partially fully active frankly are agnostic, we want them to be able to come to us to build out a fully featured, fully diversified portfolio, so as it we’re all in on that initiative..

And expanding it outside the U.S. too as part of the initiative, which will take time..

Great. Thanks for taking my questions..

Thank you. Our next question comes from the line of Brennan Hawken with UBS. Please go ahead with your question..

Good morning. Thanks for taking the questions. First on DOL, can you – is the idea that you’ve got some upward expense pressure next year on technology.

Is that a function of the indications of working with your distribution partners and as they make those changes to level pricing and some of the adjustments that you need to make to your own system and therefore that piece is somewhat inflexible?.

I think it is not so much that it’s other projects and initiatives that are underway. Particularly in the part of the business that does things like fund accounting and pricing and all that.

I think that’s we’re trying to invest in technology to make sure that we can scale that going forward and support all of the – all of the product demands that are out there in the industry. So it’s more of that unless really of the DOL. I mean we think we have a lot of share classes.

We think that we can do that with just incremental spend but not too much..

Okay. Okay thanks for that. And then appreciate it must be pretty hard to manage all the different distribution partners and all the different approaches. But as you have those discussions and it seems firms are becoming more and more clear in what it is that their policies are here in recent times.

Do you have an update to the amount of AUM that you think is exposed to this rule and as you’re having discussions with distribution partners. Are you seeing any of those partners actually have an impact in the current iterations and in the prep for the current rule on assets beyond just retirement accounts? Thanks a lot..

I mean I’ll just start by saying this rule puts all assets in a different place because again I think I’ve said this before, but the thought that you could – you can run one pricing structure under retirement and then have the other business at a different pricing structure creates all kinds of problems as well.

So I think many are just thinking about moving to one standard at some point. Now again there’s different philosophies on that in different phases and so it’s hard to say X percent, but I’d start by saying all of it. At some point this will, is a game changer for the traditional way funds are priced.

And Tom, do you want to…?.

Yes. I think that you’ve seen Merrill Lynch, JPMorgan, I think today Commonwealth came out and they said look we’re going to treat the non-retirement business exactly like we’re treating the retirement business because it’s just too complicated to do something different.

We’ll see if that trend continues, but it’s likely to if you think about it especially dealing with the same customer with their retirement assets and then their non-retirement assets and trying to explain to them why there's different pricing..

Okay.

And then any update to the AUM exposed?.

No actually I don’t - I think I mean to Greg’s point, we're going towards an environment where I think it's all exposed.

There's going to be very little difference between retirement assets and non-retirement assets just because it's just going to be difficult and I think someone asked the question and perhaps it was you about the technology associated with trying to keep track of all of this.

It's much more difficult for the broker dealers than it is for Franklin Templeton. So when they look at the cost of the administration of two different buckets of business. I think they're coming to the conclusion that we're going to have one bucket of business and leave it at that..

Okay. That's helpful. Thanks, but appreciate how difficult it is given how things are moving, but appreciate the color..

Thanks..

Thank you. Our next question is coming from the line of Glenn Schorr with Evercore ISI. Please go ahead with your question..

Hi. This is John Dunn in for Glenn. One more on repatriation.

Let's say it did happen, about how much would you say spoken for and how much is deployable at this point?.

Yes. Well, I think that $8 billion or so maybe $6 million is international or outside the U.S., well all that’s deployable that remains to be seen, but the bulk of it should be..

And then just one more on cash. With the amount you guys have, I would think that 100% payout could go for a long time.

Is that a fair characterization and what might your willingness to do that would be?.

Well, keep in mind that we do – we paid our 100% of consolidated net income, but part of that is earned outside the United States. So that's sustainable indefinitely. I don't think it's sustainable indefinitely, but we certainly have flexibility in terms of the ability to raise capital or just other things..

Gotcha. Thanks very much..

Our next question is coming from the line of Brian Bedell with Deutsche Bank. Please go ahead with your question..

Great. Thanks very much. Thanks for all the color on the Department of Labor. It's really good. Maybe just another one on that, obviously a lot of confusion we're hearing that as well. Just as you think is from a timeframe perspective.

Do you sense that things will be pretty well buttoned down by year-end and advisors will be in a position to sort to make decisions about where they want to allocate and all the difference will have everything to wind up even if we do have two different ends or two different spectrums say by year-end or do you think this will go on for a while.

And then Tom also maybe just what you're hearing from the wholesalers about the broad desire for advisors to move – to pass their products from active?.

Let’s start with the last part of the question first. As you move to an advisory business model, if you're charging 1.5%, you want to make sure that the underlying investment fees are if you will cost effective, right.

So there is – as Greg’s pointed out, there's a heightened interest in management expenses and that's going to continue that’s one of the reasons that we launched our strategic beta lineup because we want to be able to play in more of an active space within the retail business.

What we're seeing from advisors is frankly there's a lot of confusion because a lot of advisors have built a commission based business and that's where you're selling a product to a client. Now they're being looked at as having to or being required to build portfolios. That's a very different business model. That's a very different skill set.

So we're working, again we're doing extensive training internally to be able to work with advisors to help them with that. And as Greg pointed out, we started building out our investment platform team seven, eight years ago because the platforms if you will, the gates research, gatekeepers become even more important, more powerful going forward.

So we're working on it from both ends. And I do know just attending meetings, summer meetings with our clients that they've been working on this for quite some time. They are not standing still and I think many of them and you're starting to see the announcements are coming out with here's what we're going to do come April.

So a lot of them have started to make those decisions already..

Great. Just another question on the expenses.

Ken you mentioned on the fund accounting side that you're reinvesting in that area? Have you looked at that versus outsourcing it and are you committed to non-outsourcing it at this stage?.

Yes. We have definitely looked at that and we probably every five or six years look at it again and again. And the conclusion historically has been the same and currently right now we think it makes more sense to do it ourselves and I would say the biggest determinant of that is our existing cost structure.

So as you know we have extensive operations in low cost jurisdiction and so when we compare the cost of doing it ourselves to what do we cost for outsourcing it makes economic sense for us to keep it insourcing. So that's the current thinking, but as you know things change outsourcing companies get more efficient. So it's a continuous evaluation..

Great. It sounds like for now you're keeping it in-house and certainly….

For now yes that's our conclusion..

Okay and then maybe just last one for Greg. Obviously the acquisition question is always asked especially in this type of environment, but I mean as you think about the types of firms that would be interesting. Just from a strategic standpoint.

Would something that enhances your distribution capabilities which are already extremely large and build out different types of products, would that have a preference over say a rationalization and scale type of acquisition where you'd be combining funds into say merging weaker performing funds into stronger performing ones to get the track records and looking at more like a cost synergy play..

Yes, I mean I think obviously there's a lot more opportunities to go out and just target a strong investment manager and bolted on to your existing distribution system and that's one that certainly in markets that we've talked about before and you know the pound so weak that makes the UK more attractive market despite Brexit we see that as a more of a near-term opportunity to acquire something that that would be you know additive to our lineup and strengthen our presence in a market where we don't really have a strong presence in the U.K.

Outside of that I think the others become much more difficult and you know a larger one. That is much harder to do and much more disruptive obviously to the entire organization, but one that you know in the right situation again is something that we would certainly look at but I think it is much more difficult to execute..

Great. That’s great color. Thank you..

Thanks..

Thank you. Our next question is come from the line of Chris Harris with Wells Fargo. Please proceed with your question..

Thanks. We’re looking at your hybrid category here, I mean redemptions have improved substantially, but sales keep ticking lower. It’s kind of interesting that that’s happening because performance is improving so much. So you can talk about that a little bit.

What is going to take to get sales going here given the performance already seems to be improving quite nicely?.

Yes, I think was exactly the question I had to our group early this morning when I was like going through some of the numbers I thought that stood out on hybrid gross dropping and there are some other moving parts in that number is actually the Franklin income fund, its gross sales were exactly level quarter-over-quarter despite that the number of hybrid declining it had almost exactly the same level of gross and that’s the key driver that some other parts in that, I mean K2 falls into the hybrid category and that had a little bit of a drop off quarter-over-quarter.

So that contributed to the gross number dropping down.

But I think it – we are very optimistic that that fund should continue to be a strong driver of outflows in this kind of environment and I think it takes a little bit of time for people to realize that it’s back in the top decile for the one-year and you have a lag effect of energy prices and what that did to a lot of funds and I look at across the lineup and I am very encouraged right now.

I think we talked about in the past as a value, with a value discipline, you tend to get more energy exposure than sometimes the market and a lot of that has come back along with materials and whether it’s our high yield area, the income fund area and hybrid, Templeton area and Mutual Series all of our rising dividend fund, all those funds now are performing very well.

So I would hope that we will get some momentum back now on the strong one-year numbers and actually our hybrid and equity assets, 75% of them are in the top two quartiles for the one-year. So I think that’s a big change from where we were six months ago..

Got you, okay. And then a quick one on DOL, I think when we all think about those risks, we tend to think about in terms of flows.

But just wondering whether you guys think ultimately this rule might force a management fee changes across the industry?.

I think I try to answer that, before that I think the pressure on fees is there.

I think those components of your overall fees, which are in a state of flux and you can look at parts like the revenue share piece in it, you do away with that that’s going to make it a little bit easier to lower overall management fees and make you more competitive on that basis.

Other areas, I think distributor retention, the historic number that actually was going away anyway over time. But that goes away immediately if you give a pricing at the broker dealer level in these new class of shares.

But as the world was transitioning more to advisory, the traditional A share was getting smaller and smaller as part of our business, so that changes as well. TA fees all of those things, sub-TA fees all of those are again in a state of flux. So I think it’s early, but just to say that it puts everything kind of in play at this stage..

Thank you. Our next question is coming from the line of Craig Siegenthaler with Credit Suisse. Please go ahead with your question..

Thanks.

Just want to see if you have any early thoughts on how the global bond fund, your new products and also K2 share with the new highly liquid invested in the SEC’s new liquidity risk management role?.

Yes. I mean I think that’s a good question and I think our initial reaction is it should be okay, but I think again it’s too early for us. This just came out. We’re assessing it. And I think that’s the obvious one you’re going to look at and see how it works, but too early to really give you a definitive answer one way or another..

And just as a follow-up, how much that excess cash is sitting in the U.S.

right now?.

Excess, I think we’re roughly in total about $2 billion and maybe $1 billion excess..

All right. Thanks for taking my questions..

Our next question has come from the line of Michael Cyprys with Morgan Stanley. Please proceed with your question..

Hey, good morning. Thanks for taking the question. Just curious if you could talk a little bit about how you see pricing evolving product management as more and more assets shift to lower fee passive price products and DOL going into effect. We’re seeing price cuts in ETFs business there to drive more flows to the ETF player.

How do you think about the price elasticity of demand for active massive products?.

Well, I think it depends on how you’re performing against the passive. I think you’re never going to be passive on price is the consensus view like it is today that passive will outperform that’s not a view I share and I think in the next decade, I think active do very well. And then if you outperform the passive pricing becomes less of an issue.

But I think the world is overly focused today strictly on price and isn’t really looking at anything else and I think that will change as well.

But again as I’ve said before I think any industry that’s slower growth and has a lot of managers out there is going to be continued pressure on pricing, but an active manager you’re not – if the consensus view is passive is a way to go, you’re not going to increase your business by cutting your fees in half, it’s just you're not going to get there..

And then are there any areas that you could speak to today where you’ve reduced fees or put any waivers in effect and then just how you're thinking about the opportunity and interest for repricing act maybe in some structures with pay for performance perhaps using some sort of Fulcrum freight..

I think you are absolutely right. I think that you have to be more flexible that’s something we certainly are doing in the institutional market right now, we’re looking at new categories for us and coming with more of a performance based type fee because I think that fits what people are willing to do that will pay for more alpha.

I think that the openness to consider those something we have to do right now because of the consensus view you know on passive versus active.

So I think that that is something that we are studying as well on just making sure our fees are competitive in markets and whether that means cutting into profits to maintain share, I think that’s that something you have to consider..

Okay. Thank you..

Thank you. Our next question comes from line of William Katz with Citigroup. Please go ahead with your questions..

Okay. Just two follow-ups and thanks for taking the extra one. Tom if you comment – I will just move on that specific angle.

Could give us a sense what the mix of your assets are between brokerage and advisory, if you have that kind of look through lens just given [indiscernible] on the bus and so curious given most likely going for the rotation to an advisory and brokerages.

What kind of sort of money most we might be talking about?.

Well, the large majority of our business takes place without a commission. I mean, this has been taking, this trends has been taking place for a number of years, now it's accelerating under the DOL. So frankly we're almost there.

As Greg pointed out, there's going to be a new share classes and less breakpoints and some other changes, but the business overall. Franklin Templeton’s business and the industries business has been moving towards – on the bus and no load..

Okay. And Greg just sort of speak by your comments about the UK market, so when – the news mentioned that's maybe particularly more interesting given the currency dynamic.

What kind of framework are we talking about? We are talking about a market extension type of transaction, consolidation and some of the redundancies or could you be wanted by something out from a parent that might have a majority stake in a third entity?.

Those all sound attractive. And I think we continue to look at anything that would make sense and I wouldn't rule out any of those different scenarios..

I mean just one follow-up to that, in terms of size just given that where you are.

Is a [merger of equal] is something that makes sense strategically or is it more of a fill in, maybe something that make more complimentary to your platform?.

I think I spoke about that earlier that the merger of equals is difficult for a lot of reasons especially as you get this big, but they can be – that are done and executed properly they could add a lot of value over time. The easier one is just going out and buying a strong player in the market.

That’s available, that's not always easy to do, but specific to that market that would be attractive to us. But again, I just wouldn't rule out any of those scenarios..

Okay. Thanks very much for your patience..

Thanks. End of Q&A.

Thank you. It appears to be end of our question-and-answer session. I would like to turn the floor back over to management for any closing comments..

Well, thank you everyone for participating on the call. And again, we look forward to speaking next quarter. Thank you..