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Edited Transcript of AMK.N earnings conference call or presentation 11-Feb-21 10:00pm GMT

·49 min read

Q4 2020 AssetMark Financial Holdings Inc Earnings Call Feb 12, 2021 (Thomson StreetEvents) -- Edited Transcript of AssetMark Financial Holdings Inc earnings conference call or presentation Thursday, February 11, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 ================================================================================ Conference Call Participants ================================================================================ * Christopher Charles Shutler William Blair & Company L.L.C., Research Division - Research Analyst * Michael Masters Young Truist Securities, Inc., Research Division - VP and Analyst * Patrick Joseph O'Shaughnessy Raymond James & Associates, Inc., Research Division - Research Analyst * Ryan Peter Bailey Goldman Sachs Group, Inc., Research Division - Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, everyone, and welcome to AssetMark's Fourth Quarter 2020 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. -------------------------------------------------------------------------------- Taylor John Hamilton, AssetMark Financial Holdings, Inc. - Head of IR [2] -------------------------------------------------------------------------------- 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'll discuss the results for the fourth quarter and provide an update to AssetMark's business outlook for 2021. The 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'd like to note that certain statements made during this conference call are forward-looking statements. These forward-looking statements represent our outlook only at 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, the required disclosure related to non-GAAP financial information. And with that, I'll turn the call over to my colleagues. Charles, take it away. -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Taylor, and good afternoon, everyone. I hope everybody is safe out there, remaining masked and staying as 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 5 key messages during our call today. I'll discuss messages 1 and 2, while Gary will cover messages 3 through 5. 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 advisers 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 a difference in the lives of our advisers 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 1 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 in assets, 306 engaged advisers and over 24,000 households to our platform. We attracted 743 new producing advisers who saw the value to outsourcing to AssetMark. In 2020, net flows were strong and helped drive platform assets to $74.5 billion at the end of the year, the highest in our company's history. These strong operating results translate to strong financial results. We still grew despite the industry headwind of losing $15.7 million in net spread based revenue for the full year and $6 million in asset-based revenue due to moving all our opening third-party mutual fund strategies to lower cost share classes. Net revenue increased 3.4% year-over-year driven by asset-based revenue, which was up 11%. Adjusted EBITDA grew 4.7% to $115 million, and adjusted net income grew 10.7% to $73.2 million. We reported adjusted EPS of $1.02 for the year, the highest in our company's history. We also had continued success driving scale in our business, evidenced by the growth in our adjusted EBITDA margin of 30 basis points. Lastly, in 2020, we also advanced our M&A strategy. In February, we closed the OBS acquisition, which remains highly accretive. The strong operating and financial results from 2020 were a testament to the strength and the resiliency of our business, our advisers and our employees. Let's discuss this in a bit more detail, starting with our business. Our platform enables advisers to outsource high cost, noncore services that would otherwise require significant investment of time and money. During the pandemic, the importance of having an outsourced provider showed even greater value. Our advisers were not left alone to try and make sense of the volatile equity markets, navigate the pandemic and figure out how to service their clients and prospect for new clients under shelter-in-place orders. Instead, they had to AssetMark by their side every step of the way. Prior to the pandemic, a Cerulli study found that advisers spent 51% of their time on back-office non-client facing activities. Our comprehensive platform allows advisers to spend more of their time servicing existing clients and prospecting for new clients. Spending time with clients, albeit virtually, was and is crucial during these times. We also significantly improved the platform in 2020. Let me highlight some of these improvements. For the full year, we invested $50 million in the development of technology and our dedicated technology team with a focus on building and enhancing tools and services to help advisers. One example is our enhanced client proposal and new portfolio review tools, which empower advisers to clearly demonstrate how the strategy is proposed or chosen based on their clients' goals, concerns and financial dreams. This is a crucial component of our financial wellness vision. We also expanded the breadth of our curated investment platform. In February, we added fixed income solutions from American Funds, Dorsey Wright and PIMCO to help advisers serve their clients' retirement needs and enhance and diversify their fixed income portfolios. More than 2,100 advisers have invested client assets in these investment solutions with assets quickly approaching $1 billion. In August, we introduced our enhanced security back line of credit, or SBLOC program, which gives AssetMark trust company clients faster access to low interest rate liquidity supported by digital and streamlined securities backed lending. In less than 6 months, 309 lines of credit have been issued, which is well ahead of our goal. In December, we added CIBC private wealth investment management services and wealth planning expertise, which will help provide advisers with customized solutions to meet the expanding needs of high net worth investors. In the first month, we've built a robust pipeline for 2021. Continuing to invest in our platform allows our advisers to be more efficient, effective and valuable for their clients. Speaking of our advisers, they remain highly engaged in complementary of AssetMark. I want to start by thanking our advisers for continuing to trust AssetMark to help them grow their businesses. We continue to build strong relationships with our advisers, hosting over 530 webinars and creating thought leadership materials that help inform, educate and inspire. Through increased sales outreach and a great number of marketing initiatives, our sales activity was almost double in 2020 compared to 2019. While our increased activity allows us to serve our advisers during this challenging year, we also continued to scale our sales organization and drove unit costs lower by 7%. Finally, I would be remiss not to mention the people who make AssetMark great. Our over 725 associates have been working tirelessly from home for a year -- almost a year. And have done a fantastic job of serving our clients during this time of great need. I want to thank our associates for their dedication to our clients and how they have rallied to face up in this crisis. The improvements to our platform, doing right by our advisers and having highly dedicated employees all contributed to our phenomenal operating and financial results in 2020. While last year shaped up to be the best in our company's history, we believe we are just beginning to scratch the surface of this immense opportunity that is right in front of us. Let's turn to Slide 5 in our next topic. As we look ahead to 2021, we are excited about what is on deck for the new year, and we are already off to an amazing start. Our sales team just finished 18 highly successful Premier adviser meetings, which were attended by over 950 advisers. In 2 weeks, we will host our largest annual adviser event, Gold Forum, which will be conducted, of course, virtually. We are excited to be able to spend 3 days engaging with our best clients to represent over $40 billion of assets on our platform. Our pipeline of projects, new products and client experience improvements is robust and work is already underway as our core pillars continue to define our strategy and guide our investments. We are focused on continuing to differentiate via digital experiences and expanding adviser engagement. We are addressing our advisers' evolving needs, which include an emphasis on comprehensive financial planning and advice, increased reliance on technology and the desire to outsource value-added services. Our operations and services teams continue to wow our clients with their focus on customer obsession. The new business team supported a record number of new accounts applications in January. We are growing our ops and service team to support advisers and their growth while still achieving scale. Building off all the great work we are doing, we plan to start extending the reach of our platform in 2021 while continuing to deliver outstanding business results. Turning to Slide 6. Last quarter, we announced that one of our 2021 strategic pillars was to attract adjacent advisers through channel expansion and our biggest opportunity being under resourced RIAs. Both hybrid RIAs and independent RIAs have experienced significant growth over the last 10 years, and these growth trends are expected to continue. As seen on the slide, hybrid RIAs and independent RIAs have outpaced other channels in both adviser headcount and adviser managed asset growth. In 2020, RIAs and hybrid RIAs made up 15.8% of the production on our platform, up from 10.9% in 2018. Pure RIAs have grown their production on our platform 50% since last year and 100% since 2018. We continue to focus on enhancing our offering to better serve RIAs and their clients. This quarter, we are launching AssetMark Institutional, or AMI, to support these advisers. So let's take a look at Slide 7. While AssetMark institutional will offer best-in-class service and access to AssetMark's events,our advisers have come to know and value, it will also provide a differentiated experience for the RIA community. AMI offers a fully assembled, holistic solution built specifically for our RIAs providing the right set of products, operational support, technology and community resources to support their growth, efficiency and scale. First, AMI will include a new suite of products such as advisor managed portfolios, alternative investments and other products to provide RIAs the products they need to be successful. Second, AMI offers a client experience that supports stronger relationships with financial planning, account reporting and digital communication. Lastly, we plan to host specific events tailored for the RIA community and have thought leadership materials designed specifically for them. So with that, I'll now turn the call over to Gary to discuss our financial performance for the fourth quarter and share some thoughts on the outlook for 2021. Gary? -------------------------------------------------------------------------------- Gary G. Zyla, AssetMark Financial Holdings, Inc. - Executive VP & CFO [4] -------------------------------------------------------------------------------- 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 great organic growth, strong earnings and our best margin of 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 $47.5 billion, up 21% year-over-year. This growth was driven by fourth quarter net flows of $1.5 billion and $5.7 billion of market gain net of fees. The improvement in our net flows quarter-over-quarter is driven by increased production, while redemption rates have remained relatively stable. In December, we realized the highest month of production in our company's history. For the full year, net flows of $5.5 billion or 8.9% of our beginning of year platform assets, in line with our target of 8% to 10%. Our net flows have increased each in the past 3 quarters as a result of our ability to efficiently and effectively transition from in-person events to virtual events while continuing to provide high levels of service that our advisers have come to a from 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. For the full year 2020, these core net flows as a percentage of our beginning of period assets were 10.3%, above our stated target of 8% to 10%. The strong net flows in the fourth quarter, plus a strong market in December, resulting in record platform assets of $74.5 billion and 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 adviser 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 the first quarter from our acquisition of GFPC and OBS. As previously discussed, these outflows are from advisers who have not engaged in AssetMark. Both deals continue to remain highly accretive to AssetMark, and these outflows do not have a material impact on our economics. As we have done in the past, we will be sure to disclose these items in our monthly AMK report to give investors an understanding of how our core business is performing. Turning to our adviser metrics for our entire business, we added 177 NPAs in the fourth quarter of 2020. Our total adviser base at the end of the fourth quarter was a little more than 8,450 advisers, of which 2,536 were defined as engaged advisers. Engaged advisors are up 13.7% year-over-year and now account for 90% of the total assets on our platform. Now let's turn to Slide 10 to discuss this quarter's revenue. Entering the fourth quarter, our assets were at $67.3 billion, leading to a reported revenue of $110.9 million, this reflects a strong increase in our asset-based revenue, offset by the decline in spread-based revenue due to last year's rate declines. Please focus on our revenue net of related variable expenses. In the fourth quarter of 2020, our net revenue of $76.2 million was down 0.9% year-over-year. Asset-based net revenue was up 7.7% or $5.3 million year-over-year to $73.7 million. Recall, this reflects our mid-2020 shift to lower cost mutual funds, which resulted in a reduction of revenue, of about $3 million a quarter. So absent that onetime product share, our asset-based revenue growth would have been about 12%. Spread-based revenue is down, of course, materially at 73% year-over-year due to the aforementioned decline in interest rates. Now let's turn to Slide 11 to more fully discuss the drivers of the change in net yield year-over-year. As the waterfall shows, revenue was relatively flat year-over-year, with the increase in asset-based revenue, offset by the decline in spread-based revenue. Our waterfall splits the impact of our asset growth which generated $8.9 million in additional revenue and the impact of the compression of net revenue yield, which reduced revenue by $3.7 million. Of this $3.7 million impact, about $3 million was due to the shift to lower cost mutual funds with the remaining impact due to fee compression and fee waivers. It is important to note that year-over-year fee compression impact was about 0.5 basis points, marginally better than the 1 basis point we expect each year. Moving to spread-based revenue, it decreased $5.3 million year-over-year, driven by yield decline from 1.65% to 0.31%. Lastly, other income decreased $700,000 or about 0.5 basis point, driven by interest related income. Overall, net revenue as a percentage on total platform assets for the fourth quarter was 45 basis points, down 1 basis point quarter-over-quarter and down 8 basis points from 2019. The bottom of Slide 11 helps detail the year-over-year decline in yield. As it shows, 3.5 basis points are driven by the asset-based revenue. Of this, about 3 basis points is due to the shift to lower cost mutual funds. The decline in spread revenue resulted in a decline of 3.8 basis points on our total yield. Clarity and transparency in the calculation of our annualized revenue yield net of variable expenses is shown on Slide 16 in the appendix of our earnings presentation. Now let's discuss expenses as shown on Slide 12. Total adjusted expenses decreased 2.5% year-over-year to $84.2 million. Our operating expenses, which include compensation and SG&A declined 6.8% for the year. This is driven by a 6.9% year-over-year decline in employee compensation and a 6.5% decline in SG&A. We feel great about our efforts to hold the line on our operating costs in 2020. Let me run through our expense adjustments now. In the fourth quarter, we added back a total of $25.7 million pretax, which is comprised of 5 items. First, $13.8 million of noncash share based compensation; second, $5.1 million of amortization expense related to our 2016 sale; third, $2.3 million in acquisition-related expenses associated with our acquisition of GFPC and OBS; fourth, $2.8 million related primarily to internal reorganization and integration costs. And lastly, $1.7 million in write-off costs associated with our year-end debt refinancing, which I will discuss more in a moment. For additional color, our spent -- adjusted expense reconciliation table or income statement line item can be found on Slide 17 in the appendix of our earnings presentation. Now let's turn to Slide 13 to discuss our earnings for the quarter. We view adjusted EBITDA as an important measure of our company health. Our fourth quarter of 2020 adjusted EBITDA was $32 million, up 9.2% year-over-year. Adjusted EBITDA margin for the quarter was 28.9%, our best quarter we ever reported. For the full year, our adjusted EBITDA margin was up -- was 26.6%, up from 26.3% in 2019. This improvement in margin year-over-year despite the decline in spread-based income is a testament to our management team's ability to focus on expense management, while still investing in future growth. Our adjusted net income for the quarter was $22 million -- I'm sorry, $22.2 million or $0.31 per share. This is based on a fourth quarter diluted share count of 72.3 million. The marginal year-over-year increase was the result of the adjusted EBITDA of $2.7 million, lower taxes of $0.4 million and lower interest expense of $0.4 million, offset by higher depreciation of $1 million. Our marginal tax rate is 25% for the year and 25.2% for the quarter. We have worked hard for the year to create cash efficiencies, and our adjusted net income now reflects the benefit of our current year recognized research and development tax credits of about $800,000. This translates into an adjusted effective tax rate of 23.5%. We have applied this adjusted effective tax rate of 23.5% to our adjusted net income, reflecting the gain in the fourth quarter of $2.4 million, of which $1.7 million is a catch-up from the first 3 quarters of the year. We plan to use this rate of 23.5% in 2021 and will true-up to the actual rate at year-end as always. For additional color, please see Slide 18 in the appendix. Now let's look at the reported fourth quarter balance sheet. Our balance sheet strength and flexibility position us well to support our strategic objective to grow at scale. Just prior to year-end on December 30, we secured a new $250 million revolving credit facility. At that time, we drew down $75 million on the new credit facility and use those funds plus cash on our balance sheet to retire our $124 million existing term loan. In addition to withstanding our available cash by $100 million, the interest cost on the new facility will be LIBOR plus 2%, which is 1 percentage point less on our old facility. On a run rate basis, this will save us $1.6 million pretax annually in total interest costs. Following this refinancing, we ended the year with $70.6 million of cash on our balance sheet compared to $109.3 million at the end of third quarter '20. Let's discuss our capital expenditures next. For the fourth quarter, our capital spend was $8 million or 7.2% of total revenue. As discussed last quarter in 2021, we are expecting our capital expenditures to be about 7% of our total revenue as we continue to invest in the future of our business. Now I will discuss our expectations for 2021. Let's turn to Slide 14. Our growth expectations for the year reflect the positive momentum that we have been talking about on this call. Still, we are cautious. There are a lot of variables, such as pandemic, the market, new administration that could impact our results. Our financial model starts in the asset growth and reiterating our past comments, we expect our organic growth to be 8% to 10%. Assuming a modest market lift, we expect our assets to grow between 11.5% and 13.5% for 2021. We then expect our net revenue growth to be in the mid- to high teens this is driven by entering the year with strong asset levels, while assuming about 1 basis point of fee compression that we often mention as our regular expectation. Part of this forecast is our expectation that interest rates will not increase in 2021, and we will see a modest growth in spread-based revenue due to higher cash levels as platform assets increase. We expect our operating expenses, which consist of compensation and SG&A to increase mid-teens during -- due to increased investment in 2021. Now we break down these additional investments in 3 rough buckets: volume growth, near-term investments and longer term investments. Understanding these 3 types of expense growth help give context from the flexibility we have to adjust this spend increase if circumstances warrant. First, approximately 3% to 4% of our operating expense growth is volume related. As we grow, we need to add more staff and capabilities in our operations and services business to support this growth. Second, our near term investments, which contribute 4% to 5% of the growth. Here, we're spending on our new AssetMark institutional initiative, some new product development and productivity investments. And third, is additional investments for even longer-term growth, which makes up about 4% to 5% of the expense growth. These investments into digital lead generation, transition services and outsourcing will help prepare AssetMark for growth in 2022 and beyond. As always, we are focused on realizing improved margin on our revenue, so we expect our adjusted EBITDA to be up about 15% to 25% year-over-year. Based on the growth outlook we have laid out, we expect margin expansion of around 100 basis points in the, year. Much higher than the 50 to 75 basis point goal we have targeted in previous years. With that, I'll hand it over to Charles for his concluding remarks. -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- 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 advisers, especially, and delivered by our associates. I have never had -- I've never been more excited about our company's future. I look forward to sharing our progress in subsequent earnings calls and in future conferences. So with that, those are the conclusion of our prepared remarks, I'll turn it back to the operator for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Presenters, we have our first question from the line of Alex Blostein from Goldman Sachs. -------------------------------------------------------------------------------- Ryan Peter Bailey, Goldman Sachs Group, Inc., Research Division - Associate [2] -------------------------------------------------------------------------------- This is actually Ryan on behalf of Alex. I just wondered if you could talk a little bit about AMP? And I guess, early adoption and the trends that you're seeing there. And then how you're thinking about competition in the space? I think you've probably seen other temps start to open up? And just how you're thinking about that? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Ryan, happy new year. Hope you're doing well. So AMP is Advisory 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 advisers 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 that value. But also and very importantly, understand the value of outsourcing over time. The key there is those advisers that are overwhelmed with technology are overwhelmed with trying to grow their business and really help their clients plan for the future. Those are the types of advisers 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, I mean, it's 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 advisers are today, RIAs are by 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 cobble all that stuff together and to really do everything for their advisers. The sea change that we're seeing in the industry is that starting with the investor, the investor is looking not for those things, but they're looking for planning and deep relationships. 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 investor's perspective. So our belief in our bet is that advisers are going to say, "Hey, I want to outsource more, and I want to transition using the AMP capability. When we look at competition, I'm not quite sure how to think of it, right? There's no one doing what we're doing, taking the exact same approach, but there's lots of ways that advisers 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 the move toward outsourcing and the move towards partnering and getting it integrated experience in back-office and getting much more capability, much more community. And that's where we think the opportunity is going to be for AssetMark. -------------------------------------------------------------------------------- Ryan Peter Bailey, Goldman Sachs Group, Inc., Research Division - Associate [4] -------------------------------------------------------------------------------- Maybe kind of sticking with the RIA discussion. I think you had said that pure RIAs on the AssetMark platform are growing 100% in assets since 2018. I guess is that kind of they had grown that platform -- the -- I guess the question is, have they grown assets on the platform or they kept growing their books because they were previously under resourced and being part of the AssetMark platform and sort of taken or relieved a lot of the processes that they had to go through and give them a bit more time? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- So it's a function of the way we grow. So the existing advisers on our platform are growing because they're bringing more assets to AssetMark. Some of that is a function of them using our high net worth capabilities or other capabilities to gather new clients. Some of it is share of wallet growth. And then, of course, new RIAs, new producing advisers, we call them, joining the platform. So it's all of the above. -------------------------------------------------------------------------------- Gary G. Zyla, AssetMark Financial Holdings, Inc. - Executive VP & CFO [6] -------------------------------------------------------------------------------- Ryan, this is Gary. Just to be clear, it was production that had doubled over the 2-year period, not any of them. It doesn't change at all what Charles is saying, right? He's saying reasons why it's growing, I just want to make sure you have the correct mix. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- We do have another question from the line of Michael Young from Truist Securities. -------------------------------------------------------------------------------- Michael Masters Young, Truist Securities, Inc., Research Division - VP and Analyst [8] -------------------------------------------------------------------------------- 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 come from kind of the RIA and RIA adjacency versus kind of the core legacy business? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [9] -------------------------------------------------------------------------------- Gary, you want to do that one? -------------------------------------------------------------------------------- Gary G. Zyla, AssetMark Financial Holdings, Inc. - Executive VP & CFO [10] -------------------------------------------------------------------------------- Sure. Sure. I think so first, Michael, congratulations. I understand a baby is quite imminent. So best of luck with that. That's very exciting. But -- so to your question, I'm trying to think how to put it. So I'm trying to convert in gross to production. Here's what I would say. I would say in general, a growing percentage of our growth, if you will, a 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 reps, that's our core constituency in who we serve. But I don't have a breakout for you in terms of how to say it other than to say we're focused on growing. And then as we talk more in detail in the upcoming quarters about AMI, what Charles was talking about, we will start talking in more -- some more metrics about what's coming from that group, which is that RIA subset versus what you might call the larger IBD metric. -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [11] -------------------------------------------------------------------------------- Gary, I would just -- this is Michael, I would just add to that a little bit. When we talk about the RIA segment and hybrid segment -- the IBD segment. Everyone uses those terms because there's some differences, I guess, that are important to think about. Certainly, the language and the communities are different. I can test in different growth dynamics. But what we would expect to see is fluidity as more people grow 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 to 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 -- in 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 advisers. It's looking across registration, it's looking at kind of the history that we've had. How big the beginning of the year -- it's obviously a ratio, right? So the beginning of the 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's 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. -------------------------------------------------------------------------------- Michael Masters Young, Truist Securities, Inc., Research Division - VP and Analyst [12] -------------------------------------------------------------------------------- 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 end up at the high end, low end of that range based on macro and various adoption characteristics? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [13] -------------------------------------------------------------------------------- Totally, right? So we're not forecasting some kind of weird number, right? We did 8.9% in 2020, 10.3% 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 and December market result. I mean, December was a torrid market environment, the beginning period asset number is really high at $74.5 billion because of market return. So to get that 10% at 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. -------------------------------------------------------------------------------- Michael Masters Young, Truist Securities, Inc., Research Division - VP and Analyst [14] -------------------------------------------------------------------------------- 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's some maybe lessons learned or new business implementation strategies that you've kind of discovered through the pandemic and operating in the work from home environment that may stick that's helping support some of that? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [15] -------------------------------------------------------------------------------- Yes. It's a great question. I think every executive -- I want to say every industry, but I'll certainly say in financial services has learned a lot about operating in different environments. 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 don't want to travel, not at all, right? We want to be back out in the field. We want 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 and 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 and discussion with other advisers, kind of closer work. It's a much better way to deliver it via Zoom, it just works really well. So I've mentioned earlier our premier adviser meeting is the 18 meetings that we had in the first quarter here. We can do that content in much shorter time and if you live in -- I used to live in Los Angeles when I grew up. If you have to drive 30 miles in Los Angeles, you're talking about 1.5 hours, 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 we'll deliver much more content that way. We'll deliver much more regular smaller group content and community that way. And then when we're out in 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 don't just -- mention 1 more and then I'll stop, 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 they're living, have great experience or great cultural fits. And that also is a big productivity enhancer, may not be a cost per person enhancer. But you get highly trained, great people, and you're not constrained by the geographies in which you live. So there's a lot of changes that are occurring because of COVID. COVID is obviously a disaster, a horror, a nightmare. But there's a lot of learning there that I think is going to make our business better as well as many others. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question comes from the line of Christopher Shutler from William Blair. -------------------------------------------------------------------------------- Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [17] -------------------------------------------------------------------------------- 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? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [18] -------------------------------------------------------------------------------- Thanks, Chris. Good to talk to you. So you mean adviser facing, not back office, all that -- such as that.. -------------------------------------------------------------------------------- Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [19] -------------------------------------------------------------------------------- Exactly. -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [20] -------------------------------------------------------------------------------- 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 3 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 onto 1 page, a simple visual view of the investors' life, their goals, the risk, the likelihood of meeting that success. Integrating that experience into eWealthManager and into the entire adviser conversation is job #1. Job #2, which is somewhat -- well, I don't know if it's more complicated that the other, but the way we deal with risk in our industry, is we basically ask people, what's your risk tolerance? Can you take a 20% drawdown over what period of time, you know the story at 6 to 8 questions. But that's not the way human beings think about risk and about portfolio. There's really 3 concepts that we need to think about. One is that, your risk tolerance. The other 2 are risk need and risk capacity. So tying back to that visualization of planning, of that sort of 1 page, here's my life? Or what -- what's my risk need? How much risk do I 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 28 years old, Google employee making $200,000 a year, my capacity to take risk maybe 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 and the visualization of that dialogue and then, of course, the compliance issues, integrating that experience into the eWealthManager 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. 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 and the individual tools in there, that's where we're investing from an adviser-facing technology perspective, and it's going to be a multiyear investment. -------------------------------------------------------------------------------- Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [21] -------------------------------------------------------------------------------- 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 maybe just remind us what's most interesting to you? Is it more kind of capability types of deals or consolidating deals? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [22] -------------------------------------------------------------------------------- Yes. I'm happy to do that. So we remain very focused on M&A. We connect -- me personally, some of our key team members are -- our Head of Corporate Development, we are connected across the industry. 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 2 legs to it. #1, by the way, #1 was not more important than #2 but just taking it in that order. #1 is consolidation. The deals that we've done have all been consolidation deals, those deals aren't just prevalent as they once were. There's still quite a few smaller players out there. If we think they'll 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's relatively small and the relatively complicated deals. And so we'll keep looking at those as always a trade-off between what 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 capability side, we are spending a lot of time and effort there. If you heard my description, I know you did, Chris, financial Wellness. You can imagine the suite of tools that are out there that are either tools or businesses that do some of those things and how they might integrate into our tight platform, we look at all that kind of thing across the entire kind of wealth landscape. And as you know, deals are serendipitous to get them done. They're all competitive and multiples are nosebleedy on the capability side. So we'll be disciplined, but we will look at a lot of things on that capability side and hopefully get something done. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- We do have another question from the line of Patrick O'Shaughnessy from Raymond James. -------------------------------------------------------------------------------- Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [24] -------------------------------------------------------------------------------- So we continue to see a lot of consolidation in the independent broker-dealer and the 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? Does it increase opportunity? Or is it kind of irrelevant? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [25] -------------------------------------------------------------------------------- Patrick, good to hear your voice. So consolidation is 1 of the major trends. I'm pretty sure on one of the calls, we talked about investor trends, adviser trends, industry trends and regulatory trends. Those 4 big trends are the ones we're watching and consolidation across financial services, either to find growth or to drive lower cost scale are 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 are an RIA consolidator, obviously, it matters a lot to you. But for us, there's 300,000 advisers. There's, I think, 16,000 or 18,000 RIAs, something like that. There's just a lot. And there's a lot of subscale RIAs out there. There's a lot of these groups of hybrids that we call producer groups, some people call them OSJ groups. But these producer groups, there's a lot of those and they're -- 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 advisers isn't there anymore. And they seek that connective tissue, and we are able to provide that very high level, like glove experience that is just hard to do, hard to do at scale, and most others don't do it. And so that's an opportunity for us. In addition, as some of these brokerages come together, we're actually quite excited about partnering and helping those broker-dealers find ways to move advisers from commission to fee for 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 they're independent advisers 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, they're, of course, investing in capabilities because they want to grow and they want to find revenue sources in a world where they've gotten killed on spread. They've gotten killed on product internal revenue sharing. The grid is tougher and tougher. So adding capabilities, camp-type capabilities is something a larger firm might like to do. And so that makes them better, makes -- more competitive. And then, of course, I'm a glass 3 quarters full guy, believes it makes 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-modal set of broker-dealers out there, where many don't have the money to invest to build their own platform, to bring in outside technology and do that. And we see a real opportunity, particularly as we're adding things like AMP and other capabilities to be that provider for some of these other broker-dealers, and we think that's a real opportunity. So Patrick, like all things, right? We see the world as full of opportunity, big TAM, great growth dynamics, but increasingly competitive to make us better as well. -------------------------------------------------------------------------------- Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [26] -------------------------------------------------------------------------------- Got it. I appreciate the insight. And then as we're thinking about your push into the RA space with a little bit more gusto here, can you talk a little bit more about how the needs of RIAs differ from the needs of independent broker-dealers and what different functionality that's going to require from your platform? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Yes. So when you say independent broker-dealers, you mean the adviser, right? -------------------------------------------------------------------------------- Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [28] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [29] -------------------------------------------------------------------------------- Independent broker dealer? Yes. So at the highest level, the differences are not much, right? So most IBD reps that are advisers, right, they're not on commission, right? So let's say, okay. There's many that are still on commission, there's many that are still selling a lot of insurance. That's a big difference, right? But for those advisers that are fee-based and are really thinking about advisory, managing their own rep as PM in the IBD world, RIA and the RIA world, constructing mutual fund portfolios. There's not really much difference. The RIA has much less support than the IBD rep because the IBD itself, the broker-dealer is providing many more platform services and compliance where the RIA is doing everything. And so while at the highest level, the sort of -- I'm helping clients, I'm a planner, 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 need is greater there, although the history of who's outsourced and who's not has been different. So that's the biggest difference. The other thing I would just add is that for an IBD rep, they can use their own platform at the broker-dealer to trade stuff if they want to do it and then outsource to us for our capabilities. So the share of wallet discussion. For most RIAs, they are trading as the custodian and using their own tools, Excel 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 advisement portfolio is allowing them to manage the fleet, is really critical, really critical for the way that adviser thinks about value added. Is that helpful?. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- We do have another question from the line of Will [Kari] from JPMorgan. -------------------------------------------------------------------------------- Unidentified Analyst, [31] -------------------------------------------------------------------------------- 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 advisory solution using products from an affiliated asset management arm could create a conflict that requires disclosure. Can you help us understand the most significant conflicts of interest of AssetMark? And how do you think about the framework to address and mitigate these conflicts of interest? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [32] -------------------------------------------------------------------------------- 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 adviser is one of them. We're a service provider. So we don't supervise the adviser. We're not -- the adviser is not affiliated with us in any way. The adviser is choosing us, hiring and firing us based on the competency of our solutions and the quality of our work. So there's not like a natural conflict of interest, like if I'm affiliated with the broker-dealer and the broker-dealer's making money on the product. 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 adviser is charging their fee, we're charging our fee. And they are fully disclosed to the client, and they're completely different. We're not paying or doing anything like that. So there isn't that conflict of interest. Where we see conflict, starts with our field force. What we would hate to have is a field force that is incented by product revenue. So we pay our field force and our consultants in the field as a percent to goal. And so they have asset-based 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're focused on the adviser and they're 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's 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 the very fundamental structure of our relationships are very helpful in that. -------------------------------------------------------------------------------- Gary G. Zyla, AssetMark Financial Holdings, Inc. - Executive VP & CFO [33] -------------------------------------------------------------------------------- Yes. I'd just echo your point that our position in the value chain and our structure being the outsourced provider does eliminate a lot of the things you would hear about because, again, we are just a service provider. And also, you're absolutely right, Charles. We pay our sales folks percent to goal, regardless of the assets that come in. And we do earn a -- AssetMark does earn different amounts based on the type of products. Some them, we make some third-party vehicles and whatnot. And so that's in reality, but we're not directing any of that and so we feel great about that setup. -------------------------------------------------------------------------------- Unidentified Analyst, [34] -------------------------------------------------------------------------------- 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 subscale? Is that an initiative that's currently underway and we could see the fruits of that near-term or is that a longer-term potential option for your business? -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [35] -------------------------------------------------------------------------------- I'd say more of the latter, Will. We have a strategic account team that we've had for many years that are very focused on broker-dealers. That's their full job -- full-time job. We brought in a new leader of that group let's say, 6 months ago, it could have been 3, it could have been 9 months ago and -- whose got a great history in the space. And as he's 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 IBD is kind of, as I said, a bimodal or at least 2, maybe 4 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 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 an instance in building technology, it would still be AssetMark as AssetMark is, but it would be a closer alignment. And so, we're not in 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, 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 on. We see that as an opportunity. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions from the line. Presenters, you may continue. -------------------------------------------------------------------------------- Charles George Goldman, AssetMark Financial Holdings, Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- Great. So thanks, great questions, as usual. I hope everybody got what they needed 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. -------------------------------------------------------------------------------- Gary G. Zyla, AssetMark Financial Holdings, Inc. - Executive VP & CFO [38] -------------------------------------------------------------------------------- Bye-bye. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- 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.