AssetMark Financial Holdings, Inc.

Good afternoon, everyone, and welcome to AssetMark's fourth quarter 2021 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, Austin. Good afternoon, everyone, and welcome to AssetMark's fourth quarter 2021 earnings conference call. Joining me today are AssetMark's chief executive officer, Natalie Wolfson, and chief financial officer, Gary Zyla. Today, they'll discuss the results for the fourth quarter and provide an update to AssetMark's business outlook for 2022. Following our introductory remarks, we'll open up the call for questions. We also have an earnings presentation that Natalie and Gary will reference during their prepared remarks. It can be accessed on our IR website at ir.assetmark.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 could 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. Natalie, take it away.

Thank you so much, Taylor. Hello, everyone, and welcome to our fourth quarter earnings call. We are a few weeks away from my one-year anniversary as CEO, and what an amazing year it has been at AssetMark. Before we begin our prepared remarks, I would like to start by thanking our 8,600 advisors 8,600 advisors, and 850-plus teammates. 2021 was a record year, and it would not have been possible without the loyalty of our advisors and the dedication and skill of our team. I also want to thank our analysts and investors for their continued support of AskMark. Starting on slide three, platform assets ended the year at a record $93.5 billion, driven by record quarterly net flows of $2.9 billion, which included our first billion-dollar month of net flows in December. For the year, our net flows as a percentage of beginning period platform assets were 13.3%. Households and engaged advisors were both up double digits for the year and ended the year at all-time highs. We also experienced record results for both top and bottom line financial metrics. Full-year net revenue was up a little less than 28% year-over-year to $378 million. Adjusted EBITDA in 2021 was up more than 36% to $157 million, and adjusted net income was up more than 41% to $103 million. And we continue to scale the business as evidenced by our ability to expand adjusted EBITDA margin, a robust 300 basis points in 2021. Turning to slide four, our record results are a direct outcome of the value we bring to our advisors and their clients. For more than 25 years, we stood behind thousands of independent financial advisors and provided them with everything they need to serve their clients and run their businesses. By redefining the advisor experience, Asimark is also redefining what it means to be a modern TAMP. Our singular focus is bringing unmatched value to independent financial advisors and their clients. We recognize that independence is sacred, and we champion it. The independent advisors we serve are objective, unbiased, and singularly focused on helping their clients reach their financial goals. When advisors work with AssetMark, they have a trusted ally. We are an extension of their team, and they are part of a community of thousands of like-minded advisors. As we redefine what it means to be a modern TAMP, we're focused on five key areas. I'll now discuss the 2021 progress we've made in each. The first component of our growth strategy on slide five is to meet advisors where they are, catering to a variety of affiliations, new, growth-oriented, or mature advisors. In March of 2021, we launched Asimark Institutional. Since launch, Asimark Institutional has gained a lot of momentum. Just as we have done with our broker-dealer-affiliated advisors, we're building a community of like-minded RIAs who see the value in outsourcing to Asimark. Because of our efforts and the value of our offering, we saw 49 new RIA firms join AssetMark in 2021, with current platform assets averaging $34 million during the first year of transition. In addition, RIA platform assets now account for a little over $20 billion of assets on our platform, and RIA is made up 20% of total production in 2021. In 2022, we'll be focused on continuing to build out this offering. Turning to slide six, the second component of our growth strategy is to deliver a holistic, differentiated experience to advisors and their clients, providing an end-to-end, easy-to-use platform designed to create meaningful conversations between advisors and their clients, while also, and very importantly, saving advisors time and resources. In 2021, we took a huge step forward in building out our financial wellness offering with the acquisition of Voyant. We are pleased with Voyant's year one results and want to highlight three key areas of their success. First, let's focus on technology. In 2021, Voyant maintained exceptional approval ratings from users, upgraded numerous integrations, and added dozens of new features. As a result, Voyant was a five-star winner of FP Advisor Service Award and was also voted the best non-research software for paraplanners by readers of the UK's Professional Paraplanner. Second is growth and expansion. In 2021, Voyant Australia was launched, bringing Voyance financial planning tools and technology to Australia's community of 20,000 financial advisors. Voyance also began its entry into the U.S. market through its acquisition by Asimark. In August, we gave Asimark's top advisors a free trial of Voyance, and feedback has been extremely positive. In 2021, Voyance's number of advisor and paraplanner licenses increased by approximately 10% year over year. Lastly is Voyant's integration into Ask Marks. We integrated Voyant's financial planning capabilities into eWealth Manager and also built Income Planner, a retirement income planning proposal technology which is powered by Voyant. We are pleased with the advancement we have made in our financial wellness offering and our focus on continuing to build it out in 2022. And we look forward to telling you more as the year progresses. The third component of our growth strategy is to enable advisors to serve more investors across the wealth spectrum. varying stages of life and generations. Now let's turn to slide seven. In 2021, we did a tremendous job of enhancing our platform, enabling advisors to serve investors. We did this by adding new products, features and tools to our platform. And through this, we were able to capture more share wallet from our existing advisors, as well as attract new advisors. In total, new products have added 8.5 billion of assets on our platform on a rolling 36 month basis. For our advisors' wealthiest clients, we added a host of new solutions, such as alternative investments through iCapital, as well as a suite of separately managed accounts. This past quarter, we made enhancements to our tax-loss harvesting capability, which will improve the client experience. For mass affluent and emerging affluent advisors, we've expanded our Savos personal portfolios to include new sleeves. As a reminder, these portfolios offer features that are usually found in high-net-worth solutions at an accessible investment minimum. Lastly, we added pooled employer plans to help our advisors serve the retirement needs of small business owners. We are continually focused on building out our platform to enable advisors to serve more investors, and I look forward to discussing these new additions to our platform in upcoming earnings calls. The fourth component of our strategy, as seen on slide eight, is to help advisors grow and scale their businesses by offering turnkey advisor solutions and programs. Last quarter, I discussed our business consulting offer, which is a huge competitive advantage for AssetMark. In 2021, our business consulting team served over 26 billion of platform assets, a 33% increase from 2020. Additionally, they launched and supported over 20 new advisor benefits, one of which I want to discuss with you in more detail today. In the fourth quarter, we soft-launched Marketing Advantage, AssetMark's marketing outsourcing program. Having a defined and executable marketing strategy has never been more important for advisors. In fact, in a 2021 Broadridge Financial Advisor Marketing Survey, it was found that only 26% of financial advisors have a defined marketing strategy. Yet, those that did have a strategy onboarded more than twice as many clients over the last 12 months as those who didn't. Marketing Advantage, our response to this advisor need, is a suite of marketing tools and resources designed to enhance an advisor's brand, deepen client relationships, and attract new business. Over 100 advisors have used Marketing Advantage during the soft launch period alone, and we just announced a full launch two weeks ago. Turning to slide nine, the final component of our growth strategy is to pursue strategic transactions by adding capabilities and assets that improve advisors' ability to serve investors and expand their business. In 2021, our M&A growth strategy was highlighted by our acquisition of Voyant, which closed in July. As I have mentioned in previous earnings calls, we are more deliberately focused on M&A than we've ever been before. To that extent, last month we announced a new $500 million five-year credit facility. We're very excited about the opportunity to significantly increase our access to capital and reduce our ongoing borrowing rates. We remain well-positioned to execute on M&A with approximately $425 million in purchasing power, while continuing, as always, to be a disciplined buyer. Lastly, we would be remiss if we didn't provide some commentary about the current macro environment and how that impacts asset markets. Later in the call, Gary will discuss the impact of interest rates on our spread-based revenue. Right now, I'd like to take a moment to briefly provide some thoughts about talent. Talent acquisition and retention have never been more crucial. Our strategy has two components to address this need. First, and most importantly, is ensuring that Askmark is a place where talented individuals want to work. We added more than 150 new team members in 2021 and received high marks in our annual employee engagement survey related to diversity, creating high-impact work, work satisfaction, and teamwork. We need to continue to make strides against all these measures so that the best of talent wants to work at AskMark. The second component of our strategy is appropriate compensation. To that end, at the end of last year, we gave each team member a one-time year-end bonus. We funded our variable incentive compensation at a high level, and in early 2022, we will increase salaries across the board. All of these changes have been accounted for in our current plan, which Gary will go through in a few minutes. We believe that creating a workplace that embodies our values of heart, integrity, respect, and excellence, along with having a robust learning and development program and compensating team members appropriately will help us attract and retain the best talent. In closing, 2021 was a record year for AskMark. Platform assets grew to over $93 billion. We served more advisors and investor households than ever before, all while achieving the highest net promoter score in our company's history. We realized double-digit growth for top and bottom line financials and expanded margins by 300 basis points. We expanded into a new and growing channel. We completed our first capabilities acquisition, allowing us to diversify revenue, and entered 2022 with strong momentum. I will now turn the call over to Gary, who will take us through a deeper dive of our fourth quarter 2021 results and provide an updated outlook for 2022.

Thank you, Natalie, and good afternoon to all those on the call. as Natalie discussed, 2021 was a record year for asset markets, highlighted by an all-time high in platform assets and record numbers for net flows, revenue, adjusted EBITDA, adjusted net income, and adjusted EPS. As usual, I will start with a discussion of our platform assets, then talk about our revenue, expenses, and then earnings. I will conclude with an update on our outlook for 2022. Starting with slide 10, fourth quarter platform assets were a record, $93.5 billion, up 26% year-over-year. This growth reflects fourth quarter net flows of $2.9 billion, the highest quarterly total in the company's history, and the fourth consecutive quarter of record-breaking flows. We also realized $3.7 billion in market gain net of fees. For the full year, we achieved net flows of almost $10 billion. This was over 13% of our beginning-of-year platform assets, well in excess of our annual target of 10%. Let's now turn our attention to the advisor metrics. In the fourth quarter, we added 215 new producing advisors, or MPAs. This marks the third consecutive quarter of MPAs north of 200 and is the highest total of MPAs since the beginning of the pandemic in first quarter 2020. Our total engaged advisors at the end of the fourth quarter was 2,858. We added 109 engaged advisors in the fourth quarter and 322 engaged advisors in 2021. Our engaged advisors make up 92% of our platform assets. As we always point out, growing the number of engaged advisors on our platform is a key focus for management, and it is crucial to drive further growth of our business and its financials. Now, let's turn to slide 11 to discuss this quarter's revenue, which was a record $144 million. As you know, we focus on revenue net of related variable expenses. In the fourth quarter of 2021, our net revenue of $103 million was up 35% year-over-year. This is driven by asset-based net revenue, which was up 32% to $97 million, and the addition of subscription-based revenue from Voyant, which was $3.2 million. Spread-based revenue for the fourth quarter was $1.7 million. Speaking of spread revenue, recent commentary from the Fed on rising rates will have a positive effect on asset market spread-based revenue. Turning to slide 12, based on ending cash on January 31st of about $2.9 billion at our trust company, a 25 basis point increase in the Fed funds rate would result in about $4.5 million of spread-based revenue on an annualized basis. Historically, about 75% of this annual revenue falls through to our bottom line. Simply put, asset markets well positioned to benefit in a rising interest rate environment, and this may speed up our revenue diversification and earnings growth. That said, we are always cautious in our planning. You will see that our 2022 guidance, which ties to our operating plan, does not include rate hikes in 2022. We look forward to finding more color next quarter once we have greater clarity. Slide 13 details our year-over-year net revenue walk. As the waterfall shows, net revenue was up year-over-year driven by the impact of our asset growth, which generated $21 million in additional net revenue. Also adding to our increase in net revenue is a $2.4 million reduction in our asset-based expenses. As a reminder, this is ongoing savings that is primarily driven by restructured agreements with providers that we first realized in the second quarter of 2021. On another positive note, fee compression was negligible year over year. Subscription revenue from Voyant added $3.2 million in additional revenue, and Voyant's consulting revenue drove the increase in our other revenue line item as well. Lastly, spread-based revenue decreased about $300,000 year-over-year due to the decline in our average yield from 31 basis points to 26 basis points. Now let's discuss expenses, as shown in slide 14. Total adjusted expenses increased 32% year-over-year to $111 million. Quarterly operating expenses were up 47% year-over-year to $64.7 million, driven by an $11.6 million increase in compensation expense and an $8.9 million increase in SG&A. So turning to slide 15, let me provide you some additional color on our operating expense increase. As the graphic shows, we started with fourth quarter 2021 operating expenses of $44.1 million. We added $13.4 million due to increased volumes, travel, and events. This growth in expenses is commensurate with revenue growth. I've been practicing saying commensurate the whole time. It's very exciting. Secondly, we added $2.9 million to the addition of which, as a reminder, was not in our expenses in 2020. This brings us to a core operating expense of about $60.4 million in the fourth quarter of 2021, up 37% year-over-year. The remainder of the expense increase was driven by specific investments we made in the quarter as a result of our strong year. First, we paid $3.1 million related to bonuses, which Natalie alluded to, including an excellence award paid to all employees and an increase in our annual bonus approval. Second, we chose to spend an additional $1.2 million on a few specific strategic initiatives. This spend was not originally in our plan for 2021, but will help accelerate growth in 2022 and beyond. Before wrapping up our expense discussion, let me quickly run through our adjustments for the quarter. We added back a total of $12 million pre-tax, which is comprised of four items. First, $5.6 million of non-cash share-based compensation. We expect this number to decline in 2022 to an average of about $4 million a quarter. Second adjustment to expenses is $2.9 million of amortization expense related to prior acquisitions. Again, we expect this number to decline in 2022 to about $1.5 million a quarter. Third, $3 million related to primarily reorganization and integration costs and one-time costs related to the pandemic. And lastly, $400,000 in acquisition-related expenses primarily associated with our acquisition employees. Now, let's turn to slide 16 to discuss our earnings from the quarter. For the fourth quarter of 2021, JustEven was $38.3 million, up 20% year-over-year. adjusted EBITDA margin for the quarter was 26.7%, down 220 basis points year-over-year due to the increased expenses that I have previously just discussed. Excluding those non-repeating expenses, fourth quarter adjusted EBITDA would have been $42.6 million with an EBITDA margin of 29.7%. On an annual basis, we have expanded our operating margin 300 basis well above our long-term target of 50 to 75 basis points. Our reported net income was $12.4 million compared to negative $9.9 million in the fourth quarter of 2020. This marks the third consecutive quarter of positive GAAP income, and we finished 2021 with positive reported net income of $25.7 million. Our adjusted net income for the fourth quarter was $24.7 million, with 33 cents per share. This is based on the fourth quarter that we share account of $74.7 million. Our adjusted effective tax rate for the whole year is unchanged at 23.5%. For further comment, please see the adjusting net income walk-in slide 20. Turning briefly to our reported fourth quarter balance sheet, let me update you on our cash and debt positions. We ended the quarter with a little over $75 million in cash, and we continue to generate cash at about 50% conversion rate from operating activities and capital investments. In 2020, I'm sorry, in 2022, we expect to generate about $100 million cash. Turning to our debt position, as Naomi mentioned in January, we announced a $500 million five-year credit facility with an interest rate of adjusted SOFR plus 1.875%. we used the new $125 million term loan in this facility to retire our existing debt, which had a rate of LIBOR plus 2%. As Natalie noted, we're really excited about the opportunity to significantly increase our access to capital and reduce our borrowing rate, highlighted by the margin improvement of 12.5 basis points. Now let's turn to slide 17 to provide an update on our 2022 expectations. As you know, we bill in advance based on platform asset totals at the end of the quarter. As a result, we have already collected revenue for the first quarter of the year based on ending platform assets from December 31st, 2021. So far in 2022, we have seen increased volatility in the market, and assets in our platform are down in January from year end. However, there are still six weeks remaining in the quarter, possible upside from interest rates, and strong business momentum. As a result, we are reaffirming the guidance we presented in November and anticipate earnings growth in excess of 20%. We are incredibly excited about 2022 and AssetMark's ability to continue to thrive and grow. This will be highlighted by a full year of revenue from buoyant, a likely increase in spread revenue, and strong advisor and net flow growth. This will lead to double-digit growth in revenue and adjusted EBITDA and a margin expansion in excess of 100 basis points. We will, of course, provide an additional update during our 1Q22 earnings call, as we will have certainty around end-of-quarter asset levels and perhaps more clarity on the impact of any rate movements. And with that, I'll hand it over to Natalie for her concluding remarks.

Thank you, Gary, and thanks everyone for being on the call today. I've never been more excited about our company's future. I look forward to sharing future updates at upcoming conferences and on subsequent earnings calls. This concludes our prepared remarks. I will now turn the call back to the operator to begin question and answers.

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, it is star one. If you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question is from Ryan Bailey of Goldman Sachs.

Hi, Natalie, Gary, and Taylor. Natalie, a high-level question for you. We often hear about the aging of the financial advisor population, and we might have a potential retirement acceleration over the coming decades. So I was wondering, could you speak to what net attrition of advisors for the industry might mean for the day-to-day impact of the businesses of the remaining advisors, and then what that might mean for AssetMock?

Yeah, thank you so much for the question, Ryan. So you are correct in that the average age of the advisor has been increasing for quite some time. And many advisors are reaching what you would classically call a retirement age. A few things I just want to say, though, very, very common because advisors get so much value and satisfaction out of their work that they don't fully retire in the classic way that we would think about retirement. Instead, what they do is they bring on a successor or they sell off a part of their business, or they bring on a team so that they can continue to serve clients much, much later in life than you would normally expect. Even so, as advisors age, many of them are looking to to retire fully and fundamentally change the aspects of their work. And for those advisors, some of them are selling, some of them are becoming part of bigger practices, but many, if not all of them have succession plans where younger advisors are entering into the business in one form or another. In fact, if you look at the total number of certified financial planners, just as an example, there have never been more new certified financial planners than there were in 2021. And those certified financial planners are of much, much younger age, a much more diverse group. And this group of new or emerging advisors, they're entering the field at a rate, a replacement rate of the advisors who are leading. And so I don't expect that there will be a huge rotation where, you know, there will be a much, much lower amount of advisors. But instead, you'll see these new financial planners, these new and emerging advisors enter the industry. The last thing I'll just say is that our business consulting group, which I mentioned on the call earlier, one of the things that that group focuses quite a lot on with the advisors that we serve is making sure that they have a robust succession plan, both emergency succession plan and long-term succession plan, and that they are actively grooming a younger generation to take over their business.

Got it. Okay. And maybe... Maybe a separate point. Maybe it's somewhat related to this. So your households per advisor for AssetMark is up about 19% over the last two years. I was just wondering if you could comment on what the driver of that is. Is it that you guys are winning more sort of wallet share from the financial advisors? Are they growing organically while they work for you because what you're doing is bringing up time for them? Or is there anything else that we should keep in mind?

Yeah, I mean, the answer to that question is really all of the above. So, in fact, our advisors are absolutely growing. We just completed our 2021 value of outsourcing survey. And what we found is advisors that outsource grow at a faster rate. They attract more new clients than advisors that don't. We've also been investing in helping our advisors market more efficiently and better. And our marketing outsourcing program that I mentioned on the earnings call earlier today is just the most recent example of that. So increasing our advisors' growth rate and ability to track new households. Our advisors are highly likely to be referred, and specifically coming out of 2020, that the level of service that they provided to their clients really outpaced the competition. And so they saw tremendous growth in 2021 from new clients. And then also we're adding new products and services to our platform so that we can serve categories of investors that we haven't been able to serve before. Examples of that are Atomark personal portfolios where we added new sleeves and also new high net worth offerings. One other thing I'll just mention is the high net worth offering that Asimark has been building for over a decade now. We've added products, services that serve the entire wallet of the high net worth individual. And that has really helped us grow our advisors' businesses from much, much larger clients.

Maybe if I can sneak one more quick one in. Gary, related to that comment about 75% spread revenues falling through the bottom line, is that the 25%, is that a deposit beta comment, or is that reinvestment into the business, or is it both?

Deposit beta.

Okay. Thank you. Mm-hmm.

Our next question is from Jerry O'Hara from Jeffrey.

Okay, great. Hi, how are you? So just kind of a question around M&A and, you know, how you're thinking about it on a go-forward basis. Are there any, you know, kind of particularly identifiable opportunities or product gaps that you've kind of seen or identified? Or is it sort of just more opportunistic in nature? Any sort of color or context there would be helpful. Thank you.

Yeah, absolutely. Thanks so much for the question, Jerry. As it relates to M&A, first thing I just want to say is we look at the universe of opportunities that there are to serve advisors. And related to that, the technology they use, the services they need, what's powering advisory practices that are growing and thriving? And all of those areas are high opportunity areas for asset markets. So buoyant financial planning obviously is a huge part of a successful advisory business. And so we wanted to own that part of the advisor experience. There are other aspects of technology, other aspects of asset management, other aspects of servicing that are critical to the advisor's ability to deliver quality support for their clients. And those are the areas that we'll focus on. In an M&A environment like the one we're in right now, you have to be both strategic and opportunistic. We have identified the parts of the market we're most interested in acquiring, and as those opportunities become available, we are very aggressive about researching and ensuring that we're part of those conversations. The environment's tough. I mentioned this on the last earnings call, and we're going to continue to be a disciplined buyer. We want to make sure that that asset, whether it's scale or capabilities, is a fit for our business and that we feel like we can deliver in the medium term accretive acquisitions. And in an environment like this one, that means you have to sift through quite a lot of opportunities to get to those that make sense. And Gary and I and the entire leadership team at AssetMark are dedicated to doing that.

Okay, that's helpful. And then perhaps one, and apologies if I missed this, but as it relates to the strategic initiatives of $1.2 million that are not expected to repair, did you give any kind of context on what exactly that was or can you if you didn't?

Yes.

sure um gary why don't you do yeah so look we discussed i did not gary so you didn't miss anything happy valentine's day uh but um basically we began initiatives um uh We have an initiative for our advisor growth. We have a digital lead generation initiative. We have another initiative related to our online web presence and whatnot. These are initiatives that we were planning to begin in 2022. Again, with the thought of bringing in more advisors, making it easier for them to do business and creating leads.

And they're non-recurring in nature because in many instances we engaged in consulting projects or worked on advertising, again, to pull forward 2022 expenditures into 2021. Okay, great.

Thanks for taking my questions this afternoon. Thank you.

Sure. Our next question is with Kenneth Worthington of J.P. Morgan.

Hi, good afternoon. Hi. You know, just following up on that question and sort of the one-time bonuses, is Asmark going to pay these sort of one-time bonuses in the future? And why isn't one-time going to be sort of an ongoing tradition there? And then there was sort of the pull forward of expenses, you know, the one-timers that aren't recurring. Does this sort of happen again and again, like things are going great, you've got some more money to play with, so it all makes sense, but why don't we sort of see this in the future as well? And then as we think about the 16% to 20% expense growth, is it inclusive? Does it incorporate these one-time expenses in 4Q, so we're growing off the higher number, or is it sort of exclusive of the one-time investments? Sorry, I couldn't quite tell.

Yeah, so why don't I take the first two of those questions and then let Gary speak to the modeling of the 16% to 20% expense growth. So as it relates to the one-time bonuses, as Gary and I mentioned in our prepared remarks, 2021 was an extraordinary year. Best in history in terms of assets, best in history in terms of net new asset growth, best in history in terms of revenue, best in history in terms of EBITDA, best in history in terms of EBITDA expansion. And we're a team here at AssetMark, and we wanted to share that success with the team. You know, they had a change in leadership in 2021. It was an incredibly great year in terms of results, but also a difficult year in terms of, you know, still being in the pandemic and everyone working hard. And so for the first time in our history, we did a one-time bonus for everyone at the firm. And I got to tell you, the team here, they earned it. It's just a wonderful, wonderful group of people dedicated to making a difference in the lives of advisors every day. But the bonus came at an extraordinary time with an extraordinary set of results. And so that's why we categorized it as one time. If we have an extraordinary year in 2022, like we did in 2021, maybe we will deliver the same kind of bonus. If we don't, then we won't. And so it felt one time in nature to us. The second thing I just want to comment on is your very good question about is this something where we invest more in the fourth quarter because there's money to be invested. It's something we should expect in the future. And the answer to that question is probably yes. We always have more visibility into our overall business results in the fourth quarter because we bill in advance based on the assets at the end of the quarter before. And so by the fourth quarter, we know, give or take a very small margin, what our results will be at the end of the year. And Gary and I feel that working with the executive team, we should invest for future growth when we have the opportunity to do that. Last year, we had already expanded margin by 300 basis points. And we wanted to make sure that we were investing appropriately in growth. And that's part of how we balance the need for revenue growth and margin expansion. We tried to be clear about that in the third and fourth quarter last year and just want to reinforce that we're committed to investing in future growth where we can. to you to talk about the expense expectations.

Yeah. And so, you know, Ken, it's a great question, right? And one of our goals, Ken, is to make sure that we're trying to communicate to you and all the investors so there are no real surprises in what's coming forward, right? We try to go through our outlook for the upcoming year and exactly what Natalie is going through as we think through as we go through the year. So when you think about our 2016 20% growth next year in expenses, you know, I would bucket into four categories. About a third of that is related directly to volume and salary. So that does capture, and we always had captured back when we made the plan late last year, you know, the increase in cost for talent that Natalie was talking about. That's about one-third of our expense rates next year. About one-quarter is due to a full year of buoyant, right? We only had a half-year cost for buoyant in 2021. And so part of our expenses will go up because of a four-year buoyant. About a quarter of our increased expenses are going to be related to what we would call a travel and events budget. Specifically, in a week from now, we're going to hold our annual Gold Forum event. It's a $3 million to $4 million event. It's what we have done every year for 20 years except last year. And so this is very exciting. We're stoked about going out and seeing our top 500 advisors at our events. And then the last third of our growth next year is further investments, right? And so, Ken, there is a long list of investments we are excited about making and bringing to advisors all the time. The $1.2 million that I alluded to in the fourth quarter, because we could, you know, that accelerated some stuff, and we still have a large bucket of investments that we have budgeted now for 2022. Does that help?

Okay, awesome. That's excellent. The elephant in the room for me remains the fundamentals seem to be good. Management execution seems to be good, very good, great. The stock price is not reflecting that. How does Huatai think about the stock, if at all, if they're even communicating with you about it? I guess my question is, are they receptive to suggestions about what might get the stock to act better, or do they have suggestions about what might improve the stock price performance? There's been a number of things floated to me, I'm sure to everybody else, I'm sure to you. Anyway, do they want to be part of a potential solution there, or is this not really a concern and they're a half a world away and this never even comes up with you and the management team.

Yeah. So Ken, thanks so much for asking the question and I agree with you. It is the elephant in the room. Um, and so I'm really, I'm really glad you asked the question. First thing I just want to say is, uh, what's high there are majority shareholder. And so they care deeply about the stock price as any majority shareholder would. They are frustrated by the stock price and they and the management team and the board, we talk about the stock price to make sure that we're doing everything we can for our shareholders to understand their needs. At the same time, what we control is fundamental. What we control is making a difference in the lives of our advisors and their clients And over the long and medium term, if you don't do that, nothing else matters. And so we are absolutely having conversations with West High. As your majority shareholder, they are absolutely focused on the stock price. But at the end of the day, all that matters, if you don't deliver fundamentals, if you don't delight your clients, if you don't have a strong and happy team, nothing else matters. And so we're focused on that.

Okay, great. Thank you very much.

Thanks, Ken.

Our next question is from Michael Young of Truist Security.

Hi, Michael.

Hey, thanks for taking the question. Hey, how are you, Natalie?

Good, thank you. How are you?

Doing well, doing well. Wanted to maybe start with one for Gary just As we kind of think about the year and market appreciation, that's the part that could be maybe most elusive kind of within the targets, at least at this point, with a potential offset from higher rates. But if we just think about if that 3.5% market appreciation weren't to materialize and we were just kind of flat year over year, how much of an impact is that as we think about kind of EBITDA and EBITDA margin expansion for the year, again, X rates?

So, I mean, just very ballparky. If you're talking about the revenue impact, if you miss on this 3.5% growth, very ballparking at, say, $10 to $15 million of revenue. It would be about $3 billion of assets or so, about 40 basis points, somewhere in that range. That said... That said, Michael, we've already locked in a quarter of it, right? So we already entered the year with billing first quarter. And so, in short, whatever the market does in the fourth quarter of this year doesn't quite actually matter because that's for billing for next year. And so we've already mitigated about a quarter of the market risk of any given year when we're talking to you in February, right? And so the main focus will be what the market will be doing the rest of this quarter and into next quarter. And at the same time, Natalie and myself, executive team, we are always focused on making sure that we are planning our expenses and our investments appropriately. And so, you know, as the market recovers or does not, we will alter the timing of some of our investments.

Right. No, fully appreciate that you guys have a lot of leeway and lead time on the expense side, which is great. You know, and then, you know, the other piece would be kind of higher rates. It seems like that could offset, you know, an additional 50, 75 percent of kind of lower market performance if that were to materialize. I guess the other question I did have was a follow-up kind of on the rate outlook and spread revenue, just twofold. One, you know, the cash balances. Can you just remind us, you know, what we should expect in terms of gearing of cash balances? As rates rise, do those tend to come down as a percentage of assets, or has any mixed shift occurred since the last time we were in higher rates that might impact that? And then as well, we may see higher absolute levels of rates this cycle. So at what point do kind of deposit betas catch up later on, maybe in the rate hike cycle?

Yeah, so a couple things I just want to say about cash balances when interest rates go up. Cash balances, the type of cash balances that we have at Aston Mark Trust, those cash balances are cash held in a model to pay client fees. And so they're less elastic than true cash balances that you would see at a, like at a custodian. We do have position paced cash, high yield cash, and that tends to be a little bit more elastic, but the bulk of the cash assets we have on our platform are less so because they're held for the short term to pay for fees. In aggregate, it's about 3.5% of the assets held at the trust company. And honestly, there are two, two activities that influence cash balances, and neither are related to rates. One is if there's extreme volatility in the market, we see our cash balances go up. And the cash balances go up because clients move to cash to be more conservative, or the strategists on our platform rebalance to cash to be more conservative. And so market volatility is one thing that really influences our rates. And then the other thing that influences our rates is when the strategists reallocate for one reason or another. You know, they might move to cash for the short term as they reallocate their assets. And then the third, which is not related to fees either, is the amount of assets that we're attracting to the platform will raise the overall level of cash because 3.5% of those assets go to cash. So it's a great question and something we look very closely at at Asimark, and the nature of our cash makes the elasticity a little different here.

Great. And then, you know, Gary, kind of the last one was just on the beta. As we move into, you know, maybe 200 basis points up in rates, et cetera, do we see sort of diminishing returns at that point?

Yeah. Not a big champagne problem to have, but, you know, I think yes. Generally speaking, you know, right now what we would set our beta was about 75% that we would call to our bottom line. A little bit diminished as you get higher into that 200 basis point range, but, you know, not that much, but it is really less.

And, you know, obviously as you get above the 200 basis point range, if we get there, you know, you're returning a lot of those incremental rates to the client. So, yeah, as you get above 2.4, I'm sorry, 2.5, 3% will want to be returning some of that, much of that to clients.

Okay, perfect. Thank you for all the info.

Our last question is from Patrick O'Shaughnessy from Raymond James.

Hey, good afternoon, guys. Question on the expense outlook for 2022. When you guys last quarter gave your initial outlook of, I think, 16% to 20% growth, did that contemplate the non-repeating spend during the fourth quarter?

No. No. Go ahead. So what I want to say is

One of the reasons that we provide a range is so that we have flexibility at the lower end of the range to implement things that are absolutely essential but could not be predicted. And so the one-time bonus that we did at the end of last quarter, as I said, it was an extraordinary year. We were very, very happy to do that for our team. And we could do it within the bounds of the range that we had given and then adjusted upwards. And so, you know, we expect to stay within that range. And again, the lower end of that range is given so that we have the flexibility to make decisions that we think are important for future growth or the health of our business.

Okay, understood. I appreciate that. Your January net flows, $650 million, up year over year, but your lowest quarter since, or lowest month, rather, since May of last year. Is there typically seasonality in January? Is there an Omicron factor? Obviously, just one month. Don't want to read too much into it, but kind of what sort of commentary can you provide on January flows?

Yeah, I mean, absolutely. So yes, definitely down versus fourth quarter of last year, but up 31.6% versus January of last year. There was absolutely an Omicron element to it, as well as the market volatility. Even so, I'm really, really happy with our pipeline. and what we see in our pipeline, and one of our strongest Januaries ever in 2022. So obviously we'd love every month to be like December or better, but January can have seasonality into it. It's a month where there is a lot of volatility in flows, and we couldn't be happier with the pipeline. And we also just couldn't be happier that it's up 31.6% year on year. Got it.

And then last for me, I know you guys pay a lot more attention to engaged advisors rather than total advisors, but you did add, I think, 97 new total advisors this quarter, which was your strongest quarter since 2018. Anything you would call out is really driving that, and would you expect to maintain that momentum going forward?

Yeah, so a couple things that we would just call out as it relates to the number of our advisors increasing as well as the number of our engaged advisors and the number of new producing advisors. All three were high in the fourth quarter of last year and in 2020, 2021. First thing I'll just say is we have a concerted effort to make sure that we're growing the advisors that are disengaged to be engaged. invested heavily in a new channel of digital digital account development so Raising awareness of our brand raising awareness of our offer broadly in the advisor community in ways that we haven't done before and then lastly with our net promoter scores being as high as they've ever been advisors are referring asset mark and to their friends and colleagues. In addition, we are helping them save time and money and grow faster, and so advisors' colleagues are seeing that success and wanting to take part in it. So all of those things are leading to the number of advisors in general going up and new producing advisors going up as well. The last thing I'll just say is entering new channels. RIA are enterprise channels where we have relationships with credit unions, and bigger institutions has made an impact as well. We have a program, we call it Leadership Advantage, where we bring these types of enterprise clients together and we help them learn how to attract new advisors and for their advisors to grow. And we're seeing a lot of momentum from that part of our business.

Great. Thank you.

Thanks, Patrick. Thanks, Patrick.

There are no further questions registered at this time. So I would like to pass the conference back to Natalie for any closing remarks.

Thank you so much for your time today. We'll look forward to talking to you again next quarter. Everyone stay safe and have a great spring.