AssetMark Financial Holdings, Inc.

Good afternoon, everyone, and welcome to AssetMark's fourth quarter 2022 earnings conference call. Currently, all participants are in listen mode only. 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 fourth quarter 2022 earnings conference call. Joining me are AssetMark's Chief Executive Officer, Natalie Wilson, 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 2023. 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, Taylor, and good afternoon, and welcome to our fourth quarter earnings call. I hope everyone is doing well today. Before we begin, I'd like to formally welcome Adhesion Wealth to the AssetMark family. AssetMark and Adhesion have a shared mission, and we couldn't be more excited to have them join our team. I would also like to thank our over 9,200 advisor clients and nearly 1,000 teammates. 2022 is a record year for Asimark, and it would not have been possible without the loyalty of our clients and the dedication of our team. As we start 2023, we are the top independent TAMP as measured by platform assets, as well as the top TAMP as measured by advisors, having just won Wealth Advisor's Top Overall TAMP Award in January. I could not be prouder of the year we had in 2022 and how we have started off in 2023. My prepared remarks today will focus on our evolution and growth in 2022. I will then provide a detailed analysis of each of our five growth pillars, highlighting the progress we are making on each. Finally, I'll preview our strategic focus in 2023. Gary will then discuss the financial and operating results for the fourth quarter and introduce our 2023 outlook. Starting on slide three, in 2022, we continued our evolution from a TAMP to a holistic, full-service wealth management platform. On December 16, 2022, we closed the acquisition of Adhesion Wealth to complement our end-to-end outsourcing offering. In addition, we continue to optimize our digital ecosystem to provide advisors with a differentiated experience that champions client engagement and drives advisor efficiency. To further enable our advisors to serve diverse clients across the wealth spectrum, we expanded our investment platform to include improved income planning capabilities, personalized investment solutions, and enhanced tax loss harvesting services. As advisors increasingly focus on serving their clients, we expanded our turnkey business programs and invested meaningfully in our personalized consulting services, both of which foster advisor growth and efficiency. Simply put, we executed on our strategy, which allowed us to achieve record results in 2022. Now let's turn to slide four to highlight these results. While doing so, I'd also like to take a step back and provide some perspective on how we've grown since our IPO in 2019. In 2022, we served more advisors and investors than ever before, supporting over 9,200 advisors who used our platform to help more than 241,000 investor households. Since our IPO in July of 2019, we have added more than 85,000 households, approximately 1,400 total advisors, and 750 engaged advisors. Additionally, we achieved record financial and operating results and matched our all-time high net promoter score. Full year net revenue for 2022 was a record $456 million and is up more than 20% year over year and almost 60% from our IPO. 2022 adjusted EBITDA was up 27% to nearly $200 million, and adjusted net income was up more than 26% to $130 million. We also continue to scale our business as evidenced by our ability to expand adjusted EBITDA margin 270 basis points in 2022. Since our IPO in just three years, we have doubled the earnings of the company and expanded adjusted EBITDA margins a robust 600 basis points. well above our historical guidance of 50 to 100 basis points a year. Now let me turn your attention to our growth strategy. As I do every quarter, I want to give you an update on how we are moving the ball forward in each key pillar. Starting with the first component on slide five, we're meeting advisors where they are. In December, we closed on the acquisition of adhesion wealth, welcoming more than 560 advisors and close to 16,000 households. Adhesion, the industry's second largest model marketplace with over 400 asset managers, provides its clients with outsourced overlay portfolio management services, client engagement technologies, and tailored managed account solutions for TAMPs and RIA enterprises. At the heart of both Adhesion and AssetMarks is the proven concept that outsourcing leads advisors to a better quality of life, ability to grow and scale, and better investor outcomes. Adhesion will greatly amplify our ability to serve the rapidly expanding RIA market, allowing us to serve different advisor profiles and to significantly increase our total addressable market. RIAs will no longer have to choose between fully leveraging our curated investment solution or fully relying on Adhesion's model marketplace. They can now choose to do either or both at AFMARC. We believe both full outsourcers and those that are leveraging the marketplace will benefit from our consulting services, community of like-minded advisors, and the open architecture nature of our offering. Adhesion has a strong plan for growth this year, and we will look forward to sharing their progress during future earnings calls. Now turning to slide six, the second component of our growth strategy is to deliver a holistic, differentiated experience to advisors and their clients. We're pleased with the growth of Voyant in 2022, especially during the second half of the year. Excluding foreign exchange pressures, revenue from Voyant was up approximately 13% year-over-year, driven by an uptick in both enterprise and advisor consumer licenses. Enterprise advisor licenses are up more than 50% year-on-year, driven by a new deal with the retail arm of TD Bank in Canada, which added more than 5,000 licenses for the quarter. Boyance continues to gain traction in existing geographies, including the UK and Canada, and they are also progressing well in high-potential expansion geographies. For example, they've experienced excellent momentum in Australia with strong year-over-year license growth. We're excited about Boyance's prospects and the diversification of revenue it brings to Asimark. Third component of our growth strategy is to enable advisors to serve more investors across the wealth spectrum, varying life stages and generations. Let's turn to slide seven to discuss this more. There's no denying that 2022 was a difficult macro environment for advisors and their clients. Inflation surged to 40-year highs, causing the Fed to increase rates seven times throughout the year. This led to historic losses in bond markets and highly volatile global equity markets. Advisors needed timely education and actionable solutions to lead their clients through these difficult times. In response to this environment, we launched our Market Volatility Toolkit, which helps advisors get informed, feel confident, and stay in front of their clients' questions and concerns. Since launch, the toolkit has had over 9,600 page views from over 1,800 unique users. Our events also continue to be highly valuable for our advisors. In 2022, we held over 70 in-person events with over 2,300 advisors in attendance. Our 2022 events net promoter score was the highest it's been since 2018 at 72. Additionally, just next week, we will be hosting over 600 of our top advisors at our annual Gold Forum. This event is our largest ever, topping last year's events attendance by nearly 40%. We also leveraged webinars in 2022 to provide timely information given the ever-changing market. Last year, we hosted 49 webinars with over 8,100 advisors attending. Not only did we do an excellent job of being there for our advisors, we also added new investment solutions to our platform, expanding our eligible client wallet. In April, we launched four new ESG strategies as part of our values-driven investment program. Since launch, we've had over 2,100 proposals submitted, totaling $194 million. In July, we reopened Sabo's fixed income ladder strategies, a proprietary strategy of Asset Marks. This strategy aims to smooth out fluctuations in equity markets, inflation, and interest rates using a disciplined buy and hold approach. Since reopening, we have already had over 2,900 proposals submitted, totaling over $834 million. In October, we launched three new market volatility strategies for advisors to leverage during these uncertain times. It's been just a few months since launch, but we've already had over 900 proposals submitted, totaling 82 million. We will continue to educate our advisors and provide them with the best solutions possible to enable them to serve investors. Now let's turn our attention to slide eight and the fourth component of our growth strategy. While 2022 was challenging for investors, it was equally challenging for our advisors and their businesses. Over the last year, we have invested heavily into business programs to help advisors grow and scale. This is largely driven by our business consulting team, which provides our advisors individualized guidance by helping them to identify actionable opportunities to increase their efficiency and to grow and scale over time. As I've mentioned in previous earnings calls, I firmly believe that our business consultants and the program-based support are a competitive advantage for Asimark and are one of the key reasons why advisors continue to win. Over the last year, we grew our business consulting team over 40% while also launching programs to help with some of our advisors' most pressing needs. For example, in January 2022, we launched Wealth Builder Prospecting, Since launch, this tool has been used by over 600 advisors with strong lead generation and conversion metrics. Last February, we launched AssetMark Marketing Advantage. Celebrating its one-year anniversary this month, Marketing Advantage has been used by hundreds of advisors during its first year. Finally, we expanded our Advisor Acceleration Academy, which I discussed last quarter. We hosted a total of three classes with over 280 advisors for the year. We just finished our last class in December, and the results from all participants were off the charts. Finally, we kicked off 2023 with our investment consulting program. A pilot program right now, this investment consulting provides select advisors direct access to advisors' investment consulting team so that they can benefit from guidance in creating customized model portfolios that leverage the strategies available on our platform. It takes great pride in our ability to help advisors grow and scale. It's why they win and then we win. Turning to slide nine, which is the final component of our growth strategy, we pursue strategic transactions by adding capabilities and assets that improve advisors' ability to serve investors and expand their businesses. Even after purchasing adhesion for $46 million, we still have about $450 million in purchasing power for future M&A opportunities. We are also doing a great job of increasing our purchasing power each quarter because of our strong cash generation. As always, we are proactively looking at all opportunities that we feel will benefit our advisors and their clients. Now let's turn to slide 10. While 2022 was a record year, there were challenges and we are not taking our foot off the gas. Investors need more guidance, support, and advice than ever before. A recent Suruli study found that 44% of investors agree that they need more advice than they've received in the past. In 2023, in response to this and other trends, we'll continue to focus on executing our growth strategy. In short, we will expand our RA offering with adhesion, we will continue our re-platforming efforts, we will expand our fixed income and SMA offering, and we will focus on helping advisors grow and scale their business through enhancements to our advisor benefits program and our service capabilities in addition to our investment consulting program, which I discussed a little earlier. Our strategy is working. We are well-positioned to help advisors grow, which in turn will help asset markets grow. I could not be more excited about the opportunity ahead. I'll now turn the call over to Gary, who will take us through a deeper dive into our fourth quarter 2022 results and discuss our 2023 outlook.

Thank you, Natalie. And good afternoon to all those on the call. I want to echo Natalie's welcome to the Adhesion Wealth team. We are so excited to have them join the AssetMark family. As Natalie mentioned, 2022 was another record year for AssetMark. During my remarks today, I will highlight our fourth quarter results and share with you our 2023 outlook. Starting on slide 11, fourth quarter platform assets decreased 2.2% year over year to $91.5 billion. Quarter-over-quarter platform assets were up 15%, which includes $6.9 billion from the acquisition of adhesion wealth, a market impact net fee of $4.3 billion, and quarterly net flows of $908 million. Net flows in the full year of 2022 were $5.6 billion, and 2022 2022 net flows as a percentage of beginning period assets was 6%. Net flows continue to be pressured by lower production relative to last year as money continues to sit on the sidelines due to market volatility. And those assets that are coming onto our platform are coming on at depreciated levels. But that said, redemption rates are still lower than expected, a strong sign of our advisors' satisfaction. All in all, we are quite pleased with our net flows to the year, given the current market environment. Let's now discuss our advisor metrics. We added 143 new producing advisors, or MPAs, in the quarter. We are focused on continuing to stay close to our existing advisors and doubling down on our in-person marketing events and digital advisor acquisition strategies. We believe focusing on these areas positions us well to win new advisors and share a wallet from existing advisors, both of which will positively impact future flows. On slide 12, we show our engaged advisor count. Total engaged advisors at the end of the fourth quarter was 2,882. During the quarter, we added 281 engaged advisors. This increase is driven by our acquisition, market appreciation, and core advisor growth. Specifically, of the 281, 185 were from our acquisition of adhesion. 52 were advisors that moved back above the $5 million platform asset threshold as a result of market appreciation. And 44 were core advisors who qualified for engaged status for the first time due to their organic growth on the asset market platform. Our engaged advisors account for 30% of all advisors using our platform and make up 92% of our platform assets. As always, growing the number of engaged advisors is a key focus for management, as it is crucial to drive further growth of our business and its financials. In addition to the asset level and advisor count, the third way we measure our growth, which is not asset-based, is the number of households on our platform. The number of households are up almost 15% year-over-year to 241,000. As Natalie mentioned, the acquisition of Adhesion added nearly 15,000 households to our platform. Now, let's turn to slide 13 to discuss this quarter's revenue, which was a record $164 million. As you know, we focus on a revenue net of related variable expenses. In the fourth quarter of 2022, our net revenue was a record-hugging $24 million, up 20% year-over-year. This is driven primarily by spread-based revenue, which was up $26 million, or 15 times from a year ago. This more than offset the decline in asset-based revenue, which was impacted by market depreciation. Slide 14 details our year-over-year net revenue walk. As the waterfall shows, Net revenue was up year-over-year, driven mainly by spread income, which we just discussed. Year-over-year yield on spread improved over 300 basis points to 327 basis points. Also contributing to our increase in net revenue is a $1.2 million reduction in asset-based expenses. As a reminder, this is ongoing savings that is primarily driven by restructured agreements with providers. Asset-based revenue was down $8.3 million yearly year, primarily driven by the $6.2 billion decline in billable assets. Year-over-year fee compression was 95 basis points, of which half was driven by adhesion. Subscription revenue from Boeing was flat year-over-year, primarily driven by foreign exchange pressure. Excluding the impact of FX, subscription revenue was up approximately 13% year-over-year. As Natalie mentioned, we are encouraged to avoid growth prospects both in their existing geographies and in high potential expansion geographies. Last, the other income increased about $2.2 million year-over-year, driven largely by higher interest income earned under corporate cash. Before discussing our expenses, I want to emphasize the stability of our revenue during the past two years under very different market conditions. In 2021, We had the sixth best year for U.S. equity since 1990. This strong growth helped us add over $9 billion in platform assets from Market Impact. We experienced a then record revenue numbers with asset-based net revenue accounting for 96% of our total net revenue. 2022 was quite a different story. Market Impact caused a $14 billion loss of platform assets in a year. And asset-based net revenue, which is a percentage of total net revenue, fell to 83%. Yet, 2022 was another record revenue year for AssetMark, driven by over $55 million of spread-based net revenue. For the restate, the last two years have been two completely different market environments. And in each year, we have been able to grow revenue to record numbers. We are excited about the resiliency of our revenue models. As buoyant revenue continues to grow, it will provide further revenue diversification as it is not correlated to equity markets or interest rates. Now let's discuss expenses. During slide 15, total adjusted expenses increased 6.2% year-over-year to $118 million. Quarterly operating expenses were up 7% year-over-year to $69.2 million, driven by a $4.5 million increase in SG&A. The increase in S&A was primarily driven by increased travel and event costs. Compensation expense was flat year-over-year. We increased our headcount by 12% year-over-year, but that cost was offset by lower variable compensation. As always, I will quickly run through our adjustments for the quarter. We added back a total of $9.3 million pre-tax, which is comprised of four items. First, $3.8 million in non-cash share-based compensation. We anticipate this to increase to just under $5 million per quarter in the second half of 2023, at which point we will likely be at the ongoing run rate of non-cash share-based compensation. The second adjustment to expenses is $2.1 million of expenses related to acquisitions, primarily for adhesion wealth. This includes one-time costs such as legal and professional fees. Third adjustment is $1.6 million related primarily to reorganization and integration costs. Lastly, $1.8 million is acquisition-related amortization. In 2023, we expect a quarterly run rate of this about $2.2 million. Now let's turn to slide 16 to discuss our earnings report. Fourth quarter 2022 adjusted EBITDA was a record $52.9 million, up 38% year-over-year. We are extremely pleased with our adjusted EBITDA this quarter, which is a testament to our growing revenue diversification and the flexibility and discipline management of our expense base. Adjusted EBITDA margin was up a robust 550 basis points year-over-year of 32.2%. In the full year, we grew adjusted EBITDA margins 270 basis points of 32.3%, well above our target, our annual target of 5,200 basis points. Reporting net income for the quarter, $25.6 million. And for the full year, with $103 million, more than four times reporting net income for the full year 2021. Adjusting net income for the fourth quarter is $34.3 million, $0.46 per share. This is based on the fourth quarter diluted share account of $73.9 million. Our adjusted effective tax rate for the full year is now 24%. up from 23.5% due to the growth in pre-tax income, outpacing the growth in our tax credits and deductions. For the card, please see the adjusted income walk on slide 21. Now let's look at the reported fourth quarter balance sheet. I would highlight two items. First, we continue to do a great job of generating cash. We ended the fourth quarter with $136 million in cash, and this is after paying $46 million in cash for adhesion. This week, we still have $375 million in our credit facility that is available to the company. Our cash balance, our strong ability to generate cash, and our credit facility give us a lot of dry powder for future M&A deals, which remains an important focus as a key component of our growth strategy. Second, capital expenditures, which primarily reflect our long-term investment, focus on creating new capabilities, increasing scale, and improving service. For the fourth quarter, our capital spend was $11.3 million, or 6.9% of total revenue. In 2022, capital expenditures were 6.2% of total revenue, well within our previous guidance of 6% to 7% of total revenue. Our capital projects, primarily tech-related IP, reflect the constant focus we have in improving our business within the confines of our capital spend parameters. The largest capital investments in 2022 focus on our continued replatforming efforts and productivity initiatives. In 2023, we will continue our replatforming efforts, productivity initiatives, and build other new solutions for our advisors. We are set to do all this while maintaining a run rate between 6% and 7% of total revenue. During slide 17, I would like to provide some commentary on the meaningful impact that SPREAD continues to make on our financial results and how we look to maintain that. Our ability to earn spreads is a direct result of our owning our own custodian, Asset Mart Trust Company, or ATC. As you know, spread-based revenue is a function of the amount of cash held by investors at ATC and interest rates. First, let's discuss cash balances. In the fourth quarter, total cash from the percentage of assets at ATC remained elevated. Over time, we expected to revert to a more normalized level of about 3.5%. Turning now attention to interest rates, the Fed increased rates two times during the fourth quarter and once more in January. These rates increases are highly beneficial for the growth of our spread income. The rates will not stay high forever. As a result, we have started to deploy a portion of our insured tax deposits to fixed-term agreements. In the fourth quarter, we added $750 million of new fixed-rate term contracts. And as of December 31st, 21% of cash ATC is in fixed-rate term with an average maturity of 1.78 years and a gross rate of 4.39%. As a reminder, we have the optionality of placing up to 40% of cash at ATC into fixed-rate term. We will continue to update the state on the deployment of cash into fixed-rate term on future earnings calls. Finally, let's turn to slide 18 to discuss our 2023 Our financial model starts with asset growth. It continues adopting the growth of our trust company and the growth of SaaS-based revenue from Boeing. We have already discussed spread and subscription-based revenue, so let me focus on asset-based revenue. As discussed in my earlier prepared remarks, core net flows continue to be pressured by lower production. Our expectation of platform asset growth in 2023 is 10 plus percent, which includes organic growth in the high single digits and a modest market list of 3.5%. Driven by the growth in spread revenue, subscription revenue, and a full year of adhesion revenue, we expect our net revenue growth to be in high teens to low 20s. This assumes the asset growth is slightly offset by about one basis point of fee compression, which is our regular expectation. We expect our operating expenses, which consist of SP&A, a compensation NSCNA, to increase in the high teens. For clarity, about a quarter of the year-over-year increase is due to the full impact from adhesion. About a third of the increase is due to volume, and the remainder is driven by our strategic investments into talent acquisition, advisor growth, and technology initiatives, such as our advisor benefits program and billing system replacement. As a reminder, our expense growth is disciplined and closely managed. and we will not let our expenses outpace our revenue growth. As always, we are focused on realizing improved margin on revenue and growing earnings. We expect our adjusted EBITDA to be up 20% plus year over year, and we expect margin expansion between 50 and 100 basis points for the year. With that, I will hand it back over to Natalie for her concluding remarks.

Thank you, Gary, and thank you to everyone on the call today. I'll look forward to seeing you in person at upcoming investor conferences. This concludes our prepared remarks. I'll now turn the call back to the operator to begin our question and answers.

If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, it is star one. Our first question is from Gerald O'Hara with Jefferies. Your line is now open.

Good afternoon or I suppose good afternoon folks. Good evening to some. Maybe one to just kind of talk about the solution set and I'd kind of be curious specifically what you're hearing from advisors and clients with respect to kind of alternatives on the platform and where that kind of solution set might be evolving within your ecosystem or maybe how you're kind of thinking about it as just sort of a solution in the broader picture of things.

Thanks so much for the question, Jerry. Alternatives are clearly a very important need for high net worth and ultra high net worth investors, as well as if you broadly define the term alternative investments, volatility managed solutions for all investors. So at Asset Park we've implemented alternatives on our platforms in two different ways because we view these needs as being very different. For the smaller investor, the mass affluent and below, we implement alternative sleeves within our market-based portfolios so that advisors and their clients could talk about how much volatility they're comfortable with and then implement the portfolio where the sleeve of alternatives is sized appropriately to their risk needs. We expanded that offering last year as I mentioned in my remarks and added three solutions towards the second half of last year. In addition to that, for larger RIAs, And then also for larger investors who are served by those RIAs, they have needs for true qualified purchaser alternatives. And we have a partnership where we deliver access to those alternative investments, fully diligent, to our advisors who serve investors who have those needs. And that solution is tailored for RIAs.

Okay, great. Thanks. And then maybe just to follow up, Gary, I appreciate your color on cash, credit facilities, and just overall capital management. I don't know if this is maybe more towards Natalie, but can you kind of remind us a little bit on you know, with respect to the M&A possibilities, what capabilities you might find most attractive as we sort of look past the adhesion deal, and congratulations on closing that at the same time.

Thanks so much. As Gary and I both mentioned, we couldn't be more excited about welcoming the adhesion family to Asimark. As it relates to capabilities, as you know, We have two types of acquisitions we are really excited about, capabilities acquisition and scale acquisition. We didn't ask about scale acquisition but I just wanted to mention it because it remains an important part of our strategy because we know once advisors become part of our ecosystem we can help them grow and succeed. Part of how we do that is we have the right capabilities on our platform that are geared towards helping advisors scale their business and enhance their service levels to their clients. So the capabilities we are looking at fall into two categories. The first is, where are they spending their time and effort in a way that doesn't add value to their client relationship? That's how we can really help advisors scale, where they can turn that percentage of their time to working with clients and helping those clients achieve their goals. And there are lots of different aspects of this. Marketing and lead generation, compliance exercises, key technical key parts of their technology that take them a lot of time and effort, like performance reporting and performance calculations. These are all areas that because they take advisors so much time and effort, we would love to do more of. And then as it relates to the second part, what we try and do is we try to enhance the advisor's dialogue with and interaction with their clients, so that that interaction sets that advisor apart. And that's one of the reasons it was so important for us to purchase Voyant, because the financial planning and the goals that's at the heart of the advisor's conversations with their clients. And so there are other aspects of the advisor's dialogue with their clients, which take a lot of time and are difficult and require specialty skills. And those areas would be areas that Asimark is interested in. So just some examples, tax management would be an example of that. Direct indexing would be an example of that. Investment selection would be an example of that. All of those areas could be interesting to ask Mark, among others that I didn't mention. So hopefully that clarifies.

Yeah, absolutely. And thank you for taking the question. Maybe just a real quick one for Gary. Apologies, this will be the last, I promise. You mentioned sort of fixed rate term in the sort of average, if I heard it correctly, 1.7 years. Any reason why you wouldn't maybe try to stretch that out a little bit longer? Or maybe can you kind of just help us sort of understand what the sweet zone is there for the cash management in terms of fixed rate contracts?

Yeah, sure, Jerry. And, hey, you can ask as many questions as you want. We'll be here all day, man. But, you know, the way we've engineered into this – process, we've created sort of layers of a laddered approach. And we entered into some contracts at one year, some at two, some at three right now. Due to the, there is a slight unpredictability to our cash balances, right? That cash balance goes up and down with the assets on our platform and also the market environment. And so we are being, let me just say, cautious as we're entering the program. in terms of the tenure of these contracts initially to make sure that we can review the process and make sure we kind of learn from what we're doing. So for now, in the short and medium term, we're probably going to stick to this sort of one, two, and three-year ladder and see where that takes us, and then we'll evaluate it in a year or so.

Okay, makes total sense. Thanks for taking my questions this afternoon.

Our next question comes from Jeff Schmidt with William Blair. Your line is now open.

Hi, thank you. The TD Bank partnership with Foyant looks like a great win for the company. And I'm just curious how you differentiate Voyant in the marketplace relative to competitors, just as you kind of roll that out more. What's the pitch there, I guess?

Absolutely. So a couple of things. The first thing I want to clarify about Voyant is that Voyant is a leading financial planning provider outside the U.S. And so they have really great market share in the U.K., in Canada. starting in Australia and then beginning to gather market share in the U.S. And there's a few ways that Voyant has distinguished itself outside the U.S. The first is the flexibility and depth of its technology and the degree to which that technology can be customized by enterprise clients so that the example you used, the TD example, they can use Voyant's technology to create a financial planning system that suits the needs of their advisors and how they would like their evaluators to have financial planning conversations with their clients. Flexibility includes language, tax regime, workflow for the advisor, and the type of financial planning that is delivered, as well as the degree to which that particular institution can connect their own financial products to the plan. Outside the U.S. in the enterprise market, it's really the flexibility and richness of the technology. In the small business market outside the U.S., the way that they differentiate themselves is the richness of the tax integration in the financial planning system, the degree to which the small business can leverage the technology off the shelf, meaning the simplicity of it. And then lastly, the training that Boyant provides to the small financial market or small advisor, the small advisory market. Inside the U.S., they differentiate based on all those things. In addition to that, the fact that they can create a great conversation between the advisor and their client, which talks about the consequences of cash flow decisions clients are making every day to their ability to achieve their long-term goals. And that single user interface is so incredibly powerful for the advisor and for the client. The advisor, because they can help the client understand their ability to retire based on the spending habits they have today. And for the client, because they can be comfortable that they're spending the right amount and still reach their long-term goals. So it's really an incredible technology, and we're very, very excited to have it as part of the AssetMark offering.

Okay, great. And then building on the question about fixed rate balances and understand your concern about sort of where that percentage of client cash is going to shake out. But even if you sort of move that up to a 40% mix and fixed rate, I mean, it seems pretty conservative. So I guess my question is, are you seeing the demand out there to move it up to that? And I guess, can we expect you to be pretty aggressive in doing that just given the unique rise in interest rates here. Thanks.

I'll start this one and then hand off to Gary if he has anything to add. We are seeing interest in our fixed-term deposits in the marketplace, which is great. And as Gary mentioned, our most important value in our cash program is making sure that clients have the liquidity they need at the insurance levels that we've promised. And so we're going to focus on that first, because that's the primary reason for the program. And then secondly, on the yield that the program delivers to the investor, and then the spread that it delivers to AFMAR. And so we're definitely seeing demand for the balances that we can provide. And we'll continue to manage that closely, keeping in mind our first principle, which is obviously the client outcomes.

Okay, great. Thank you for the answers. Thank you. Thanks, Jeff.

Our next question comes from Alex Bolstein with Goldman Sachs. Your line is now open.

Hey, guys. This is Michael on for Alex. So I guess for a first question kind of keying in on organic growth here, since September the annualized growth rate that you guys put out in the monthly has been 5%, below 5%. Before that, the average for 2022 was closer to eight, and then, you know, last year was like closer to double digit or above. So I guess what factors maybe have contributed to that slowing growth rate other than, you know, the market impact and lower production? Is there a specific channel that you guys might have been seeing a slower organic growth coming from? And any other call you have there would be helpful.

So I'll start, Michael. This is Gary. No, to your last question, there's not a specific channel that we would attribute this to. Overall, and overall in the industry, we've seen it in our competitors, et cetera, there is a slowdown in the movement of money. And when we think about our net flow, net flow for us are purely the money in, what we call production, and the money out, the redemptions. Like we mentioned, our redemption rate, the money going out, has been very favorable, consistent with our very high MPS scores we have with our clients. We believe once our suppliers have money on our platform, they're getting the service and the technology that's really appealing to them and helping them grow their business. What we are seeing is a slowdown of production coming in. And, you know, slowdown enough to exactly bring what you said, our net close rate down from the high single digits to the five or so that we've seen in the second half of 2022. We've seen, as we say, green shoots. That gave us the encouragement for the outlook that we gave you, which was that we believe that our net flow growth rate will be in the high single digits in 2023. And that is a process. That's a process of the market kind of opening back up.

Great. That's helpful.

I just wanted to add to what Gary said. When there is uncertainty in the market, there can be all sorts of contributions to uncertainty. Recently we had the pandemic, we had the credit crisis, times near and around elections. Advisors and their clients pause to take stock of the situation they are in, and to make sure that they're comfortable with their portfolios and comfortable with the risks that they're taking. It's a natural human response. And in my view, the best companies and the best advisors take that time to serve their clients. And in 2022, where you had record high inflation and completely unexpected and historic losses in the bond market, our advisors, because they're great advisors, were taking that time to serve their clients. As things become more certain and as investors and advisors have taken stock, then you start to see the momentum return. And you never know exactly when that's going to happen. But based on my experience, if you spend that time serving your clients is what Asimark did in 2022 and what our advisors did, you always benefit from the resurgence in interest. And so that's why one of the green shoots that Gary mentioned earlier and why we're excited about 2023. The last thing I'll just say is 2022 is a little bit of a math problem as well because your beginning period assets were inflated and the flows throughout the year were impacted by the market's decline. And so about four percentage points or so of that loss is was contributed to by just the math of the higher beginning balance relative to the flow.

That's helpful. Thanks.

I guess for a second question, getting back to the kind of spread-based revenues. So obviously bank demand for deposits has been rising. I guess maybe an update on what the spread on the floating portion of the cash might be. And if you have any update on where cash balances kind of stand today halfway through 1Q23. Thanks.

Sure. So, you know, our – I'll just make sure I give you the right number, Michael. So on a net basis for the quarter, we are just under 3.5 points, 3.5%. on our ICD program, which is the majority of the cash that we disclose every month or so. And so the cash balance at the end of the quarter was about $3.5 billion. And we earned, like I said, about 3.5% on the ICD. And so that sixth term number I gave you, which is a gross number of 4.39, is what is in excess, right? Now, as we disclose, there is a cap that we will earn about 4% on our cash. Everything above that will go certainly to the end investor. And so we are approaching that cap, but part of our process in moving to some fixed rate term is to ensure that we can maximize earnings for ourselves and, of course, our end clients. when rates return probably to more normal levels in either end of this year and into next year.

Thanks, guys. Thank you.

Our next question is from Madeline Daildian with JP Morgan. Your line is now open.

Hi, good afternoon. This is Madeline on for Michael Cho. I wanted to dig a little bit deeper on the organic investment priorities you mentioned as part of your 2023 growth strategy on slide 10. 22 was a choppy year, yet you still expanded margins quite substantially. So since 23 is still experiencing a bit of that market choppiness, I'm curious how you're thinking about the priority areas for these investments and if you're delaying or even accelerating any particular areas within the current market conditions. Thanks.

Thanks, Madeline, and nice to meet you over the phone. So as it relates to our priority investments, we're very disciplined about ensuring that our expense growth doesn't outstrip revenue growth. And as a result, we have multiple lists of potential investments we can make depending on how the year unfolds around us. If we have a great year as it relates to revenue growth, we'll expand our investments to make sure that we're investing in accordance with the revenue growth. And if the year unravels to be less positive, we make sure that we invest in what we think are the highest priority areas for our future growth. And that's part of the investment discipline. We have it at the mark. It doesn't mean that at any stage we're not investing for growth. We're investing for growth all along. It just really depends how much we want to put our foot on the gas. So in 2023, we really feel like the most important areas for us to grow and the most important drivers of growth and therefore the most important areas of investment are adhesion and making sure that we create a shared client experience between asset market adhesion. And the reason we believe that is because in doing so we expand our total addressable market by nearly 60%. We also believe that this intersection of open architecture model marketplace with more curated and diligent solutions gives advisors one place, one experience for the whole of their business versus having to manage two partnerships. That's the first area. Second area is where we know that in times where markets are choppy, taxes are extremely important. And we are going to extend the tax management services we deliver to our advisors to deliver to their clients. And we believe that this will be highly impactful because it will give advisors a source of return in their conversations with their clients. And in addition to that, it will expand the eligibility of non-qualified assets on our platform. The third area that we're investing a lot in is making sure that we have the investments on our platform that advisors and their clients need across market cycles. And so we're going to expand our fixed income offerings because right now, now that the fixed income market is healing and there's yield in the marketplace again, demand for a robust suite of fixed income solutions is expanding and expanding really materially. We're also continuing to invest in our productivity. We want to make sure that our solutions are as straight through and automated as possible to save advisors time to make sure that the services we deliver to them are accurate and that our service organization can focus on the high impact areas of their advisor's business. And then lastly, we're very, very much focused on making sure that the initial experience of an advisor with AssetMark is extremely good. And that's blocking and tackling for us. But in 2023, we're very much focused on that onboarding experience and making sure it's as smooth as possible. And then one last thing I'll just mention, because I think it's important and it's not so important for 2023 specifically, but very important across time. Asimark is going to continue to re-platform, and we're going to invest in that. Last year we changed our trust accounting system, which created a lot of efficiency and scale in our custodians. This year we're very much focused on a new billing system, which will provide advisors with a lot more flexibility in how they bill their clients. We're working on expanding the capabilities we provide through our advisor portal, eWealth Manager, which we'll be delivering at the end of this year and through the following year. And then we'll also focus on trading, which sounds like a lot, but we're going to do all of this within the 7% of revenue guidelines that we have talked to you about in previous earning calls and also this one.

Great, thank you for the detail. And then just moving to the top line of things, we've seen households growing pretty steadily in a consistent direction past few quarters. Can you provide any incremental color on what's driving that underlying organic growth, excluding adhesion, and any metrics that you can share that we better appreciate the potential AUM and revenue opportunity here?

So I'll start, Madeline. Nice meeting you. So households is a great method to look at because, again, it's not AUM-based. And so during its market volatility, including the up market in 2021 and the down market in 2022, it tends to feel like the actual progress we're making. And so the number of households is purely a function of new advisors coming onto our platform, opening up new accounts for households. as well as our existing advisors, their organic growth, and they're increasing their share while on our platform. That is growing about 15% a year is indicative of the underlying growth of the business. As markets come back or go down, the assets will catch up or lag behind the household growth, but it is part and parcel to our overall growth strategy of both MPAs, new advisors, as well as growing share of our existing advisors.

And then adding to that some capabilities that Asimark has that makes us attractive to new households that our advisors are attracting. The first thing I would just call out is we have a proven ability to help advisors serve higher and higher net worth individuals. We have a lot of training, a lot of resources, investment solutions, partnerships. that help advisors move up market. And so a good percentage of our household growth is due to that capability. We also have a proven ability to help advisors move from commission to fees. So we're there managing the money in a commission orientation to where they're outsourcing it in a fee-based orientation. And we have sample tools, training, materials, resources for advisors to use to do that. And so that also contributes a lot to household growth. We also help advisors serve small businesses. One of the reasons it's so important that we have a retirement offering. So you start with the plan part of the business and then you grow to the personal part of the investor's, the advisor's client's business. And so that contributes to household growth. And then last but not least, we also have solutions that help advisors with the next generation. of their clients. Smaller solutions or getting started solutions, that also contributes to household growth.

Great. Thanks for the clarification. Thanks for taking my questions.

There are no further questions, so I'll pass the call back over to the management team for closing remarks.

All right. Well, thank you, everyone, for joining our second quarter earnings call. We really appreciated spending time with you and look forward to talking – sorry, fourth quarter. Did I say second? Fourth quarter earnings call. We really look forward to seeing you next quarter.