AssetMark Financial Holdings, Inc.

Hello everyone, and welcome to AssetMark's first quarter 2023 earnings conference call. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. Today's call is being recorded. Now, I'd like to turn the call over to Taylor Hamilton, Head of Investor Relations. Please go ahead, Mr. Hamilton.

Thank you. Good afternoon, everyone, and welcome to AssetMark's first quarter 2023 earnings conference call. Joining me are AssetMark's Chief Executive Officer, Natalie Wolfson, and Chief Financial Officer, Gary Zyla. Today, they will discuss the results for the first 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 of 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. And with that, I'll turn the call over to my colleague. Natalie, take it away.

Thank you, Taylor. And good afternoon and welcome to our first quarter earnings call. Today I want to start with a discussion of our record results for the quarter, as well as provide some color given the current market environment. I will then provide a detailed analysis of our five growth pillars, highlighting the progress we are making on each. Finally, I'll turn the call over to Gary, who will discuss our financial and operating results for the first quarter and provide an update about our 2023 outlook. Starting on slide three, the first quarter of 2023 was another record quarter for Aspark. We ended the quarter serving an all-time high 243,000 plus households and around 9,300 advisors, of which over 2,900 are engaged. From a financial standpoint, total revenue was a record $177 million, up 19% year-over-year, while record net revenue was $133 million, up 25% year-over-year. These all-time high top-line results, coupled with disciplined expense management, allowed us to also achieve our best-ever bottom-line results. Specifically, adjusted EBITDA was $59 million for the quarter, up 32% year-over-year, while adjusted net income was $40 million, up 38% year-over-year. Adjusted earning per share was $0.53 in the first quarter, up 36% year-over-year. I'm extremely pleased by these results, and I'm also encouraged by some green shoots we're seeing. As you know, we've been staying extremely close to our advisors through webinars, education, and live events. Our advisors continue to look to us for coaching and actionable ideas, not only to help their clients, but also to grow and scale their businesses. One area we're seeing improvement in is net flows. As a reminder, for the last few quarters of 2022, we had talked about pressured net flows caused by lower production relative to 2021, as money continued to sit on the sidelines because of market uncertainty. I'm happy to say that first quarter 2023 production is at the highest level since the fourth quarter of 2021, and net flows have improved sequentially each month since November of 2022. In April, we wanted to let you know that we are expecting net flows to be in line with the trend from previous years, where the tax month was lower than the first quarter average. Net flows are commonly depressed given the seasonality of tax payments in the month. As you may recall, net flows in April of last year were also impacted by tax payments, and in 2021 and 2022, net flows were impacted by the tax months of May and July, respectively. Growth production looked strong this April, and we're pleased with the net flows given the seasonality related to the month. Like net flows, in the latter half of 2022, advisors had not been moving their platform relationships at the same rate as they had historically. In contrast to this, in the first quarter of 2023, we achieved 166 new producing advisors, or NPAs, at Asimark. This was the highest quarterly total since before market uncertainty took hold in earnest in the first half of last year. In addition, March was also the best month for attracting NPAs in the last two years. Personalized consulting and service have truly resonated with NPAs who look to Asimark to help them improve their client experience and business growth and scalability. All in all, results for the first quarter were excellent, and we feel we have a lot of momentum headed into the remainder of the year. Before I turn to our growth strategy, I'm also pleased to announce the hiring of Josh Armey, who joined AssetMark last month as Executive Vice President of Corporate Strategy. Josh brings decades of experience in enterprise strategy and transformation, having most recently served as the Head of Transformation at Edward Jones. Josh will serve as a member of our executive committee and will work with leaders across the organization to accelerate our strategic growth and maximize our long-term performance. Now, as I do every quarter, I want to give you an update on how we are moving the ball forward in each of our five key strategic pillars. On slide four, you can see how we are focused on advancing our growth strategy in 2023. We firmly believe that our record results in 2022 were a testament to having the right strategy in place and then tirelessly executing on that strategy. This slide shows what we're focused on for this year. Today, I will focus on the items in bold. Moving to slide five, the first component of our growth strategy is to meet advisors where they are. In late 2022, we closed on the acquisition of Adhesion Wealth. Since then, we have been actively working with the Adhesion team on integration, cross-selling opportunities, lead sharing, and most importantly, ways to continue to help RAAs grow and scale. Adhesion Wealth had a successful start to 2023, winning new clients, building on its technology, and adding new investment models to its model marketplace. Adhesion continues to focus on bringing on new RAA firms to the platform while expanding share wallet of existing firms. This quarter, Adhesion added seven new RA firms, which brought 63 million of assets to the platform. In April, Adhesion saw one of their existing RA firms add over 100 million to the platform. From a technological standpoint, Adhesion added Adhesion Tax Alpha and Adhesion Alliance in the first quarter. Adhesion Tax Alpha introduces new ways to visualize and demonstrate the value derived from ongoing active tax harvesting in a unified managed account. It even has a long history of creating tax alpha and now has a new and exciting way to enable advisors to show the value to their clients. Adhesion Alliance, on the other hand, is a premium program for the adhesion asset manager community, providing them with advisor usage and product adoption insights. This is a valuable offering for asset managers and it underscores what is and is not working on the platform, putting the manager in a position to make better, more informed decisions while simultaneously encouraging collaboration between Adhesion and their advisor community. Adhesion also added new investment models to its model marketplace this quarter. In the first quarter, Adhesion added managed risk parity suite, dividend equity strategies, core equity strategies, focused all-cap strategies, and an ESG large cap core strategy. We are very pleased with Adhesion's start to the year, and we look forward to sharing their continued progress during first future earnings calls. Turning to slide six, the second component of our growth strategy is to deliver a holistic, differentiated experience to advisors and their clients. Here, we're focused on our continued re-platforming effort, which began with the replacement of our trust accounting system last year. By replacing our trust accounting system, we have been able to grow with scale, save time for advisors, and have faster cycle times because of straight-through processing for client requests. This quarter, I want to discuss two more ways we are continuing our re-platforming effort. First, we are rebuilding eWealth Manager, our digital platform designed to power our advisors with a range of features such as investment analytics, performance reporting, and investment proposal generation. eWealth Manager 3.0 will be a compelling data-driven advisor and investor digital wealth management experience that is reliable, scalable, and fast. It's focused on the intersection of a modern platform design with scalable and flexible architecture and compelling and intuitive digital capabilities, all supported by data analytics to create a personalized user experience. We believe eWealth Manager 3.0 will help Aftamark increase wallet share of existing advisors, attract new producing advisors, and create opportunities to serve new markets, all while we lower the cost to serve. In the second half of 2023, phase one of eWealth Manager 3.0 will launch. This phase will include more wholesome advisor insights, new and improved navigation, and a new personalized landing page experience. Subsequent phases will launch over the next two years. Second, in July, we are implementing a subscription-based billing system responsible for collection of 90 plus percent of the firm's asset-based revenue and for the collection and disbursement of advisory fees totaling over $650 million annually. Our billing services are also highly valued offering to our advisors. The new billing system will provide enhanced reporting capabilities to our advisors with automated billing processing that's highly scalable. We spent a lot of time and resources building eWealth Manager 3.0 and replacing our billing system. These are recent examples of how we invest in platform modernization and enhancements over time, all within the confines of our capital spend commitment of 6% to 7% annually. The third component of our growth strategy is to enable advisors to serve more investors across the wide spectrum, varying life stages and generations. Let's turn to slide seven. We continue to help advisors and their clients navigate the prolonged market uncertainty, including recent regional bank failures. Additionally, following last year's pain in the bond markets, we are seeing strong interest from investors seeking to lock in yields that haven't been seen this high in years. Our platform has been well-positioned with a breadth of cash and fixed income strategies to help investors address liquidity and diversification needs. Let me share with you a few examples and results from the first quarter. First, we increased the rate on our high-yield cash solution, which provides up to $2.5 million of FDIC coverage by an average of 130 basis points. Additionally, we had gross sales of $369 million in our SAVA laddered bond strategies, which provide laddered short-duration exposure to U.S. Treasury and agency securities. We have also provided timely and actionable information so that advisors were prepared to respond to their clients following the bank crisis. In fact, our bank crisis webinar was attended by nearly 700 advisors and even supported our NPA growth efforts as we added nine new producing advisors from this webinar alone. While high-quality short duration has been of particular interest, we expect more investors to add back duration and or risk as the end of rate increases our nearing. Due to our robust platform offering, we are well positioned to retain the strong inflows we've seen in this space. We are constantly evaluating our investment offerings to ensure that we provide our advisors a curious suite of investments enabling them to serve more investors across the wealth spectrum. So now let's turn our attention to slide eight and the fourth component of our growth strategy. Last quarter, I briefly mentioned our investment consulting program, and I'd like to discuss it in more detail this quarter. The new program provides select advisors direct access to the AFMARC investment consulting team for guidance in creating customized model portfolios using strategies available on our platform. The advisor comes away with a suite of investment models customized for their practice to bring efficiency to their business and a consistent client experience. The advisor is provided with a comprehensive investment analysis backed by a simple story explaining and clarifying the why behind the proposed model portfolio. All why the advisor remains in control of his or her client outcomes and their investment options. We believe this exclusive offering will be a game changer for advisors, helping them differentiate from their competition, also helping them grow and scale their business and stay meaningfully engaged with their clients. In the first three months since launch, we have had 13 advisors take part in investment consulting, of which over 50% were new producing advisors. We take great pride in our ongoing ability to help our advisors grow and scale. And as I've said before, it is why they win and why we win. 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 businesses. We have approximately $140 million in purchasing power for future M&A opportunities and are doing a great job of increasing our purchasing power each quarter because of our strong cash generation. We are proactively looking at opportunities that will benefit our advisors and their clients. As a last note, and as you may have already seen in our financials, We put up a $20 million accrual for this quarter. As we have disclosed in our SEC filing since 2020, we have been in discussions with the SEC regarding alleged incomplete disclosures relating to our past ICD program and third party custodial support payments. All alleged activities under review ceased between 2019 and 2021. After working with the SEC, we are in discussions to resolve this matter and believe that we will come to a resolution soon. Transparency and trust are paramount to asset marks and its mission of making a difference in the lives of our advisors and their clients. Because of this, we wanted to provide you with this information today. We will also provide further updates as we are able to share more and once the matter is fully resolved. I'll now turn the call over to Gary to take us through a deeper dive on our first quarter 2023 results and to provide an update on our 2023 outlook.