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Edited Transcript of AMK.N earnings conference call or presentation 28-Aug-19 9:00pm GMT

Q2 2019 AssetMark Financial Holdings Inc Earnings Call

Sep 12, 2019 (Thomson StreetEvents) -- Edited Transcript of AssetMark Financial Holdings Inc earnings conference call or presentation Wednesday, August 28, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles George Goldman

AssetMark Financial Holdings, Inc. - President, CEO & Director

* Gary G. Zyla

AssetMark Financial Holdings, Inc. - Executive VP & CFO

* Taylor John Hamilton

AssetMark Financial Holdings, Inc. - Head of IR

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Conference Call Participants

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* Alexander Blostein

Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst

* Christopher Charles Shutler

William Blair & Company L.L.C., Research Division - Research Analyst

* Kenneth Brooks Worthington

JP Morgan Chase & Co, Research Division - MD

* Kevin Damien McVeigh

Crédit Suisse AG, Research Division - MD

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Presentation

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Operator [1]

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Good day, everyone, and welcome to AssetMark's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) 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.

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Taylor John Hamilton, AssetMark Financial Holdings, Inc. - Head of IR [2]

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Thank you. Good afternoon, everyone, and welcome to AssetMark's Second Quarter 2019 Earnings Conference Call. With me today are AssetMark's Chief Executive Officer, Charles Goldman; and Chief Financial Officer, Gary Zyla. Today, they will discuss the results for the second quarter and provide an outlook for AssetMark's business in 2019. 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.

Before we get started, I would like to note that certain statements made during this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only at the date of this call. Actual results could differ materially. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. Further information on these and other factors that could affect our financial results is included in filings we make with the SEC from time to time, including the section titled Risk Factors and our Registration Statement on Form S-1 filed with the SEC in connection with our IPO, all of which can be found in our website.

Additionally, during today's conference call, we will be discussing net revenue, adjusted EBITDA and adjusted net income, all of which are non-GAAP financial metrics. These non-GAAP metrics are not calculated in accordance with GAAP and may be calculated differently than similarly titled metrics presented by other companies. A discussion of why we use non-GAAP financial metrics and quantitative reconciliations of adjusted EBITDA and adjusted net income to the most directly comparable GAAP measures are available on our press release and our quarterly report on Form 10-Q for the quarter ended June 30, 2019, both of which can be found on our Investor Relations website.

And with that, I'll turn the call over to my colleagues. Charles, take it away.

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [3]

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Wow. Thank you, Taylor. It is really awesome to have all of you on the phone today for our very first, our very first quarterly conference call as a public company. Thank you.

It was great to meet many of you during the course of our IPO road show in July. Gary, Taylor and I look forward to getting to know more of you as we attend investor events, industry conferences and hold future earnings calls. Our IPO in July was a tremendous milestone for our organization, and we are indeed excited to be a public company.

Before we begin, though, I'd like to extend a special thank you to our passionate and dedicated over 700 associates who do an incredible job serving advisers every day. I'd also like to thank the nearly 7,900 advisers who are on our platform. We enjoy serving you and making a difference in your lives and the lives of your clients. Lastly, thanks to the firms and individuals who have invested in AssetMark, and thank you for joining our call today.

So starting on Page 3. We're going to focus on 5 key messages during this earnings call. First, given that many of you are new to our story, I wanted to take just a little bit more time on this call to provide an overview of our company's history, mission and strategy. Second, I'll spend some time discussing the current market opportunity and some of the broad industry trends that we are watching. And finally, Gary will cover messages 3, 4 and 5, looking at the quarter's financial results, which are highlighted by all-time high in platform assets, strong top and bottom line growth and the acquisition of Global Financial Private Capital.

So on Slide 4, I want to spend some time discussing AssetMark's history, our mission, strategy, values and culture. I think most of you know that AssetMark was founded in 1996 by financial advisers for financial advisers. Three advisers were working together and realized that they did not have the skills, technology or time to deliver world-class solutions on their own. Because our founders were independent advisers themselves, they saw this megatrend towards independent advice that drives our industry to this very day.

They realized that for the independent adviser movement to grow, advisers would need to build capabilities and scale and -- or find those capabilities through other providers. At that time, few providers existed, so they've decided, as many entrepreneurs do, to build a TAMP, build that capability themselves. While our company has grown to nearly 7,900 advisers and 700 employees over those last 23 years, our mission has remained the same: We are dedicated to making a difference in the lives of our advisers and their clients.

To accomplish that mission, we are focused on a consistent strategy defined by 3 differentiating strategic pillars. First is our fully integrated and compelling technology platform. Our technology suite fully integrates our core proprietary technology with third-party tools that help advisers get things done more efficiently and effectively, which allows them to spend more time with their clients. This fosters deeper adviser and client relationships, which in turn contributes to greater loyalty and more assets on our platform. We believe that our technology is a key differentiator and serves as a competitive advantage amongst our peers.

Second, we deliver personalized and scalable service. Our advisers are in the relationship business, so we're in the relationship business. We have over 100 people in the field, 200 service professionals and a dedicated business consulting team. Almost half of our employees are adviser-facing, with the sole mission of making a difference in the advisers' business and the lives of their clients.

Lastly, we provide a holistic and curated investment solutions platform. Our focus on asset management begins with the client. Our products and those of our partners are easy to understand and use. They are built with the adviser and the client -- and their client in mind. We perform careful due diligence to help ensure we offer a wide range of well-suited products to help our advisers' clients reach their long-term goals. Investing in these 3 strategic pillars supports our mission and differentiates us in the market, resulting in strong organic growth.

Our company is also guided by 4 key values: heart, integrity, excellence and respect, which define how we engage with our clients, partners and employees. And we deliver these values through a very strong focus and culture of compliance. I know a lot of companies promote a culture focused on the client, but we believe our financial results, that organic growth, our Net Promoter Scores, our consistent dialogue with our advisers demonstrate that we truly are 100% client-focused.

Turning to Slide 5, I want to spend just a few minutes discussing the industry and secular trends that are propelling our business forward. I think you all know we operate in a very large and growing industry. We -- while we have experienced tremendous growth over the last 23 years, we also have a lot of opportunity in front of us.

At the end of 2017, U.S. households had nearly $100 trillion, that's trillion with a T, in net worth. Over $20 trillion of this wealth was managed by financial advisers, and these assets have grown at a compound annual rate of 9% over the previous 5 years.

Not only is the demand for financial advisers increasing, but advisers are transitioning to an independent model, and we expect this trend to continue, with independent-advised assets growing from $8.4 trillion in 2017 to $12.1 trillion in 2022, as you can see on the graph, from 42% to 48% of total adviser-managed assets.

Additionally, there has been a dramatic shift from commission- to fee-based pricing models over the last decade. In 2018, advisers received 67%, 67%, of their total revenue from fees, which is marked at an all-time high and up from 40% in 2013. This shift has been driven by the long-term adviser trend towards a fiduciary standard of care. This trend is a major driver of growth for AssetMark because we are a -- we serve fee-based advisers who are independent, serving clients in a fiduciary model.

This is a large and growing market that has tremendous tailwinds. We believe that our current offering and growth plans are well positioned to capitalize on these favorable industry trends.

Turning to Slide 6. In August, we released the findings of our impact of outsourcing study, which you can find on our website. I want to call out a few key statistics from that study.

First, 68% of advisers surveyed say outsourcing delivers stronger client relationships, and 67% experienced increased rates of new client acquisition because of outsourcing. Second, 98% of outsourcers surveyed believed that they delivered better investment solutions due to outsourcing.

Lastly, 77% advisers who outsourced experienced an average of 27% growth in AUM, and 67% experienced 17% lower operating costs. In other words, outsourcing works, and we are in the outsourcing business.

On Slide 7, I want to briefly touch on the 5 key areas we are focused on to accelerate our growth. First, we're focused on growing the number of advisers by building new independent adviser relationships through marketing and sales outreach. Second, we're working to expand wallet share from our existing advisers as we help them consolidate their operations on the AssetMark platform. Third, we are focused on helping advisers grow their businesses. We help advisers grow through deep business consulting engagements and comprehensive platform support. We believe this increases engagement and loyalty and makes assets on our platform stickier, leading to lower redemptions.

Our fourth tenet for growth is to expand to new segments. We are focused on enhancing existing and introducing new products and capabilities to better serve the RIA market and to deepen adviser capabilities across segments in the retirement and high net worth areas. We look forward to providing progress on these initiatives on subsequent calls.

Lastly, we plan to continue growth through strategic acquisitions. Pursuing those that we believe will enhance scale and operating leverage is our goal. The second quarter was a great example where we closed the GFPC acquisition which added $3.8 billion to our platform. Before I hand it to Gary, I want to discuss a few broad-level thoughts on the macro and regulatory environment and how those issues affect our business.

As we all know, we're seeing a return of volatility in the equity markets. A combination of trade uncertainty, weak economic data in China and Germany, and instances of yield curve inversion have all raised investor and adviser fears. Although uncertainty persists in the equity markets, we continue to realize strong net flows, a testament to more and more advisers looking to outsource their investment needs and leverage our carefully vetted investment solutions. As widely expected, the FOMC lowered the Fed funds rate target by 25 basis points in late July. We expect 1 more decrease later this year.

Gary's going to provide more color on the impact of these macro environment issues on our financials. And I want to remind everybody that we are not in the forecasting business. We believe markets over the long term will grow, and we build our business to invest in the platform through cycles.

Turning to the regulatory environment. We are seeing continued focus by regulators on the cost of investing. We are strong supporters of a fiduciary standard of care and support bringing better value to investors in our work each day.

For AssetMark, our focus has been to bring investment products that meet investor needs at the lowest possible cost. For example, of our third-party mutual fund closed in the first half of the year, 62% have gone to institutional shares. We expect growth of our institutional mutual funds, ETFs and individual security solutions to accelerate while the total amount of retail-class mutual funds on the platform should decline over time.

While neither we nor anyone knows with certainty what the future macro or regulatory environment will look like, we will continue to bring investment solutions to advisers that are designed to meet investor needs and preferences. And we'll continue to invest in our platform to drive organic growth.

I don't want to steal Gary's thunder, but I would be remiss not to mention that we are pleased with our second quarter results. We delivered strong financial and operating results and ended the quarter with $56.1 billion in platform assets, which are an all-time high. We experienced double-digit year-over-year growth in net revenue, adjusted EBITDA and adjusted net income while adding over 500 new advisers and 30,000 households in the last year.

So with that, Gary, let me hand it over to you to go over our second quarter results.

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Gary G. Zyla, AssetMark Financial Holdings, Inc. - Executive VP & CFO [4]

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Thank you, Charles, and good afternoon to all of those on the call today. I would like to echo Charles' earlier comments. It was a pleasure to meet many of you on our road show, and I look forward to meeting many of you in the future.

Today, I'm excited to talk about AssetMark's business model and quarterly results. Each quarter, I will follow a similar outline as I walk you through our financial results. We believe following this outline will give you a good understanding of how our business model works, what drives our results and how different components of our business fit together with each other.

I will start with a discussion of our platform assets, then talk about our revenue, expense adjustments and then our earnings. From there, I will discuss our balance sheet and other key financial highlights.

So let's begin on Slide 8 of our earnings presentation. We have experienced robust growth in our platform assets over the past 5 years, realizing a 19.9% CAGR and an increase in platform assets in 19 of the past 20 quarters. The second quarter of 2019 was no different. We grew platform assets 23.8% year-over-year to $56.1 billion, marking an all-time high for AssetMark.

Turning to Slide 9. During the second quarter, we had net flows of $1.5 billion and realized $1.1 billion of market gain, net of fees, and added an additional $3.8 billion of platform assets from our acquisition of GFPC, which closed in April. This marks the 26th consecutive quarter where we have had positive net flows and the ninth consecutive quarter with net flows over $1 billion.

Through the first half of 2019, our net flows were an annualized 13% of our beginning-of-year platform assets, well ahead of our long-term target of 10%. When we think about our $1.5 billion net flows, about 2/3 came from engaged advisers, defined as those with over $5 million of assets on our platform, while 1/3 came from new producing advisers, defined as advisers who have been on our platform under a year. In the second quarter, we added 280 new producing advisers, and year-to-date, we have added 478 new producing advisers, which is 6% more than the first half of last year.

As of June 30, we have had -- we had nearly 7,900 advisers on our platform, of which 2,125 were defined as engaged advisers. Our engaged adviser count constituted 26.9% of our total advisers, up from 24.9% in the second quarter of 2018. Engaged advisers represented 88% of our platform assets. We are pleased with these results as adding new advisers to our platform and expanding share of wallet from existing advisers are key tenets of our growth strategy.

Our $56.1 billion of -- in platform assets at the end of the second quarter provide us a strong basis for our third quarter revenue, which was billed in early July. As a reminder, we bill our quarterly platform fee in advance each quarter based on the prior quarter's ending assets. For context, in July, we collected over $80 million in platform fees in advance, which is approximately 80% of our expected asset-based revenue for the next quarter. The effect of this billing process minimizes the impact to our revenue of market fluctuations within the quarter.

Now let's turn to Slide 10 to discuss the quarter's earnings. And during the second quarter, our assets were $49.7 million, leading to a reported revenue of $104.5 million, up 17.7% year-over-year. As discussed, we focus on our revenue net of related variable expenses.

For the second quarter of 2019, our net revenue of $71.3 million was up 19.5% year-over-year and is composed of 2 main components: asset-based and spread-based net revenue. Asset-based net revenue was up 14.9% year-over-year to $62.6 million driven primarily by the growth in our platform assets. Asset-based net revenue accounted for 87.9% of total net revenue in the quarter compared to 91.4% in the second quarter of 2018.

Spread-based net revenue is the interest we earn on client cash held in our proprietary custodian. In the second quarter of 2019, we realized $7.2 million of spread-based net revenue, up 68% year-over-year. The increase in spread-based net revenue was driven by higher cash balances, which contributed approximately 1/3 to the increase; and increased interest rates, which contributed approximately 2/3.

Spread-based revenue continues to grow as a component of our total net revenue, accounting for 10.1% of total net revenue for the quarter compared to 7.2% in the second quarter of 2018. Our client cash at the end of the second quarter was $1.5 billion, on which we received a blended annualized net yield of 2.08%.

Our net revenue yield on total platform assets for the second quarter was 54 basis points, in line with our expectations and down 1 basis point from this time last year. The decline was driven by a 2 basis point decline due to the addition of GFPC assets, offset by a 1 basis point increase in yield from our core business.

To further clarify, the $3.8 billion of GFPC assets added in April yielded a blended 28 basis points of net revenue. This is lower than AssetMark's core business primarily due to 2 reasons: first, the GFPC business is custody-ed at third party and not at AssetMark; and two, $1.2 billion of GFPC's platform assets are what we call adviser-managed, which yield nominal revenue to AssetMark.

Now let me take a moment to add to Charles' comments in the current market and interest rate activities so far in the third quarter to put into context our near-term revenue impact. Through last Friday, August 23, the S&P was down for the quarter, 3.2%. For context, the market impact on our assets, net of fees, has been about 1.5%, close to the 0.5 beta we use as a rule of thumb.

As noted earlier, equity market fluctuations in July and August will have minimal impact on our third quarter revenue due to our billing in advance. That said, we are responding as we always do to market downturns by carefully adjusting our expense growth to help ensure that we maintain our margins given a likely slower growth revenue in the fourth quarter of 2019.

We are focused though on continuing our increase in market share, as evidenced by our organic net flow growth. We will not sacrifice growth for margin, but we believe we are adept at managing towards those outcomes. Specifically, we will continue our strong capital investment in technology and capabilities which is a prime driver of future growth. Regarding interest rates, we expect an additional rate decrease in September, but do not expect it to have a material impact on our earnings in 2019.

Before turning to earnings, let me run through our adjustments to earnings in the second quarter. We added back a total of $16.3 million, which is composed primarily of 3 items: first, $5.0 million in expenses associated with our acquisition and integration of GFPC; second, $5.1 million of amortization expense related to our 2016 sale to HTSC; and third, $5.2 million of noncash share-based compensation.

Speaking of the share-based compensation, I want to call everyone's attention to the fact that as a result of our IPO, we will incur over the next 2-plus years a $113 million noncash charge for the restricted stock awards granted in 2016. These costs will be amortized over the remaining vesting schedule of the RSAs. In the third quarter of 2019, we will expense $10.1 million. We will then straight-line amortize $12.4 million per quarter through October of 2021. These numbers do not include new ongoing share-based grants, but those will be broken out separately moving forward.

Now let's talk about our earnings for the quarter. We view adjusted EBITDA as an important measure of our company's health. For adjusted EBITDA, we added -- add back share-based compensation, IPO readiness, reorganization and integration costs and the expenses related to the acquisition and integration of GFPC. Our adjusted EBITDA was $28.6 million for the second quarter of 2019, up 29.2% year-over-year, reflecting strong year-over-year growth in our top line and improved margins.

Adjusted EBITDA margin for the quarter was 27.4%, up from the 24.9% margin in the second quarter of 2018. The 250 basis point year-over-year margin increase is driven by 3 items: first, our core business is scaling; second, the acquisition of GFPC; and third, a shift to less expensive vehicles which reduces our asset-based expenses. For further context, our year-to-date adjusted EBITDA margin was 26.3%.

Our adjusted net income for the second quarter was $16.6 million or $0.25 per share, an increase of 10.2% year-over-year. Adjusted net income includes the same add-back as adjusted EBITDA plus acquisition-related amortization.

Now let's look at the reported second quarter balance sheet. We continue to be focused on growing the business and believe our balance sheet positions us well to support our strategic objective to grow at scale.

First, let me discuss capital expenditures, which represents the long-term investments that we make on an annual basis. Capital expenditures reflect investments in technology, the development of new products and services, and other intangible assets but also include investments in property and equipment such as technology and support and office space. For the second quarter, our capital spend was $5.9 million. Year-to-date, our capital spend is 5.4% of our revenue, in line with our expectations.

Now turning to cash. We ended the second quarter with $65 million in cash. Our cash position was impacted by a $36 million cash spend in conjunction with our recent purchase of GFPC. Our cash serves as a position of strength, and we are confident that over the next 12 months, our cash and liquidity needs will continue to be met by cash generated by our ongoing operations.

Following quarter-end in late July, we paid down $125 million of our term loan debt using our IPO proceeds as well as cash on hand. This leaves us with about $124 million of outstanding debt and makes our net debt coverage ratio about 0.85x our 2018 adjusted EBITDA. Additionally, our -- as a result of our IPO, the rate on our term loan has decreased to LIBOR plus 3.25% from LIBOR plus 3.5%.

Before I end, I want to point you to Slide 11, which includes deal highlights on our April acquisition of Global Financial Private Capital as well as the impact GFPC had on our financials in the quarter. This summary should make transparent the impact of the acquisition on our key metrics for the quarter.

Now I'll hand it over to Charles to provide some concluding remarks.

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [5]

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Thank you, Gary. Appreciate that. Before we go to Q&A, I just want to thank you all again for joining the call. We really, really appreciate your time.

The second quarter was a great one for AssetMark, and we delivered solid results and continued to execute on our strategy focused on our clients. I'm proud of our team and what we've accomplished. I'm really excited about the future.

So for -- that is our prepared remarks for the day. I'll now turn it back to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Ken Worthington from JPMorgan.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [2]

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I guess first, with the successful public offering last month, do you think going public has improved your profile within the wealth management community? And has either the number of conversations you're having or your sales force is having with potential advisory clients changed in any noticeable way?

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [3]

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Ken, it is Charles. Great to have you on the call. Thanks for joining.

I would tell you more subjectively an answer to that question. Our profile definitely has been enhanced. We've had many great conversations with existing advisers who are quite excited about the transparency that we provided, the success of the IPO, the brand value that, that creates, their ability to point back to a more -- obviously, a public committee, but a more public-aware company with their clients. And so we've heard nothing but great feedback about the IPO. I think it's a little too early to say whether that's going to turn into increased growth directly, but it certainly has enhanced our brand, and that's been a great outcome.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [4]

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Okay. Great. And then maybe secondly, this afternoon, AssetMark put out an 8-K with your new contract. Any takeaways we should conclude with the release of the new contract?

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [5]

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Other than there's a new contract, that's it, Ken. I'm happy and my Board's happy to have gotten that done. As I mentioned during the road show, there's really no substantive terms in my contract. We renewed it. Easy, good discussion. We're very happy to focus on the future, so we're glad to get that 8-K out before this call so we didn't have to talk about it.

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Operator [6]

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Your next question comes from Kevin McVeigh from Crédit Suisse.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [7]

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Congratulations on the first quarter. Gary or Charles, I wonder, with the acquisition in the quarter, do you want to just remind us of what the acquisition strategy is? And again, given the public currency that you have, does that frame kind of the appetite as you think about expanding the addressable market, particularly vis-à-vis M&A?

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [8]

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Yes, Kevin, thanks for joining the call. So our M&A strategy has 2 elements to it. One element is consolidation. We are very excited to find GFPC, Clark Capital, Aris, the deals that we've done, smaller TAMPs that are subscale, that we can bring those assets onto our platform and meaningfully, meaningfully create a better experience for advisers and then clients by bringing those clients -- those advisers onto our platform.

We're able to pay a nice multiple to those sellers because often, they're not making any money or they're making very little. And then we look to bring them onto our platform in the mid- to high single digits, if we can, after cost synergies only. We think about revenue synergies, but we don't forecast those as we model these deals out. Those are for the subscale deals.

There may be some larger deals out there. We're always quite interested, and those will have different economics as those kinds of firms have different cost structures themselves. But we're very interested in consolidating deals of all sizes.

The other kind of deal are capabilities deals. We've not done any of those, and the reason for that is that we haven't found any that makes sense to us strategically nor the price points. Often, these capability deals are trading at very, very high multiples, and we've had trouble kind of making sense of those multiples. But we do look at everything. We're very interested in being aware of what's going on in the industry so we do look at both those kinds of deals.

In terms of consideration, having a public company currency is a wonderful, wonderful asset for us. We don't know if the next deal will be cash or cash and stock or stock, but we would consider all of those different tools to create an attractive deal.

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Kevin Damien McVeigh, Crédit Suisse AG, Research Division - MD [9]

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That's super helpful. And then just is there any way, Charles or Gary, to think about the production? You've obviously had a lot of success bringing in a lot of financial advisers over this year. But is there any way to think about the ramp kind of when they come over versus year 2 or 3 as they start to get seasoned on the earmark -- AssetMark platform, rather, I apologize, just from a growth perspective?

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Gary G. Zyla, AssetMark Financial Holdings, Inc. - Executive VP & CFO [10]

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So this is Gary. I'll start, and Charles, I'll turn it over to you.

But one thing to think about, Kevin, when we bring on new producing advisers, we think of our segmented business and that level of segmentation that we call our engaged adviser segment. And that's where they have -- they get to the $5 million level.

We're quite focused on bringing the new producing advisers on and working with them and surrounding them with the capabilities and services they need so that they really buy into the outsourcing model that we're offering and get them to this engaged level. We find that their experience with us really accelerates almost exponentially as they get to that level and start really engaging, not just with us but with other advisers on our platform.

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [11]

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I think -- Kevin, it's Charles. I'll just add on that. When we look at the exact route, what we're trying to do is qualify advisers as best we can. And as you know, advisers have -- like to try things out, and it's not the best way to go. The best way to go is to move meaningful parts of their book over. And so we have lots of programs to try to help that happen. And we're focused on that speed, that first year, how many advisers can we get to that level of $5 million in the first year.

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Operator [12]

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Your next question comes from Alex Blostein from Goldman Sachs.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [13]

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Congrats on your first call as a public company. First question, Charles, maybe picking up the point you made around the operating environment, obviously being a little bit tougher in August. But it sounds like the flow momentum remains quite robust. I think that's how you described it. Any way to put a little more granularity around that? That's kind of part 1. And part 2, can you guys talk a little bit about how the cash balances have responded to a more volatile backdrop so far in August?

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [14]

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Yes. Alex, great to have you on the call. So let me start with cash and then go to the other question. So cash balances for us, remember, are primarily 2% roughly of the portfolio that is there to pay quarterly fees. So traditionally, our business is not an attractor of cash, where we're out trying to collect as much of clients' portfolios as possible. And so for us, cash is not particularly elastic. It's really there to facilitate transactions.

We did launch a high net yield or the high-balance cash product. That product has been growing nicely as -- and is more elastic, right? It is yield-based, but it's still relatively a small part of our overall cash strategy. I think in future calls, as we think about what we're doing in the RIA marketplace, which tends to bring cash to their custodian, we'll be focused more on what we're doing to attract longer-term cash. But right now, I would say the environment isn't really a driver of cash for us, rate is.

The other point you're raising about the environment as it relates to flows. We have seen through the volatility of the year so far very strong flows. And we produce our MKT report each month, so you'll see our flows coming out for this month.

And what I would tell you is that we continue to see strong flows. We continue to see strong adviser engagement, both on the new producing adviser side and on the existing adviser side. Now it is the end of August, and it seems like everybody's on vacation, so there is a normal seasonality this time of year. But the flow, the proposals, the discussions that we're having all feel very positive.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [15]

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Great. And slightly bigger-picture question related to regulation. I think that's something you mentioned in your prepared remarks as well. But there's been a renewed focus on fiduciary standard by various states at again kind of state level. Are you seeing any response to that from these kind of potential changes for your advisers already? Or do you think these changes are still kind of uncommon? Ultimately, do you expect that to sort of expedite the move towards fee-based assets in your platform as a whole?

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [16]

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Yes, great question, Alex. I would go back a little history here. So the Department of Labor standard that was not implemented was an incredible, incredible opportunity for AssetMark as we visited with many advisers who realized they needed to go from commission to fee. That was an incredible driver of growth for our business. And as you all know, in 2018, the next year, we maintained that level of growth. And that was a wonderful -- we maintained, I should say, that level of production and net flows coming in. And that was a great thing.

As advisers move towards a fiduciary standard of care, which we strongly support, we think that the Advisers Act of 1940 is the gold standard of how advisers should interact with their clients. It puts the clients' needs ahead of the advisers and it requires clear disclosure and it allows for flexibility to meet the clients' needs. We think that's gold standard.

As more and more advisers adopt that type of standard, and therefore, need to do real due diligence on the portfolios they construct, they need to have real process and procedure around how they do what they do. The outsourcing model is a great choice for them. So we think that moving towards that fiduciary standard is not only great for consumers, it's great for advisers. And if it's great for consumers and great for advisers, then it's great for us.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [17]

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Great. The last, just a cleanup question for Gary. The details you provided in the back of the deck with GFPC acquisition, are the synergies fully in the run rate as of the second quarter? Or do you guys anticipate any incremental synergies to come through over the next few quarters?

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Gary G. Zyla, AssetMark Financial Holdings, Inc. - Executive VP & CFO [18]

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Sure, Alex. So the synergies are baked in. We will have continued onetime expense as we continue to integrate the business through probably first quarter of next year. So you will see adjustments to our earnings over the next couple of quarters related to that. But I would say the run rate that we're showing for second quarter is our expected run rate.

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Operator [19]

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(Operator Instructions) The next question comes from Chris Shutler from William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [20]

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You've talked about moving more aggressively into the RIA channel, I think, with an adviser-managed sleeve function next year. The RIA market, as we all know, is really fragmented. So maybe just provide us an update on how you plan to generate leads, how many people you need to add on the distribution side, and whether distribution partnerships are likely.

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [21]

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Chris, thanks for joining the call. So when we talk about the RIA market, we're really talking about 2 markets. And I think it's worth pointing that out. One is the traditional RIA market. The other is the -- something we call a hybrid market or the larger broker-dealer OSJs. So larger groups of advisers coming out of the broker-dealer world that maintain a license but also form an RIA and are looking for more outsourcing capabilities. So both of those are important to us. And the pace at which they grow will probably differ with the OSJ side, because we're so connected into the broker-dealer side, growing a little bit faster earlier, particularly because there are so many larger groups there.

Our connections into that group are deep today. We have lots of relationships with advisers within those groups of advisers as well as the leaders of those businesses. And so we don't expect to need additional distribution other than capabilities like what you talked about before, allowing advisers to manage a sleeve and allowing that group to consolidate more of their business.

The RIA -- the traditional RIA channel, the way we break it down is there's the larger RIAs, the billion-dollar-plus RIAs, $750 million RIAs. That's not an attractive channel for us at least in the first few years of this. Those folks tend to do everything on their own. They're at relative scale. The custodians are providing more services to them, although not TAMP-like services. But that part of the market is not where we're going.

Where we're really going is that sort of sub-250 RIA who, today, is suffering from all the same problems as the broker-dealer adviser, fee-based adviser, right? That's really the same business. They're managing all the money themselves. They're doing all the due diligence themselves. They're trying to combine all the technology. They're doing reconciliation and reporting and all the middle-office functions. It's really a challenge for that group.

So in terms of distribution into that group, your core question, first of all, we do have a number of those advisers that we work with today. Our regional consultants and business development officers in the field have connections, and we talk to those folks. We go to the events, and we connect with those folks, and we're starting to build a brand there. So part of our normal distribution channel will be fine.

We're also working with partner custodians, in some cases, who are interested in helping those advisers that are small on their platform and very difficult for them to serve, find a home that makes more sense for them economically and allows that adviser to get a much higher service model than they can get from their existing providers. And so we work across those custodial bases.

We also work with our strategist partners who are in the field. They all have wholesalers out there to refer back and forth where we're looking for the right kind of adviser that has the right sight -- the right mindset for what we're doing.

So those are what we're doing today. And Chris, as you know, we'll be launching that trading -- that adviser-managed sleeve capability next year, midyear-ish. And so then I think we'll refine that distribution strategy quite a bit more as we get closer to launching the capabilities that we need.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [22]

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Okay. Perfect. Thanks for the detail, Charles. And then, let's see. So I wanted to ask about your share of wallet. So I think AssetMark's share of wallet today is 61% of advisory assets, if I remember correctly. What do you think is a realistic ceiling for that advisory asset percentage over the medium term?

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [23]

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It's a great question. 100 -- no, I think the problem with answering that question on an average sense is that the distribution around that 61% is high, where advisers -- maybe it's by definition, right? But with advisers that are on a lot of platforms and have existing client bases that they don't want to go have conversations about that they want to bring that growth to us, but their ability and willingness to go and work on a part of the business that, gosh, that's already working for them, that's where that number really has to change.

And so I don't know, Gary, if you have a good number. But I think we would expect that number to go up several percentage points, but I don't know where it tops out.

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Gary G. Zyla, AssetMark Financial Holdings, Inc. - Executive VP & CFO [24]

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So Chris, let me just add some clarifying thoughts, right? So that 60% that you're quoting is our -- the share of wallet of what we call our engaged advisers. And as we grow our engaged adviser base, we're going to bringing in new advisers from the bottom. And what Charles is talking about, current advisers we have in our platform, we're going to be raising them in terms of their share of wallet. I don't know any more into the future than Charles in terms of that number, 70% or 75% or 65%, but there is growth there.

But overall, on that platform, the share of wallet's closer to 30% when we take into consideration all our advisers. And that number will continue to grow as well as we grow the quantity of the engaged advisers on our platform.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [25]

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Okay. That's helpful. And then just one last cleanup question. Gary, can we get the asset number for ATC?

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Gary G. Zyla, AssetMark Financial Holdings, Inc. - Executive VP & CFO [26]

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Sure. Give me one moment to look that up off the top of my head. Generally speaking, AssetMark Trust -- oh, we do have it right here, great. 35 -- $38.5 billion as of June.

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Operator [27]

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There are no further questions at this time. I will turn the call back over to the presenters.

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Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [28]

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Great. And so excellent set of questions, as usual.

Again, I want to thank all of you for all the work you've done studying our company. It's actually an amazing process to go public. We've shared with so many of our associates the process is a lot of work, an amazing amount of work, much more than we all thought going into it. But it's also been much more rewarding working with such interested, interesting analysts and investors who take the time to really know our story and really dig into the company and what we're about.

So again, I want to thank all of you. I want to thank everybody who invested. I want to thank our employees and our clients, and I look forward to the next conference call. Thank you.

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Operator [29]

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This concludes today's conference call. You may now disconnect.