AssetMark Financial Holdings, Inc.

Good afternoon, everyone, and welcome to AssetMark's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. Today's call is being recorded. Now, I'd like to turn the call over to Taylor Hamilton, head of investor relations. Please go ahead, Mr. Hamilton.

Thank you. Good afternoon, everyone, and welcome to AssetMark's third quarter 2020 earnings conference call. Joining me remotely are AssetMark's Chief Executive Officer, Charles Goldman, and Chief Financial Officer, Gary Zyla. Today, they will discuss the results for the third quarter and provide an update to AssetMark's business outlook for the remainder of 2020. Following our introductory remarks, we'll open up the call for questions. We also have an earnings presentation that Charles and Gary will reference during their prepared remarks. It can be accessed on our IR website at ir.askmark.com. Before we get started, I'd like to note that certain statements made during this conference call are forward-looking statements. These forward-looking statements represent our outlook only as the date of this call, and actual results differ materially. Additionally, during today's conference call, we'll be discussing net revenue, adjusted EBITDA, adjusted EBITDA margin, and adjusted net income, all of which are non-GAAP financial metrics. Please refer to our earnings press release and SEC filings for more information on forward-looking statements, risk factors associated with our business, and required disclosures related to non-GAAP financial information. With that, I'll turn the call over to my colleagues. Charles, take it away.

Thank you, Taylor, and good afternoon to everyone. Thank you for joining our third quarter earnings call. We really appreciate your time today and hope you're all doing well. With COVID cases on the rise, just finishing up this highly contested election, or close to finishing up anyway. Our thoughts and feelings are with you and your family and your colleagues. Starting on slide three, we're going to focus today on five key messages. I'll discuss messages one through three, while Gary will cover messages four and five. First, 2020 has been our best year ever. in terms of our ability to make a difference in the lives of our advisors and their clients. Second, as a result of living our mission and executing on our strategy, we are growing. Platform assets, engaged advisors and households are up double-digit year over year. Third, I will discuss our 2021 strategic priorities, all of which support our growth efforts. Next year, we will focus on enhancing advisor value and productivity attracting adjacent advisors, and continuing to scale our platform. Next, Gary will discuss our organic growth. In the third quarter, net flows were $1.2 billion, up 33% quarter over quarter. Lastly, Gary will walk us through our third quarter 20 financial results, which were highlighted by strong top and bottom line metrics, and our highest EBITDA margins since going public in July 2019. Turning to slide four, 2020 has been an interesting year, underscored by an economic roller coaster, societal uncertainty, business model shifts, and an extremely close presidential election. Throughout it all, we have truly embodied our mission. We have made a difference in the lives of our advisors and their clients. In 2020, our advisors have needed us more than ever, and we have been there for them every step of the way. Advisors are craving information and actionable ideas during this time, and we have delivered. As we have discussed on previous earning calls, our advisor engagement during these uncertain times has been world-class. Gear-to-date, we have hosted 450 webinars with over 20,000 attendees. Advisors have been extremely complimentary of these virtual events. We have provided perspectives and insights into the topics that matter the most to advisors. These include the election and its impact on the market, managing client expectation during times of volatility, and growing your business when you're virtual. In October, we held our virtual premier advisor meetings and had over 900 attendees, a 20% plus increase in attendance since we last hosted these meetings in person in the beginning of the year. Last week, we held our field advisory board meeting where we brought together 17 advisors from all over the country. Their feedback on asset mark was nothing short of amazing. They were highly complimentary of our webinars, people, digital tools, and how we have enhanced their ability to manage during the pandemic. We have accomplished all of this while supporting increased service volumes. Our net promoter score of 64, up five points from last year, shows we are truly making a difference. Not only have we provided our advisors with a wealth of information and actionable takeaways, but we have also strengthened our platform to enhance our advisors' value and productivity. As you can see on slide five, we have delivered meaningful technology enhancements and products to our advisors and their clients throughout 2020. A good number of these enhancements have helped our advisors connect with clients and prospects in a virtual setting. Let me highlight a handful of these features that we have added. From a technology standpoint, our enhanced client proposal and new portfolio review tools empower advisors to clearly demonstrate how the strategies proposed are chosen based on their clients' goals, concerns, and financial dreams. Since launch in August, over 18,000 proposals have been created in Client Proposal. We continue to deliver personalized and scalable service and have gone above and beyond to support our advisors. First, our new dedicated e-service team helps financial advisors meet the increasing demand for digital servicing during the pandemic. E-service provides fast, personalized digital response to advisors who have not who do not have a dedicated relationship manager. Since launching, we have delivered a little more than 10% of applicable service requests that have come through that channel. Second, we rolled out Zoom to our top advisors in April. These advisors have conducted nearly 24,000 meetings, 340-plus webinars, and reached over 90,000 investors. We have also expanded the breadth of our curated investment platform. First, we introduced our Enhanced Securities-backed Lending of Credit, or SBLOC, program, which gives AssetMark trust clients faster access to low interest rate liquidity supported by digital and streamlined securities-backed lending, which allows us to keep more assets on our platform. In the program's first three months, 185 lines of credit have been issued with demand running at 220% of year one goal. Second, Savo's personal portfolios, which we rolled out at the end of last year, bring customized solutions to the math affluent. This is an important and accretive part of our platform. Savo's personalized portfolios provide finished the first year attracting 262% of planned client assets under management. Lastly, in the first quarter, we launched two new fixed income strategies that will help advisors diversify client fixed income portfolios, navigate challenging fixed income markets, and remain focused on helping their clients achieve their long-term financial goals. Nearly 1,700 advisors have invested client accounts in these investment solutions, running at a rate of 600 percent of our first-year goal. The strengthening of our platform not only helps our advisors and their clients, but it also helps us attract new advisors. Now let's turn to slide six and our next topic. We believe that by continuing to live our mission and execute on our strategy, strong business and financial results will follow, not only have we truly embodied our mission this year, but we have also executed on our strategy, which has allowed the company to grow despite the challenging environment. Our platform assets have grown 16.2% year over year and ended the third quarter at an all time high. The number of engaged advisors defined as those with over 5 million of assets on our platform have increased 11.1% year over year. Lastly, Households have increased 14.5% year-over-year. New producing advisors have also been strong. NPAs in the third quarter were 171, and year-to-date, we have added 566 new producing advisors. The 2020 vintage of NPAs is showing higher quality than prior years. 2020 NPA size year-over-year is up 10%, measured by average production per NPA. This is driven by higher quality NPAs from the independent broker dealer and RIA channels. We have a long history of winning in the IBD space, and we are working tirelessly to further capitalize on the RIA channel opportunity. I'll spend some time in a bit discussing our plan to drive quality and quantity of NPAs in 2021 and beyond. We have indeed accomplished a lot in the past year, but we still have a long runway of opportunity ahead of us. With only weeks left until 2020 ends, I want to briefly highlight some of our key priorities for 2021 and then talk about how we were thinking about organic growth next year. So let's turn to page 7 in the slides. We're focused on three areas in 2021 which we believe will allow us to gain market share, attract new advisors, and grow organically. First, as always, we will look to enhance advisor value and productivity. We are building a financial wellness program with solutions to support meaningful wellness conversations. Virtual interactions are the new norm and improving digital experiences an imperative. We will look to enhance our advisors' digital toolkit and educate them on how to grow their practices leveraging these tools. We will also be expanding outsourcing services to help advisors with marketing and core operations. Second, we will focus on attracting adjacent advisors through channel expansion. Our biggest opportunity is subscale RIAs who we believe are greatly underserviced by their providers. We believe they are better served by us as we can help scale their businesses, enhance their client experience, and drive enterprise growth and value. Lastly, we need to continue to invest in the platform and infrastructure to support our future growth. We are strengthening our back office, security, and trading systems, all to enhance competitiveness. Turning to slide eight, our strategic priorities support our growth efforts. We aspire to get back to a 10% plus organic growth rate in 2021, and we believe we can get there. However, We do want to be realistic. In a COVID environment where people continue to shelter in place and money isn't in motion at the same rate, we believe that we will deliver organic growth in the 8% to 10% range, still an outstanding result. Let's discuss the drivers of our organic growth next year. First, let's look at net flow contribution from our existing advisors, which historically makes up about 66% of our annual net flows. There are a lot of positive signs that our existing advisors will continue to grow and meaningfully contribute to our 2021 net flows. First, year to date, we have added 566 NPAs who will become existing advisors next year. As I mentioned earlier, this cohort is exhibiting much higher quality as measured by average production per NPA. We expect continued growth from these advisors as we have found that new advisors tend to grow very quickly during their first year as existing advisors on our platform. Second, we added 168 engaged advisors since the beginning of the year. Engaged advisors make up almost 90% of our platform assets and those assets are very sticky with low redemption rates. Third, As we talked about earlier, our existing advisors are highly engaged and highly satisfied with us, as is shown by our NPS score of 64, again, up five points year over year. Lastly, we have integrated two acquisitions this year, GFPC and OVS. We have typically found that the year after integration, new acquired advisors grow on our platform as they are surrounded by our service, operations, and technology. Second, let's look at our net flows from NPAs, which historically make up about 33% of our annual net flows. There are a variety of things we are doing internally that we believe will lead to higher quality and quantity of NPAs. As you may have noticed, we recently revamped our corporate website. This is a small part of our much larger digital lead generation project that I mentioned last quarter. Starting the pilot phase in October, this project will allow us to attract more high-quality NPAs at a lower cost of acquisition. Once fully launched, we estimate this project will increase the number of qualified leads into our sales pipeline and deliver incremental NPAs per year. I look forward to sharing more as we progress through the pilot phase. We have also made strategic investments to ensure that we are well positioned to gain additional wallet share from existing advisors, as well as attract new producing advisors. First, we have added new technologies and investment solutions, as I described a bit earlier, helping to expand the breadth of our platform. Second, we are adding tools and features to make our platform more attractive to RIAs. Let's discuss the opportunity in the RIA channel a bit more. We have been working with RIAs and hybrid RIAs for years. As of the third quarter, we had over 800 RIAs or hybrid RIAs on our platform, representing approximately 10% of our total advisor base and 18% of our platform assets. While we have had success with RIAs using our managed platform offering, most RIAs also are interested in building at least parts of their own portfolios. Advisor Managed Portfolio, or AMP, will allow RIAs the ability to do just this. We have selected eight of our top RIA firms who have a long history on our platform to pilot AMP. AMP will help these advisors consolidate more assets on our platform so we can be a more valuable business partner and outsourcing solution for them. We believe this will enhance our value proposition to the RIA community and help us further penetrate the $700 billion-plus RIA addressable market. Regardless of where things stand with the pandemic, we are focused on what we can control, gaining share of wallet from existing advisors, increasing the quality and quantity of NPAs, and capitalizing on the opportunity in the RIA market. All of these areas contribute to driving organic growth. With that, I'll now turn the call over to Gary to discuss our financial performance for the third quarter and our outlook for the remainder of the year. Gary?

Thank you, Charles, and good afternoon to all of those on the call. As Charles discussed, we are very pleased with our results this quarter, highlighted by great organic growth, strong learning, and our best margin on revenues is going public. Engagement and satisfaction give us great momentum heading into 2020. Discussion of our platform assets, then talk about our revenue, our expenses, and then our earnings. I will end my remarks with our outlook for the rest of the year. Starting with slide nine, third quarter platform assets were a record $67.3 billion, up 16% year-over-year and 6.4% quarter-over-quarter. We have made great progress in our growth since our IPO, with assets up 20% over these past 15 months. During the third quarter, we had net flows of $1.2 billion and realized $2.8 billion of market gain net of fees. The improvement in our net flows quarter over quarter is driven by increased production, while redemption rates have remained relatively stable. Through third quarter, net flows are $4.0 billion annually for the year. I'm sorry. On an annualized basis, this is 8.6% of beginning of year assets, which is in line with our previously communicated guidance of 8% to 10%. Now, I would like to take a deep dive into our net flows for the year. In our September AMK report, We provide an additional detail regarding our flows, and I would like to expand upon that a bit more now. On slide 10, you will see that we show the impact on our net flows from our two recent acquisitions, the FTC and OBS, as well as from what we will call our core business. As with any acquisition, in the first 12 months or so, there is a bit more volatility as certain clients will never engage with us, and this results in outsized net flows. In general, the faster we can surround the advisors with our service, operations, and technology, the more likely they will engage, but this isn't always possible. Given that, we think it will be helpful to share the trend of the non-acquisition block. We think it shows the underlying strength of our business model and our success this year in making a difference in the lives of our advisors and their clients. As you can see, our core business has an annualized growth rate of 10% in 2020 compared to 8.6% for the entire business. For OBS, the redemptions you have seen in our monthly reports have been due to specific advisors who never engaged with AssetMark leaving the platform. To be clear, though, both the GFPC and OBS acquisitions have been very accretive to our business in terms of revenue, earnings, as well as bringing on new engaged advisors. As of the third quarter, we had 465 advisors from OBS, of which 65 are defined as engaged. The GFPC, we had 128 advisors as of third quarter, of which 63 are defined as engaged. Also, 90% of OBS advisors on our platform have had sales activity in the last 30 days, another proof point of their engagement. With GFPC, about half of the outflows have been from the advisor-managed business, which has, as we've discussed before, yielded nominal revenue to asset markets. We are very pleased with the engagement from both OBS and GFPC advisors. One last comment on net flows. Today, we released our October AMK report with net flows of $396 million, another great month. Specifically, our core business did $436 million net flows with the difference representing outflows from the OBS business. Additionally, production continues to remain strong in January. Last week was our highest week of production since March. According to our advisors metric, for our entire business, as Charles noted earlier, we had 171 MPAs in the third quarter of 2020. Our total advisor base at the end of third quarter was a little more than 8,450 advisors, of which 2,398 were defined as engaged advisors. Engaged advisors are up 11.1% year-over-year and now account for 89% of the total assets in our platform. Now let's turn to slide 11 to discuss this quarter's revenue. Entering the third quarter, our assets were at $63.2 billion, leading to reported revenue of $107.1 million, down 2.7% year-over-year. Now we focus on our revenue net of those related variable expenses. For the third quarter of 2020, our net revenue of $73.3 million was down 2.4% year-over-year. Asset-based net revenue was up 7.2 percent or $4.7 million year-over-year to $70.4 million. This is offset by a decline in spread-based revenue down 73 percent due to changes in rates earlier this year. Let's turn to slide 12 to more fully discuss the drivers of the change in net revenue year-over-year. As the waterfall shows, Revenue is up $7.0 million year-over-year due to asset growth as well as the OBS acquisition. This is split about $6 million from net flow and growth and $1 million from the OBS acquisition. This is offset by two actions in 2020 that have reset the revenue base for us going forward. First, our previously discussed transition to lower-cost, third-party mutual fund models reduced revenue by $2.3 million year-over-year. This actually was part of our outlook for this year and played out as anticipated, both in terms of the revenue impact and the impact on the revenue yield, which I'll discuss more in a minute. Second, spread-based net revenue was down $5.9 million year-over-year to $2.2 million. The decline in spread-based net revenue was due to the average yield declining from just over 2% last year to 33 basis points in the third quarter of 2020. Our average client cash over the third quarter was $2.6 billion. The remainder of 2020, we expect annualized net yield and cash to be around 25 to 30 basis At the end of third quarter, cash at Asset Marks Trust Company was $2.66 billion, of which approximately 15% was in our high-yield cash program. Lastly, other income, which consists primarily of interest earned on Asset Marks operating cash, decreased $600,000, again due to the lower interest rate environment. Our net yield in total platform assets for the third quarter was 46 basis points, in line with our expectations. This is down 2.6 basis points in the prior quarter and down 7 basis points from last year. Year over year, the 7 basis point decline was driven by a 4.4 basis point decline from spread, 2.3 basis points from the shift to lower-cost mutual funds, and 0.5 basis points from the interest income and corporate cash. Quarter over quarter, the decline is mostly due to the mutual fund change. You will note that both year over year and quarter over quarter, there was little to no yield decline due to other product mix shifts. This is a good sign that our platform maintains its revenue mix over these periods. The clarity and transparency of the calculation of our annualized revenue yield net of variable expenses is shown in slide 17 in the appendix of our earnings presentation. Now let's discuss expenses as shown in slide 13. Adjustment expenses decreased 3% year over year to $82.6 million. The decrease in expenses year over year was driven by a 1.8% year over year decline in employee compensation, and a 4.9% decline in SDNA. We feel great about our effort to hold the line on our compensation costs and SDNA costs throughout 2020. In our first quarter 2020 earnings call, I mentioned that we had eliminated $22 million from our operating budget in 2020 through a variety of cost measures, including the elimination of a handful of roles, reduction in travel, events, and conferences, as well as volume-related items, such as variable compensation and training costs. In addition to the steps earlier this year, there are a number of excellent examples of the expense management our entire team has done, First, in controlling our compensation costs, we have managed our staffing all year to focus only on investing in critical roles related to volume as well as investment in our future, all the while holding off staffing in non-critical areas. As a result, while adding key roles for growth, we have held our employee count steady all year, with our headcount up only one from the beginning of the year as of the end of October. That said, our expectation is to accelerate staffing by 20 to 30 associates, or about 3% in the next quarter or two. These additional roles will be focused on our technology build, as well as our investment in adjacent channels. Second, we have held our SP&A expenses down through our shift to virtual events and meetings while maintaining very high engagement with our advisors. Charles mentioned earlier, our virtual October premier advisor meetings had attendance of more than 900 advisors, which is about 20% more than our in-person attendance in the beginning of the year. Third, as of the end of the third quarter, we have closed three of our eight offices in an effort to reduce ongoing costs. We have positively learned that many in our workforce are just as productive working remotely and they enjoy it. Given the trial by fire we have endured this summer, it was the right time to right-size our real estate footprint. While we will take a charge of about $2.5 million this quarter for these closings, we expect to save about $1.5 million annually from this action. Once things, quote, return to normal, we will focus on maintaining the suspense discipline and continue to find more effective ways to reach and serve our clients. For example, in early 2021, our annual client event Gold Forum will be virtual and allow us to repurpose those savings into the growth activities that Charles discussed earlier. Before moving on to our earnings, let me run through our expense adjustments. In the third quarter, we added back $23.7 million pre-tax, which is comprised of four items. First, $12.9 million of non-cash share-based compensation. Second, $5.1 million of amortization expense related to our 2016 sale. Third, $3 million in acquisition-related expenses associated with the acquisition and integration of TFPC and OBS. And fourth, $2.6 million of airbags related primarily to the office closure that I mentioned above. For additional color and adjusted expense reconciliation table for income statement line items can be found on slide 18 in the appendix of our earnings presentation. Now let's turn to slide 14 to discuss our earnings for the quarter. Our adjusted net income for the quarter was $18.2 million, or 25 cents per share, an increase of 6.1% year-over-year. This is based on the third quarter diluted share count of $72.8 million. The year-over-year increase was a result of higher adjusted EBITDA of $0.1 million, lower adjusted taxes of $1.5 million, offset by lower interest income of $0.6 million. Our marginal tax in the third quarter was 25.3% and is 25.7% year-to-date. In addition to adjusted income, we view adjusted EBITDA as an equally important measure of our company's health. For adjusted EBITDA, we add back the same incentive items that set the amortization-related items. Our third quarter of 2020 adjusted EBITDA was $29.3 million, up 0.3% year-over-year. Adjusted EBITDA margin for the quarter was 27.4%, the highest since going public, and up 80 basis points year-over-year. Now let's look at the reported third quarter balance sheet. I will highlight two items. First, we continue to do a great job of generating cash, adding $15.7 million to our cash position quarter over quarter, and ending the third quarter with $109.3 million in cash. Additionally, we still have a $20 million credit line that is available to the company. Our cash balance, as well as our low debt leverage, will give us flexibility in deploying cash. Second, capital expenditures primarily reflect on long-term investments in technology to create new capabilities, increase scale, and improve service. In the third quarter, our capital spend was $8.3 million, or 7.8% of total revenue. In 2021, we are expecting our capital expenditures to be about 7% of total revenue as we continue to invest in the future of the business. Now I will discuss our expectations in the remainder of 2020. Let's turn to slide 15. Due to our excellent third quarter results, our expense management, strong net flow, and positive market, we expect our 2020 outlook at the top end of what we forecasted last quarter. Specifically, we expect net revenue for the full year between 293 and $294 million, representing a 2% year-over-year growth at that midpoint. We expect adjusted EBITDA for the year to fall between 112 and $113 million, and adjusted EBITDA margin to coming around 26%, up about 100 basis points from last quarter's outlook of 25%. We are extremely pleased with the year-over-year growth in these key financial metrics. With that, I'll hand it over to Charles for his concluding remarks.

Charles Lee Thanks, Gary, and thanks to all of you on the call today. Despite the pandemic, we have grown in 2020, and we have invested the time, resources, and capital to accelerate our growth into 2021. I look forward to sharing our progress on subsequent earnings calls with you and in future conferences. So with that, this concludes our prepared remarks, and we'll hand it back to the operator for some questions and answers.

Thank you. In order to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Kevin McVey with Credit Suisse. Your line is open. Kevin McVey Great. Thank you so much. Hey, congratulations on the results. I wonder, could you give us a sense, you know, just any teams and clients that leave here, you've noticed over the quarter given with the volatility, and obviously there's been some consolidation in the sector. And just any thoughts as we're thinking about positioning within the context of a change in maybe?

Hey, Kevin, it's Charles. Could you just say the last part of change in the – it cut out on me.

Sure, Charles. To the extent there's any change in administration, you know, in the new year, are you seeing any bad impact client activity as well?

I probably should have guessed that. Kevin, thanks for your question. I hope you're doing well. You know, it's been an interesting time, I would say, for our advisors and the broad advisor community. I think we talked a little bit in the last quarterly call. We saw across the community from a variety of different surveys a lack of engagement from advisors with their clients. There's a J.D. Power survey that came out in June that reflects that. And talking to different folks and different people around the industry, It was interesting that there was less engagement than one might think, particularly given that we all know what happens after these kinds of crises, or I should say any kind of crisis, money goes in motion. And money goes in motion because at the investor level, they're unhappy with the experience they got. At the advisor level, they're unhappy with the experience they got from their providers. And so those that are aggressive in their activity as we have been with the number of webinars, the number of client sales contacts, the number of service experiences, all the intellectual capital, and helping our advisors meet with so many of their clients via the Zoom that we enabled and all the intellectual content that we actually delivered through advisors to their clients. We expect to be in a really good position for money in motion. Specifically to your question around investments, You know, it's interesting, as the election approached, we didn't see a ton of investors or advisors moving or strategists, frankly, moving to massively more conservative positions. Remember, we manage for the long haul and our strategists manage for the long haul. And so while there are some tactical strategists that will make movements generally on quantitative measures, factor-based measures, You know, they were sort of heading into the election. I'm sure you read all the same commentary we all did. You know, people were guessing one way or the other what was going to happen. And I think people were just looking for clarity. I think the other big issue that people were preparing for, and we saw this particularly with the ultra high net worth, was around estate planning. You know, in a blue wave election, you would have expected, or many, I should say, expected that there'd be pretty meaningful tax changes around estate planning. So the $11.5 million exemption would be changed. And so there's been quite a flurry of estate planning going on. It'd be interesting to see what people do now, if they continue to execute those plans. I suspect most will. But less around investments, much more around planning for estate planning and tax planning. I guess the other thing I would add, you know, we had our field advisory board last week where we bring together, I mentioned 17 advisors. So those advisors represent the way we cut up the geography, and they have a responsibility to communicate and connect with the broader engaged advisors within their geography. So it's another way that we communicate both towards us and back to the marketplace. And it was interesting. They went around the room and talked about what they were doing and have been doing. It was 100% about behavioral issues with clients, about connecting at the emotional level. A couple examples that stuck out in my head were, you know, one advisor was running, ran a seminar, a webinar on how to cook when you're alone because a lot of investors are alone. And, you know, how to, you know, think about and keep your spirits high, you know, how to manage through COVID. I mean, a lot of behavioral things that really were not about investments or tangentially about investments. And what I was surprised and excited about was that was where advisors' heads were at, 100% in that group.

That's helpful. And then just one quick follow-up, are you seeing more in terms of outsourcing just because obviously the advisors, the sales process has changed given more remote sales as opposed to maybe in-person.

Just any changes you'd highlight as a result of that, and then I'll get back to you.

Yeah, thanks, Kevin. So we believe we're seeing that. You know, our NPA, our new producing advisor numbers are really strong this year but down, you know, so they're not as strong as they have been. And it's really a function of what we're seeing with advisors and investors. We're seeing with advisors making moves. In the remote environment, it's been harder for people to move. People have been a little bit more stay in place, let me get my business in order. For investors, same thing. But our strong belief, and I'm going to repeat what I said a minute ago, is money goes in motion after crises. It always happens. It's always happened throughout my career. And those that stay focused on the value proposition, whether it's the advisor value proposition or us or asset manager or custodian, whatever it may be, will reap the rewards. Those that froze up or made a bunch of mistakes and mostly it's freezing up won't. And so, you know, our sales teams have been incredibly busy. You know, I think last quarter reported that we were sort of double our normal sales contact. We are out there. Our digital lead gen, which I mentioned a minute ago, which is Justin Pilot, where we've defined advisors by persona and are enabling specific messaging based on the kind of advisor you are. If you go to the website and check it out, you'll kind of get a feel for that. and then our ability to focus content to those advisors that's relevant to them, intellectual content, and, of course, see where they are and deliver messaging to them through different web platforms. All of that is brand new to us. And so we think that the number of advisors, both in our traditional space that will choose to outsource to our platform or their broker-dealer's platform but choose to let somebody else manage the money,

um and in the ria segment we think is um we're just on the cusp of that that opportunity and i think it's going to be big your next question comes from the line of ryan bailey with goldman sachs your line is open hi charles gary taylor i hope you're all keeping well um i just had a quick question um to start off with on on guidance i was wondering if you could speak a little bit to some of the revenue dynamics i think Based on the guide, you're implying about $73 million for 4Q, which I think is essentially flat quarter over quarter, but the asset base looks like it's up about 6%, if not a little more. So just wondering, is there something at play there, which is holding back the revenues at all?

Hey, Ryan, this is Gary. Thanks for the greetings. I hope you guys are keeping safe and well as well. No, I think, you know, there are small dynamics at play in terms of the holidays and tactical stuff in terms of, obviously, the number of days a month, what you're going to earn from the quarter. But generally speaking, we do think our revenue basis points are going to be relatively flat quarter over quarter. And there are no other items. So, you know, as we give our forecast, we're trying to take into account the variabilities, the market, et cetera. But your observation is correct, but also that we are not expecting any material compression on our yield.

Okay. And then maybe just turning to the engaged advisors, I was wondering if you could speak to kind of over maybe the last, you know, either the last quarter or the last two quarters, how much of the increase in engaged advisors has been because of market appreciation, those, you know, flows and wallet share gains. And then maybe just stepping back, it looks like the engaged advisors as a percentage of total advisors has increased by about 1% year over year. Do you see any key drivers that could accelerate the mix of engaged advisors relative to total advisors that you could push through in 21?

You're going to do the first part, and I'll do the second part of that.

Yeah, same thing. Perfect. So, you know, we saw a large difference in engaged advisors in 2021. at the end of first quarter during the market drop, and a large rebound in second quarter as the market came back. You know, I think the margin is always a little bit that goes back and forth in the market, but no. In third quarter, the growth of Engage Advisors has a lot less to do with the market and more due to the net flows.

And, Ryan, good to talk to you. Thanks for joining us. You know, in terms of the number of engaged advisors and the percentage of engaged advisors, the number is kind of the most important thing. You know, what we're trying to do is bring on new producing advisors that become engaged advisors. And what I mentioned earlier, you know, the size being about 10% more in terms of production is than we saw last year is a really important thing. And what we're trying to do with those new producing advisors, obviously, you know, is classic funnel management. At the top of the funnel, we're trying to make sure that they know as much about us as they can, and we know as much about them as we can, so that we're delivering the right information and the right sales experience. Second thing we want to make sure we're doing as we bring people through the funnel is really understanding their business, and the kinds of things they're doing and then aligning that sales experience and the early experience with us so that they see the value of outsourcing and they don't think of it as traditionally the business was formed, you know, over the last 25 years with really everybody in our business. You know, let's try an account or two, you know, because that generally turns into a lousy experience for everybody. And so what we're focused on is how do we bring on More accounts. High net worth has been a real important part of that as our high net worth capabilities, custom portfolios, has been a big driver for advisors to go, gosh, you know, I can gain wallet share from my clients by bringing these added capabilities and then becoming an engaged advisor. At AssetMark, I get better everything, right, better experience and all the rest of it. The other big component to that is share a wallet focused on products. So as I mentioned earlier, we added a set of fixed income capabilities this year. We just launched, I think it was last week, maybe it was the week before, another high net worth manager, CIBC, who is going to do custom portfolios, really very attractive, very experienced in this marketplace where a number of us have had experience with some of their predecessor firms over the year. What we're doing with Savos and Savos, portfolio has been phenomenal in terms of getting that custom feeling down to more of the mass affluent area. And so it's really a function of having the right knowledge about the advisor and delivering to that knowledge and then having a product set that makes it easy for the advisor to outsource and that advisor go, wow, I can grow faster on the platform. And that really is what's going to drive that engaged number up in 2021 and beyond.

you for the call it's very helpful thank you again if you would like to ask a question press star 1 on your telephone your next question comes from the line of chris shuttler with william blair your line is open hey good afternoon this is the devon for chris uh charles um just a quick one given the likelihood on the broker dealer landscape

which continues to consolidate in the coming years, and the need to replace lost interest rate revenue for these companies. What are some of the implications for AssetMark? And then what are you seeing broker-dealers doing around their home office advisory offerings? Are you seeing some of the larger BDs getting more aggressive in terms of their service offerings or in terms of pricing? Thanks.

Yeah, you're welcome. Good to talk to you. Let me start with the second part of that question. I might ask you to repeat the first part. So in the second part, we continue to see the broker-dealer community at large becoming more sophisticated, more capable. We're seeing investment in products and services, mostly product and technology, particularly from the larger broker-dealers. We're also seeing strain in their systems. Of course, their loss of spread revenue and some of the impacts on their own changes in product revenue is sort of counterbalancing that. But there's no doubt that the broker-dealer community recognizes the value of having advisors bring assets to their own platforms as a revenue source. And so we continue to expect to see particularly for the larger broker-dealers, an investment in capability. Now, for us, what does that mean? A number of things. One, we just brought on a new SVP of strategic accounts, a gentleman who has worked at several of the bigger broker-dealers, a person we've known for many years. And we're really actually quite excited, given our size and scale and positioning, that we can work really well, as we always have, with broker-dealers to help them grow their businesses. We work in a world where independent advisors are independent for a reason. They want choice. And they aren't at the wires because they don't want that experience. They want choice. And not any given solution, whether it's AssetMark or a broker-dealer or whatever it may be, is right for every advisor. And so what we want to do is partner with those broker-dealers to have more advisors outsourcing investment management and technology so that the advisor can spend time growing their business and really serving clients with planning capabilities, which we all know is both better for the investor, better for the advisor, better for the broker-dealer, better for us. And so I think we're going into a period – where because of the consolidation in the TAM side, because of our positioning, because of our desire to work hand in hand with broker dealers, so many broker dealers have had great success with us, where although they are investing in capabilities and they'll continue to do so, there's a chance for real partnership. And so we're excited about that. What was the first part of your question?

Charles, you answered it. It was on the impact of consolidation for Osmar.

Okay. All right. Great. Thanks.

And then second one, if I may, for Gary on expenses. Appreciate the color, but is there – how should we be thinking about it in 2021, just in terms of kind of splitting the amount of T&E that might be lost due to COVID rolling through G&A versus more real ceiling costage that might stay down in 21? Thanks. Sure.

Yeah, I appreciate the question. Yeah, as I noted in the script, you know, we do feel very proud of the job we did in 2020 managing our expenses. You know, but we are going to invest further in the next few quarters, as I mentioned. And now, set me back to consider 2021 There will be a return of some travel, some events cost. The longer this COVID process stretches out, the more that even will stretch out. But we are rethinking a number of things. And so, you know, it will be more than 2020. It will not be back to our normal 2019 levels. I don't know if I can give much more clarity on that. You know, I do see ourselves – kind of getting back to our normal investment rate in terms of growing our expense base and our compensation and our headcount. But I can't really give a detail on where that's going to go for travel and events because there's still so much up in the air.

Absolutely. That's very helpful. Let me add something to that. Sure. You know, the part that makes it hard for 2020 is, you know, We may be sitting here in my home office, and as much as I enjoy that, I sure would like to get back out and have dinner with you and our clients and our employees. But it's hard to know whether we'll be doing that in, I doubt, January or February, but maybe March or April or June or July. It's just really hard to know that. Certainly the news from Pfizer yesterday was off the charts good, and the markets obviously had a great reaction to that. and we're all super hopeful for that. And that makes 2021 hard to forecast on some of these things. Having said that, we are reengineering, and I mean reengineering our event strategy and our travel strategy. As you probably know, maybe not, but as we've talked about, at least someone in the past, you know, years ago, AssetMark and most of us in the business were had all of our sales forces out in the field. Now most of our sales force are on the phone, either from one of our offices or now from home. And that has made us incredibly more productive and has allowed us to have way more meetings and deeper engagement. And now with the advent of Zoom and other technologies that are really getting used, those meetings are fantastically productive. We've also had enormous success delivering content this way. And I think one of the things that's become obvious to us is that where we used to, the premier advisor meeting like we had two weeks ago, where we had almost a little over 900 people, if you were in L.A. and you had to drive up from Newport or something up to Irvine, it was an hour and a half. And most of that meeting was, in fact, content delivery. Well, we can deliver that content in bite-sized chunks via technology in a far, far better way and create dynamic conversations around the content. Now, what you can't do is you can't have the human experience. But then delivering the human experience in smaller ways, more close to the advisor is is how it's going to happen. And so it'll be lower cost all around and more engaging. And as we think about that reengineering of our event strategy, of our client engagement model, frankly, of some elements of our servicing model using technology, all of those things, to Gary's point of not returning to the 19 levels, will drive productivity enhancements from a cost perspective and from an effectiveness perspective.

Makes sense. Thanks very much.

Your next question comes from the line of Patrick O'Shaughnessy with Raymond James. Your line is open.

Hey, good afternoon. Given the post-closing outflows related to OBS and GFPC, can you remind us how you underwrite your acquisitions to take into account potential outflows? Sure.

Absolutely, absolutely. So, What we look at, let me take a step back. For both these acquisitions, there is a block of business that we evaluate. We evaluate the overlap and the advisors. We evaluate their, sort of the space they're in. What we are looking for are A percent of those assets to remain on our platform, that will generate the revenue, and then we manage the expenses that we need, the incremental expenses we need. What we're generally looking for, Patrick, in most news deals, is an after-synergy multiple on EBITDA in the mid-single digits, somewhere between six and eight times what we're paying. lot goes into that including the synergies cost our ongoing running costs as well as the retention of assets now i would say um you know for both obs and gfpc we're pretty pleased with the level of assets that are retained on the platform For GFPC, we have still $3 billion of assets that we acquire. For OBS, it's a little bit less than $2 billion of assets. And those assets are turning into the accretive revenue that we price down.

Yeah, Gary, if I could add to that. Patrick, good to talk to you. A couple of things. So there's different kinds of acquisitions that we may do that we've talked about in the past, and we generally break it down into consolidation and capabilities. And in the consolidation realm, small ones need to be cost synergies only. You notice Gary didn't mention revenue synergies. We don't look at that. We do, of course, look at it, but we don't talk about that when the modeling part comes and the underwriting. We underwrite cost synergies, which is fundamentally controllable, and then asset retention, which is pretty forecastable. And as Gary said, we really want it to be in that single-digit range, which is highly accretive. If we were to do a bigger consolidating acquisition, it would have a different look to it and a different feel to it. And then, of course, the capabilities deal, which we are focused on looking at all the time, as we've mentioned in the past, will have, again, different kinds of multiples and different kinds of underwriting criteria.

Got it. Thank you. And then for my follow-up, so you talked about how you're piloting with some RAs. an advisor managed platform alternative for them. I apologize if you've probably talked about this in the past, but can you remind me how you monetize those advisor managed assets and what is the business model for that particular strategy?

Sure. Happy to do it. So the core business strategy is an outsourcing model that And so we expect that RIAs that join our platform will, over time, do more of what I'll call regular way business with us, you know, do high net worth with us or whatever it may be, strategists, and start to outsource. What we recognize, though, and I think most of you know that I ran the custodian at Schwab for many years and the custodian at Fidelity, and many of the senior executives at Asimark have been in the RIA business. Traditionally, RIAs have been non-outsourcers, period. They say to themselves, I'm independent. I want to be fully independent. I'm going to manage a set of mutual fund portfolios. I'm going to buy my own technology. I'm going to integrate it. And years ago, that was okay. But as time has gone on, those mutual fund portfolios have tended to not be what clients want, particularly high-net-worth clients. The managing of technology has become more and more complicated and more and more expensive. And the compliance requirements for the real work you've got to do on due diligence, which, you know, frankly most people don't do and we do do, has made it so that those businesses are tougher and tougher, particularly below the, you know, $500 million, $750 million range of AUM. And so as an entry point, We need to be able to say to those advisors, look, if you want to manage large cap growth or whatever on our platform, you can do that and learn, outsource your high net worth or outsource whatever it may be. And we expect that the persona, the kind of advisor that we're going to attract, is going to have a mindset for that. They're not going to come to us to just be a custodial offer that they could go to a Schwab or a Fidelity or a Pershing or whatever directly. And so the monetization question is pretty straightforward. So the regular way of business will be the regular way. And then on the AMP part of the business, it'll be a much lower cost, right, because what we're offering is custody, reconciliation and reporting, and, you know, the ability, you know, the trading tools, all the model management technology, the integrated technology that is asset market proposal, you know, proposal, account open, money movement, you know, all those things. practice management and community. So there's a whole set of things there, but we can't charge our full platform fee on that. It'll be, you know, meaningfully less, but still meaningful to us.

Great. Thank you.

You're welcome. Thank you.

Your next question comes from the line of Ken Worthington with J.P. Morgan. Your line is open.

Hi, this is Jenny for Ken Worthington. Good afternoon. Maybe just a quick one from me. How is SMR thinking about the integration of ESG into its investment portfolios? Are you seeing more demand from advisors for ESG portfolios?

Hey, Jen. Thanks for joining the call. Great to hear your voice. So it was Ken, and your voice was there. I said, that doesn't sound like him, but nice to talk to you. So ESG... we believe is an important element for investors. If you'd ask me this, or Natalie Wolfson, who runs product development and strategy for us, two years ago, we would have said, hey, globally, ESG and SRI are taking on some momentum, and we're seeing certainly on the institutional side some momentum, but we're really not seeing it on the retail side. That's changing, and it's changing driven by lots of issues, which I won't go into, but you know about those. Having said that, it's interesting. We're doing a lot of research with our advisors, and they are not getting a lot of demand for ESG. We asked that specifically. We've done research on it. We actually asked the FAB group, the Field Advisory Board group, last week, and it was very lukewarm at best, and maybe it was luke-cold. And their answer was, yeah, you know, I might have some clients that might want it, but they're not asking about it, and I might have some that I would want to attract, and I'd like it in the toolkit, and we do have you know, a toolkit already. But, you know, the next generation of the toolkit, there was pretty lukewarm reaction to it. So having said that, I'll tell you, we will invest in more ESG tools and capabilities. I'm not sure it's going to be in 2021, though, given the feedback that we've consistently gotten. We'll continue, you know, to add to what we have. And having said that, I suspect 2022, 23, and 24, it'll come over more like a wave, and we'll be ready for that to empower our advisors with education and knowledge and capabilities so that they can turn it on as they see the need.

Thanks a lot. Maybe similarly, maybe tax solutions front, what tax overlay solutions does AMK currently offer? Are you seeing more demand there or it's not going to be as near term as well?

So tax on the other hand, everybody's interested in tax. And we offer quite a few tax solutions already. Most of them are in our custom high net worth, which is, I think you know, goes down into the mass affluent. So we have a lot of tax workout capabilities already. People are focused on tax because it's one of those things that every investor is focused on and well aware of in April or October when they pay their taxes. And so people want that. People also, advisors and investors also believe that it's a source of value that is, although quite hard to measure, quite hard to measure, actually, and quite hard to put on a report, it's one of those things you can talk about. So We enjoy quite high-quality tax capabilities, and in the Field Advisory Board last week, we talked about more tax capabilities, maybe more outsourcing. When we talked earlier in our presentation about outsourcing, taking work off the advisor, allowing us to illustrate some of those tax workouts for the advisor outside of the strategist doing it, we think is an opportunity. so taxes is an area we'll continue to develop and it is one of high interests thanks a lot thank you there are no further questions at this time i will turn the call back over to mr goldman all right thank you and i know we went over time folks and i apologize for that i hope you found today's call valuable um it is a strange uh time 2020 feels like the year of no time. It just seems like the days go by as we work in our offices. But what does feel fantastic during this time is the client engagement, client interaction, the ability to use technology, the ability to make a difference in the lives of advisors and their clients. We continue to do so. We're proud of the results we've been able to deliver in this environment and proud of our people at AssetMark for all the fantastic work that they're doing each and every day. So stay safe, and thanks again for your interest and time on the call today.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating.