AMK (2020 - Q4)

Good afternoon everyone and welcome to AssetMark's Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. Today's call is being recorded. Now I'd like to turn the call over to Taylor Hamilton, Head of Investor Relations. Please go ahead, Mr. Hamilton. Taylor H

Thank you. Good afternoon everyone and welcome to AssetMark's fourth quarter 2020 earnings conference call. Joining me remotely are AssetMark's Chief Executive Officer, Charles Goldman and Chief Financial Officer, Gary Zyla. Today they will discuss the results for the fourth quarter and provide an update to AssetMark's business outlook for 2021. Following our introductory remarks, we'll open up the call for questions. We also have an earnings presentation that Charles and Gary will reference during their prepared remarks. It can be accessed on our IR website at ir.assetmark.com.

Thank you, Taylor, and good afternoon everyone. I hope everybody safe out there remaining masked in strain is productive as possible. Thank you all for joining our fourth quarter earnings call. I hope everyone is having a great start to 2021. Starting on Slide 3, we're going to focus on five key messages during our call today. I'll discuss messages one and two while Gary will cover messages three through five. First 2020 was a momentous year for AssetMark highlighted by strong operating and financial results. Second AssetMark is entering a new era of growth. Our existing growth strategy is being augmented by attracting adjacent advisors in the RIA and hybrid RIA channels. Third, Gary will discuss our organic growth which continues to gain momentum in the fourth quarter net flows were $1.5 billion, up 27% quarter-over-quarter. Next, Gary will walk us through our fourth quarter 2020 results highlighted by strong top and bottom line metrics and another record-breaking quarter for EBITDA margin. Lastly, Gary will provide some context on our financial position entering 2021 and provide an outlook for the year. So turning to Slide 4, our mission is to make difference in the lives of our advisors and their clients. During last quarter's earnings call, I shared that 2020 was our best year ever in terms of living to our mission. This quarter, I would like to take that one step further. It was also the best quarter, I'm sorry, the best year in terms of delivering strong operating and financial results. In 2020, we added $12.9 billion dollars in assets, 306 engaged advisors and over 24,000 households to our platform. We attracted 743 new producing advisors, who saw the value outsourcing to have some more. In 2020 net flows were strong and help drive platform assets to $74.5 billion at the end of the year, the highest in our company's history.

Thank you, Charles, and good afternoon to all those on the call. As Charles discussed, we are very pleased with our results for the fourth quarter and full year highlighted by a great organic growth, strong earnings and our best margin and revenue since going public. As usual, I will start with a discussion of our platform assets and then talk about our revenue, our expenses and then our earnings. Starting on Slide 8. Fourth quarter platform assets were a record $74.5 billion up 21% year-over-year. This growth was driven by fourth quarter net flows of $1.5 billion, $5.7 billion from the market gain net of fees. The improvement in our net flows quarter-over-quarter is driven by increase production while redemption rates have remained relatively stable. In December we realize the highest monthly production in our Company's history. For the full year, net flows of $5.5 million or 8.9% of our beginning of year platform assets in line in our target of 8% to 10%. Our net flows and increase each in the past three quarters as a result of our ability to efficiently and effectively transition from in-person events to virtual event while continuing to provide high level of service and our advisors of - in AssetMark. Turning to Slide 9. As we discussed last quarter, we continue to see excellent growth in our business excluding recent acquisitions. This trend continued in the fourth quarter to the full year 2020 these core net flows as a percentage of our beginning in period assets were 10.3% above our stated target of 8% to 10%. Strong net flows in the fourth quarter from strong market in December resulting in record platform assets to $74.5 billion. It gives us great momentum as we enter the New Year. We expect our first quarter revenue to be up about 8% quarter-over-quarter. Additionally, we expect organic growth to continue to be strong in the first quarter based on advisor activity metrics and our January net flows of approximately $500 million as disclosed yesterday in our January AMK report. While our core business growth is strong, we may continue to see outflows in first quarter from our acquisition of GFPC and OBS. As previously discussed, these outflows from advisors who have not engaged with AssetMark. Both deals continue to remain highly accretive to AssetMark and these outflows do not have a material impact on our economics. As you know in the past, we will be shared, disclose these items in our monthly AMK report to give investors an understanding of our core business is performing.

Thank you, Gary. And thanks to everybody on the call today. As Gary and I described, we believe 2020 was a great year for AssetMark, our advisors especially and delivered by our associate. I have never had mean I have never been more excited about our company's future. I look forward to sharing our progress in subsequent earning calls and future conferences. So with that, those are - the conclusion of our prepared remarks, I'll turn it back to the operator for Q&A.

Presenters, we have our first question from the line of Alex Blostein from Goldman Sachs. Your line is open. You may ask your question.

This is actually Ryan on behalf Alex. First one, if you could talk a little bit about AMP and I guess only adoption and the trends that you're seeing there and then how you're thinking about competition in the space, I think probably seen other tend to start to open up and just how you're thinking about that?

Ryan, Happy New Year, hope you're doing well. So AMP is Advisor-Managed Portfolios for those of you who don't know that's a product name where we're going to be providing a trading capability to allow advisors to build and manage their own sleeves. This is key for RIAs and hybrid RIAs who want to manage part of the portfolios themselves, see value in that, have sold at value but also and very importantly, understand the value of outsourcing overtime. The key there is those advisors that are overwhelmed with technology or overwhelmed - or trying to grow their business and really help their clients plan for the future. Those are the types of advisors that we're looking for. And we believe that through the folks that we've had in the product that first of all, the product works really well. We've had folks in beta test for some time and we're thrilled with the results there. But we believe through our research and through our early discussions out in the marketplace that we're going to see good growth, good growth, and we're excited about that launch. The AMI launch, the brand wrapper that I just talked about there is being more formally launched in a couple of weeks at our Gold Forum event. We're going to talk more publicly about the brand and the experience and some of the other products that are going to go along with it. In terms of competition, Ryan it's interesting if you think about where advisors are today, RIAs are buy and large, I mean the vast majority close to probably 99% managing money themselves. The core RIA approach has always been to do the due-diligence, to construct portfolios, to buy portfolio accounting, trading, CRM and planning software to gobble all that stuff together and to really do everything for their advisors. The sea change that we're seeing in the industry is that starting with the investor, the investors looking, not for those things but they're looking for planning and deep relationships. And so all that work on the back office and all that work of trying to do due diligence and everything else on everything is really not value added from the investors perspective. So our belief in our bet is that advisors are going to say, hey, I want to outsource more and I want transition using the amp capability. When we look at competition, I'm not quite sure how to think of it right there is no one doing what we're doing keeping the exact same approach but there is lots of ways that advisors can manage their own sleeves, every custodian has that offer, every portfolio accounting system does that trade over management does that. So really what the opportunity here is to move toward outsourcing and the move towards partnering and getting an integrated experience and back office and getting much more capability, much more community and that's where we think the opportunity is going to be for AssetMark.

Maybe kind of sticking with the RIA discussion, I think you had said that pure RIAs on passing on platform and growing to 100% in OpEx since 2018. I guess, is that kind of they had grown that platform - I guess the question is, have they grown assets on the platform or they had grown that books, because they were previously under resourced and being part of the AssetMark platform and sort of taken or beliefs a lot of the processes that they had to go through and giving them more time.

So it's a function of the way we grow. So the existing advisors on our platform are growing because they are bringing more assets to AssetMark. Some of that is a function of them using our high net worth capabilities, rather capabilities to gather new clients. Some of it is share of wallet growth and then of course new RIAs, new producing advisors, we call them joining the platform. So it's all of the above.

Got it.

Ryan, this is Gary. Just to be clear, it was production that has doubled over the two-year period, not AUM and doesn't change and all that the Charles is saying - the same reasons why it's growing, I just want to make sure you have current metric.

Thank you, sir. We do have another question from the line of Michael Young from Truist Securities. Your line is open. You may ask your question.

Wanted to maybe drill in a little more into the growth outlook for 2021, I know obviously the macro overlay is a bit challenging, but just as you look at sort of disaggregating that, how much are you expecting to comp from kind of the RIA and RIA adjacency versus kind of the core legacy business?

Gary, you want to do that one,

Sure. I think - so first Michael, congratulations, I understand a baby is quite imminent. So the best of luck with that and sounds very exciting. So to your question, I'm trying to figure how to how to put it. So I'm trying to convert gross stake in the production here what I'm saying. I would say in general, a growing percentage of our growth if you will, growing percentage of that 8% to 9% organic growth is coming from the RIA block now. The majority of our growth still comes from IBD rent that's our core constituency and who we serve. I don't have a breakout for you in terms of how to fit it, other than to say we are focused on growing and as we talk more in detail in the upcoming quarters about AMI, when Charles is talking about we will start talking in more, some more metrics about what's coming from that group which is RIA subset versus what you might call that the larger IBD metric.

Gary, I would just add to that a little bit that, when we talk about the RIA segment, the hybrid segment, the IBD segment, everyone uses those terms because there some differences I guess that are important to think about and certainly the language and the communities are different, segments has some different growth dynamics. But what we would expect to see is fluidity as more people go more toward independent as people join producer groups or OSJ groups that are hybrid. We'd expect to see fluidity by registration. Today, our assets are about 15% hybrid or RIA - wholly RIAs that combination. The production numbers I gave a few minutes ago. What I would expect to see as we launch into this endeavor with amp, which is an AMI, which is new for us, allowing advisers to do that work on their own, on our platform. We'll see what that growth rate looks like and how quickly that growth rate is. I think right now, when we look at our 8% to 10%. It's really looking at the base of our advisors. It's looking across registration. It's looking at kind of the history that we've had, how big the beginning year it's obviously ratio rates at the beginning of year number is, it's how long does COVID last I mean there are so many dimensions in there that are going to drive that performance way more than registration. So there is not some hockey stick, RIA growth in that number. It's really based on the kind of history that we've been able to deliver. And what we've been able to deliver in this tough macro environment.

Yes understood. So the core message is just more optimism kind of on a year-over-year basis organically and we'll see if we look at the high end, low end of that range based on macro and various adoption characteristics?

Totally right. So we're not, we're not forecasting some kind of weird number right, we did 8.9% in 2020 to a 10 If you just look at the core business without some of the M&A stuff noise in there. And this year 2021 obviously with a fantastic fourth quarter in December, market resulted and December was toward market environment, the beginning period asset number is really high at $74.5 billion because of market return. So to get that 10%. The higher end, it's somewhat a function of that. Right. So to get to the higher end what we're going to have is outstanding performance within our core market, you saw our January results, very strong. And then what we're doing in new markets RIA and hybrid and then of course, new products and new capabilities being added all to support to get to that 8 to 10 number and we think that's a very good result.

Okay. And just maybe as a second question just on the EBITDA outlook, I mean I think that's very strong and looks very positive. I'm just curious if there is some maybe lessons learned or new business implementation strategies that you've kind of discovered through the pandemic and operating in a work from home environment domestic that's helping support some of that?

Yes, it's a great, great question. I think every executive. I want to say, every industry, but I'll certainly see Financial Services has learned a lot about operating in different environment. So first of all, we've all figured out that we can travel less and be much more productive. Now that doesn't mean we want to travel. Not at all. Right. We want to be back out in the field, we will live events, but we've learned that we can be much more productive than we thought, by not having to drive around and all the rest of it as much and that's going to stick forever. I think another thing that we've learned is that in events and we are a very event in contact based company clients like getting certain kinds of content remotely. So if it's investment content or things that they are trying to digest, but don't really require community engagement - discussion with other advisors kind of closer work. It's a much better way to deliver it we assume it just works really well. So I mentioned earlier, our premier advisor meetings the - meetings that we had in the first quarter here. We can do that content in much shorter time and if you live in - from Los Angeles can grew up. If you have to drive 30 miles from Los Angeles, you're talking about an hour and half probably in the car each way. And so for delivering investment return content that kind of thing. It's really easy to digest this way. And so one of the things that will stick is will deliver much more content that way we will do a much more regular smaller group content and community that way. And then when we're out of the field, it will be much more about interaction and I think that will stick. And that, by the way is much lower cost. The other thing I want to just mention one more but that we've learned is that we can recruit attract and recruit and hire people that are remote and that are happy living where their living have great experience or great cultural fit. I mean, that also is a big productivity enhancer may not be a cost per person in enhancer, but you get highly trained great people. I mean you're not constrained by the geographies in which we live, so there is a lot of changes that are occurring because of COVID, COVID obviously a disaster or a nightmare but there is a lot of learning there that I think it's going to make our business better and as well as many others.

Our next question comes from the line of Christopher Shutler from William Blair. Your line is open.

Charles, looking out over the medium term, what are the main technology items that you want to invest in, especially as you move more into the RIA world?

Thanks Chris. Good to talk to you, sir. So you mean advisor facing not back office and all that subject?

Exactly, yes.

Yes, so the theme the thematic approach is financial wellness and I know we've talked about it, but our view of financial wellness is really three elements to it, one element is planning and the visualization of planning. We've launched partnerships with some of the major planning firms. We believe that incorporating planning whether it's Monte Carlo deep cash flow planning, a scenario planning, or more importantly the visualization on to one page a simple visual view of the investors like their goals, the risk, the likelihood of meeting that success integrating that experience into e-wealth manager and into the entire advisor compensation is job number one. Job number two, which is somewhat broader, it's more complicated than the other. But the way we deal with risk in our industry as we basically ask people what your risk tolerance. Can you take a 20% drawdown of what period of time? You know the story six-eight questions, but that's not the way human beings think about risk and about portfolio, there's really three concepts that we need to think about. One is that your risk tolerance. The other two are risk needed and risk capacity. So tying back to that visualization of planning of that sort of one-page, here's my life or what's my risk need. How much risk to a need to take? Maybe I need to take a lot less or maybe I need to take a lot more and then of course there's capacity, if I'm 20 years old Google employee making $200,000 a year, my capacity to take risk may be huge, my need maybe large, because I want to have an airplane. But my tolerance may be low. And if you think about the way that interaction works in the visualization of that dialog and then of course the compliance issues, integrating that experience into e-wealth manager to make that conversation automated is the second part of wellness for us. And then the third part is portfolio construction and proposal and you've heard me and us talk a lot about portfolio engine, our portfolio construction tools and you've heard about our new proposals and integrated other elements of proposals and visualization of income and all these other things. So if you think about financial wellness in the individual tools in there, that's where we're investing from an advisor facing technology perspective and it's going to be a multiyear investment.

Got it. Okay, super helpful. And then can you give us an update on capital allocation, how actively you are looking at M&A right now. And let me just remind us what's most interesting to you, is it more capability types of deals or consolidating deals.

Yes, happy to do that. So we remain very focused on M&A, we connect me personally, some of our key team members are ahead of Corporate Development. We are connected across the industry and we love seeing deal flow, I think we have great relationships and get to see a lot of deal flow. Our strategy is pretty straightforward it has two - strategy, number one. By the way number one is not more important than number two but just saying in that order. Number one is consolidation, the deals that we've done have all been consolidation deals, those deals aren't as prevalent as they once were. There is still quite a few smaller players out there, if we think will move the needle. If we think they can be accretive, if you look at the ones we've done recently, we were able to buy them for very, very attractive multiples for our investors. And on the other side of it there is relatively small and the relatively complicated deals. And so, we'll keep looking at those is always a trade-off between what do you have to pay and how complicated is it to get it done and does it move the needle. But that's consolidation on the capabilities side, we are spending a lot of time and effort there, if you heard my description and you do Chris financial wellness. You can imagine the suite of tools that are out there - that are either tools are businesses that do some of those things and how they might integrated into our platform. We look at all that thing across the entire kind of wealth landscape. And as you know, deals are sooner difference to get them done, they're all competitive and multiples are nose bleed on the capabilities side. So will be disciplined, but we will look at a lot of things on that capability side and hopefully get something done.

Thank you, sir. We do have another question from the line of Patrick O'Shaughnessy from Raymond James. Your line is open.

So we continue to see a lot of consolidation in the independent broker-dealer and RIA space and it seems like it's even picking up of late. Can you talk about what that means for AssetMark and does it make things harder for you to increase opportunity or is it kind of irrelevant.

Patrick, good to hear your voice, so consolidation and is one of the major trends we I'm pretty sure one of the calls, we talked about investor trends, advisor trends, industry trends and regulatory trends. Those four big trends are the ones we're watching and consolidation across financial services either a fine growth or to drive lower cost scale our major, major competitive environmental issues that we're paying attention to. On the RIA side it doesn't matter, the number of deals that are actually happening are low. So if you RIA consolidator obviously matters a lot to. But for us there, there is 300,000 advisors, there is 16,000, 18,000 RIAs something like that. There's just a lot and there is a lot of sub-scale RIAs out there, there is a lot of these groups of hybrids that we call producer groups some people on OSJ groups, but these produce groups is a lot of those are there form, and those are big opportunities for us. And so we're excited about what we see there. On the broker-dealer side, it's interesting, it's both opportunity and threat, like I guess many things in life. On the opportunity side as these broker dealers get larger and larger the community, the connective tissue for many advisors isn't there anymore. And they seek that connective tissue and we are able to provide that very high level like - experience that is just hard to do, hard to do a scale and most others don't do it. And so that's an opportunity for us. In addition, as some of these broker-dealers come together, we're actually quite excited about partnering and helping those broker-dealers find ways to help - move advisors from commission to fee from managing their own money to outsourcing and while most broker dealers on the larger side, the consolidated ones would prefer them on their own platform. They also recognize that there independent advisors for a reason. And having a scaled provider that does really good work and supports and wants to be a partner is very helpful. So those are all real opportunities for us. On the threat side with anything else as these folks get larger and larger there of course investing in capabilities, because they want to grow and they want to find revenue sources in a world where they've got killed on spread, they've gotten killed on product internal revenue sharing the grid is tougher and tougher. So adding capabilities TAMP type capabilities is something a larger firm might like to do and so that makes them better makes and more competitive in that, of course, I am a last three quarters full guy, believes to make us better because we've got to get better to win, and so that threat of investment is there. The other opportunity, I would say, related to that is, you're seeing this bifurcation or multi-model set of broker-dealers out there were many don't have the money to invest to build their own platform to bring in outside technology to do that and we see a real opportunity, particularly, we're adding things like and - other capabilities to be that provider for some of these other broker dealers, we think that's a real opportunity. So, Patrick, like all things, right. We see the world is full of opportunity big TAMP, great growth dynamics, but increasingly competitive to make us better as well.

Yes, appreciate that insight. And then, as we're thinking about your portion two or RIA space with a little bit more gusto here, can you talk a little bit more about how the need to RIAs differ from the needs of independent broker-dealers and what different functionality, that's going to require from your platform.

Yes. So when you say independent broker deal, assuming that the advisor. Right?

Correct.

Independent broker revenue. So at the highest level the difference is or not, are not much, right, so most IBD reps that are advisors right that are there, is there are not on commission. Right. So let's say, okay, there's many that are still on commission has many that are still selling the life insurance. That's a big difference. Right? But for those advisors that are fee-based and are really thinking about advisory, managing their own in the IBD world, RIA in the - world construction mutual fund portfolios. There's not really much difference. The RIA has much less support then the IBD because the IBD itself, the broker-dealer is providing many more platform services and compliance, where the RIAs do everything. And so while at the highest level, that the sort of I'm helping client - time a plan or I'm doing it with fee-based approach, those are the same, the RIA has very little support and help. And so we believe that the opportunity to bring that support and help to bring more outsourcing tools, more practice management, more community. All those things are going to create real opportunity. We actually think the needy greater there. Although the history of who is outsourcing, who has not as been different, so that's the biggest difference. The other thing I would just add is that for an IBD Wrap they can use their own platform at the broker-dealer to trade staff if they want to do it and then outsource to us for our capabilities of the share of all discussion. For most RIAs, they are trading custodian and using their own tools, to sell or buying, trade order management and we don't - for most of them to say, hey, start using a platform like ours for your high net worth, it's just not in their mindset to do that. Their mindset is much more about how do I bring my book there, how do I make my life easier completely and so amp is what we believe the Advisor-Managed Portfolio allowing them to manage the fleet is really critical, really critical time for the way that advisor thinks about value added.

Thank you, sir. We do have another question from the line of from JPMorgan. Your line is open. You may ask your question.

Often times financial services can have a number of conflicts of interest and these conflicts of interest can vary pretty significantly depending on the firm as an example. It seems like an advisor solution using products affiliated asset management arm could create a comfort that would file disclosure. Can you help us understand the most significant conflicts of interest at AssetMark and how do you think about the framework to address and mitigate these conflicts of interest.

So let me give a little bit of structure in that answer first, and then try to dig in a little bit. So at AssetMark our relationship with the advisor is one of them - we're a service provider, so we don't supervise the advisor, we're not - the advisors not affiliated with us in any way. The advisor is choosing us hiring and firing us based on the competency of our solutions and the quality of our work. So there is not a, like a natural conflict of interest, like if I'm affiliate with a broker-dealer and the broker-dealer making money in the products and therefore somehow I'm making money on the product even if I'm not getting that trail, that's a conflict of interest that you're describing. For us, we don't have that right, because the advisors charging their fee, we're charging our fee and there are fully disclosed the client, and they are completely different. We're not paying or doing anything like that. So, there isn't that conflict of interest. Where we see conflict starts it with our field force. What we would hate to have is a field force that is incented by product revenues. So we pay our field force as our consultants in the field as a percent to goal. And so they have asset base goals and they don't care if it's something we make money on, lose money on, make a lot of money, they don't care. They are focused on the advisor and they are on the advisor side of the table. So we try to avoid any conflict there. Obviously in our mutual fund family and all that stuff there all the mutual fund rules and everything, and we do I think a very good job of avoiding that conflict as well. So, Gary, I don't know if you'd add anything to that but I think. I think the very fundamental structure of our relationships are very helpful in that.

Yes, I just echo your point that our position in the value chain and our structured being the outsource provider does eliminate a lot of the things you would hear about because again we, I guess a service provider and also you're absolutely right Charles, we pay our sales folks percent the goal, regardless of the assets are coming, and we do learn, customers does earn different amount based on different types of products, some of them, we make some new our third party vehicles and whatnot. So that's a reality. But we're not directing anything there, since we feel great about that center.

And then Charles, I want to go back to a comment you made, I think in response to Patrick's question about selling the AssetMark platform to broker dealers that are potentially sub-scale. Is that initiative that's currently underway and we could see the fruits of that near term or is that a longer term potential options for your business.

I'd say, more of the latter, will - we have a strategic accounts team that we've had for many years that are very focused on broker dealers that their full job, full time job. We've brought in a new leader of that group say six months ago - could have been three, could have been nine months ago, and he has got a great history in this space and if he is thinking through the strategy there and as we're thinking through opportunities what we're seeing with this consolidation back to that question about the IBDs is kind of a - as I said a bimodal or at least, at least two maybe four different kinds of broker-dealers out there, the big ones certainly can afford to invest, the small ones certainly cannot. And so the question really is, what's the value proposition of those smaller ones do they need more closer partnerships or can they kind of go on the way they have been going on just kind of offering, a lot of different things and we think that that's changing and that they're going to need more value added, and they're going to need to partner to do it. And while we don't sell instances of AssetMark like competitors that are selling to the broker-dealers and instance going technology it would still be AssetMark as AssetMark is but it would be a closer alignment. And so we're not at a place where I would say you're going to see some kind of big hockey stick return this year, but we do think that trend and when I was answering that to Patrick's point, it was really more about trending in the industry and sort of what's going to, we see that as an opportunity.

There are no further questions from the line presenters. You may continue.

Great, so thanks, great questions as usual, hope everybody got what they need from the call today. We really appreciate your time, your engagement, and we're excited to spend this time. So we'll talk to you all soon. Thank you.

Bye-bye.

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you for participating. You have a good day.