AssetMark Financial Holdings, Inc.

Good afternoon, everyone, and welcome to AssetMark's third 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 third quarter 2023 earnings conference call. Joining me are AssetMark's chief executive officer, Michael Kim, and chief financial officer, Gary Zyla. Today, I'll discuss results for the third 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 Michael 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. And with that, I'll turn the call over to my colleagues. Michael, take it away.

Thank you, Taylor. Good afternoon, and welcome to our third quarter earnings call and my first as CEO. I'm excited and honored to talk to you today. For those of you that do not know me, let me briefly introduce myself and provide some perspective about why the board has selected me to lead Asimark into the future. I've been at Asimark for 13 years. and I've spent almost 30 years in the financial services industry helping financial advisors and their clients. Prior to taking over as CEO in September, I most recently served as president and chief client officer at Asimark. In that role, I led the firm's client success group, which is focused on helping advisors grow and deepening advisors' engagement with advisors. At Asimark, our mission is to make a difference in the lives of our advisors and their clients. We are an advisor-focused company. Every strategic decision we make revolves around what is the best for the advisor. Having the opportunity to lead our client success group for the last decade plus, I have a deep understanding of how advisors and their clients think about what solutions, tools, and technology they need to be successful. As a result, the leadership transition has been seamless for our teams, for our advisors, and their clients. I'm very excited to continue to set the strategic vision for the firm and to create continued value for our advisors, their clients, and our shareholders. Not only am I deeply committed to our mission, but I'm also deeply committed to our values of heart, integrity, respect, and excellence. These values define how we engage with our advisors, partners, and team members. During the first two months as CEO, I've been on a listening tour and feedback has been clear. Coupled with my previous experience leading our client success group, I want to share some perspective on my long-term focus, which I believe will enhance shareholder value. Turning to slide three, I am focused on three priorities, hypergrowth, accelerated capital deployment, and enhanced scalability. Let's dig into the details of each of these. First, hypergrowth. The team and I are maniacally focused on accelerating the growth of the business. This starts with growing net flows and the number of engaged advisors on our platform. We are committed to return to 10% organic growth and believe that our recent acquisitions, platform enhancements, and compelling outsource offering positions as well to get there. We are committed to getting to 5,000 engaged advisors by end of 2026. Let me share with you why this is so important. As you know, engaged advisors make up north of 90% of our platform assets. These loyal advisors grow faster, have stickier assets, and enjoy more of the benefits of outsourcing. If we grow to 5,000 engaged advisors, we double the size of the company. Let me repeat that. Over the next three years, we can double the size of AssetMark. Second, I'm focused on accelerated capital deployment. One of AssetMark's many strengths as a company is our ability to generate cash. It is time we start putting that cash to better use. To start, we are increasing our focus on M&A and partnerships, which I will discuss a bit later in my prepared remarks. Next, we are increasing our CapEx as a percent of total revenue to 8% to 10%, from the previous 6% to 7% run rate. This will allow us to invest more in the business, specifically into projects that drive growth and scalability. And speaking of scalability, that is my third long-term focus. Aston Mark has done a great job scaling, with EBITDA margins up over 800 basis points since our IPO, and we can continue to scale. One of many areas of focus is automation. especially in our operations function where we can remove up to $25 million of costs per year while continuing to invest in our already industry-leading service offering. I hope this gives you some insight into what is important to the Executive Committee and me as we take AssetMark into the future. I look forward to updating you on these long-term priorities during subsequent earnings calls. Now let's turn to the heart of today's earnings presentation. I will highlight our record quarter results and then provide an update on how we are executing on our strategy. On slide four, the third quarter 2023 was another record quarter for AssetMark. We ended the quarter serving an all-time high of 251,000 plus households and over 9,300 advisors, of which approximately 3,000 are engaged. Our advisors are extremely pleased with their decision to outsource to AssetMark as evidenced by our all-time high NPS of 72, which we highlighted last quarter. From a financial standpoint, total revenue was record $191 million, up 23% year over year, while net revenue was a record of $139 million, up 20% year over year. These all-time high top-line results allowed us to achieve best-ever bottom-line results. Specifically, adjusted EBITDA was $67 million for the quarter. This marks the sixth straight quarter of record-setting quarterly EBITDA, a powerful testament to our diversified revenue mix and disciplined expense management. Adjusted EBITDA margin was a record 34.9% and up 90 basis points year over year. Net income was $38 million, up 28% year over year, while adjusted net income was $46 million, up 32% year over year. Adjusted earnings per share was $0.62 in the third quarter, also up 32% year over year. Results for the third quarter were excellent, and we feel we are well on track for the best year in our company's history. Next, I want to give you an update on our strategic execution. As I stated earlier, it is important to note that our strategy is 100% advisor-focused. meaning every strategic decision we make is made with the advisor in mind. Moving to slide five, the first component of our growth strategy is to meet advisors where they are. Adhesion Wealth had another strong quarter and continues to focus on bringing on new RIA firms while expanding share wallet of existing firms. Adhesion added a total of $485 million of assets from new firms through the first three quarters of the year. Seventy-five percent of RIA firms experienced growth year-to-date, with 46 percent seeing significant double-digit growth. Adhesion added four new managers and 25 models to their platform, while adding three new Adhesion Alliance managers. In the third quarter, Adhesion was able to advance their strategic goals, specifically around building out their API toolkit and enhancing their platform with their pilot of Adhesion Tax Alpha dashboard. We are excited about the advantage that adhesion gives us in the RIA market and look forward to sharing their continued progress during future earnings calls. Turning to slide six, the second component of our growth strategy is to deliver a holistic, differentiated experience to our advisors and their clients. This quarter, I want to share some exciting news that will allow us to further penetrate the bank trust channel. First, let me provide some context. Banks are seeing increased competition from regional RIAs and wire house advisors who are competing for a client wallet share and raising the level of service model standards. Today, wealth management services are becoming integral to how banks better serve their clients, yet a well-integrated trust accounting and wealth management solution has remained elusive in the marketplace. Not anymore. I am pleased to announce that we have entered a partnership with an AccuTech company, Cheetah, to better penetrate the $600 billion plus total addressable market. Cheetah is a modern cloud-based trust accounting system built to serve the evolving needs of banks and their end clients. Together, Cheetah and AssetMarket will offer a premier integrated trust accounting and wealth management solutions that will allow banks to empower their trust officers and wealth advisors with a full ecosystem of trust accounting and investment capabilities. We plan to invest between $5 to $10 million of capital as an upfront technology investment in the partnership and expect to start onboarding clients in the second half of 2024. To highlight the potential long-term opportunity, we forecast an incremental $25 billion of platform assets by end of 2028. We could not be more excited about this opportunity. It represents Aston Mark's continued expansion into the bank trust channel an integral part of the firm's growth strategy. The third component of our growth strategy is to enable advisors to serve more investors. Let's turn to slide seven. Tax considerations play a prominent role in most wealth management activities. Nearly half of high net worth investors are looking for proactive tax planning support from their financial advisors, and studies show that tax management may improve after-tax returns by over 1%. Last month, we soft launched At The Marks Tax Management Services, or TMS, for a select group of 350 advisors. TMS is a personalized and comprehensive service that enables advisors to unlock new tax efficiencies for their clients at every step of their financial journey. This includes a tax efficient transition of assets from an existing investment strategy into a new investment strategy, ongoing tax loss harvesting, tax-efficient rebalances, and tax-efficient client direct data activity. The user-friendly service makes tax management a straightforward, efficient, and seamless process and has key benefits for advisors, clients, and Asimark. For Asimark, TMS allows us to amplify our financial wellness offering and provide increased revenue opportunity with additional fee of 10 basis points on enrolled AUM per year. We expect to roll out a national launch to all of our advisors in early 2024. Let's turn our attention to slide eight and the fourth component of our growth strategy to help advisors grow and scale their business. This quarter, I want to provide an update on our business consulting offering. Previously leading our client success group, I had the privilege to oversee our business consulting function and truly believe it is a competitive differentiator for Aston Martin. Today, I want to highlight some of the programs we have rolled out over the last year and provide an update on adoption. First is Aston Mark's marketing advantage. Since launch, it has been adopted by close to 400 advisors, which is over 150% of our goal. Second is Aston Mark's investment consulting. We have been extremely pleased with our results here as the program has been leveraged by over 45 advisors, with over $2 billion of total business commitment. Investment consulting is one of the key programs that will help us accelerate our organic growth. Lastly, AdvisorLink. We have over 100 advisors who have requested access, with the majority set up as buyers on the platform. Turning to slide nine, the final component of our growth strategy is to pursue strategic transactions. M&A is a key component of our business model, and as CEO, I'm highly committed to leveraging M&A to grow our business. I want to provide some color on what we are seeing in the market and our position. Activity is bouncing back. This past quarter saw a number of deals announced in the WealthTech space and adjacent sectors such as RA consolidation and wealth management, and we are seeing the follow-on effects in sectors of interest to Asimov. We are also encouraged by increased interest from businesses seeking a strategic partner. We're in a great position to be successful and capitalize on the warming M&A market. We have a strong balance sheet with significant dry powder and very low debt, which differentiates us from many of our peers. Our story is resonating with potential buyers. They see significant value in our market-leading footprint, additive distribution capabilities, technology, and deep corporate resources we bring to the table. Sellers see the opportunity to take their business to the next level by partnering with us. We're also developing creative ways to use our balance sheet to help advisors with succession planning and growth. We see much interest in this area and are excited about the opportunity to deepen our relationship with advisors. Overall, we are in a great position to be an acquirer, and making the right acquisitions will be crucial to achieve some of the long-term priorities I laid out at the beginning of the call. I will now turn the call over to Gary to take us through a deep dive on our third quarter results and provide an outlook on our 2023 outlook.