AssetMark Financial Holdings, Inc. (NYSE:AMK) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good afternoon, everyone, and welcome to AssetMark’s First Quarter 2023 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. Today’s call is being recorded. Now, I’d like to turn the call over to Taylor Hamilton, Head of Investor Relations. Please go ahead, Mr. Hamilton.

Taylor Hamilton: Thank you. Good afternoon everyone and welcome to AssetMark’s first quarter 2023 earnings conference call. Joining me are AssetMark’s Chief Executive Officer, Natalie Wolfsen; and Chief Financial Officer, Gary Zyla. Today, they will discuss the results for the first quarter and provide an update to AssetMark’s business outlook for 2023. Following our introductory remarks, we’ll open up the call for questions. We also have an earnings presentation that Natalie and Gary will reference during their prepared remarks. It can be accessed on our IR website at ir.assetmark.com. Before we get started, I’d like to note that certain statements made during this conference call are forward-looking statements. These forward-looking statements represent our outlook only as of the date of this call, and actual results could differ materially.

Additionally, during today’s conference call, we’ll be discussing net revenue, adjusted EBITDA, adjusted EBITDA margin, and adjusted net income, all of which are non-GAAP financial metrics. Please refer to our earnings press release and SEC filings for more information on forward-looking statements, risk factors associated with our business, and required disclosures related to non-GAAP financial information. And with that, I’ll turn the call over to my colleague, Natalie, take it away.

Natalie Wolfsen: Thank you, Taylor, and good afternoon, and welcome to our first quarter earnings call. Today, I want to start with a discussion of our record results for the quarter as well as provide some color, given the current market environment. I will then provide a detailed analysis of our five growth pillars, highlighting the progress we are making on each. Finally, I’ll turn the call over to Gary, who will discuss our financial and operating results for the first quarter and provide an update about our 2023 outlook. Starting on slide three, the first quarter of 2023 was another record quarter for AssetMark. We ended the quarter serving an all-time high 243,000 plus households and around 9,300 advisors, of which, over 2,900 are engaged.

From a financial standpoint, total revenue was a record of $177 million, up 19% year-over-year, while record net revenue was $133 million, up 25% year-over-year. These all-time high topline results, coupled with disciplined expense management, allowed us to also achieve our best-ever bottom-line results. Specifically, adjusted EBITDA was $59 million for the quarter, up 32% year-over-year, while adjusted net income was $40 million, up 38% year-over-year. Adjusted earnings per share was $0.53 in the first quarter, up 60 — I’m sorry, up 36% year-over-year. I’m extremely pleased by these results and I’m also encouraged by some green shoots we’re seeing. As you know, we’ve been staying extremely close to our advisors through webinars, education, and live events.

Our advisors continue to look to us for coaching and actionable ideas, not only to help their clients, but also to grow and scale their businesses. One area we’re seeing improvement in is net flows. As a reminder, for the last few quarters of 2022, we had talked about pressured net flows caused by lower production relative to 2021, as money continue to sit on the sidelines because of market uncertainty. I’m happy to say that first quarter 2023 production is at the highest level since the fourth quarter of 2021 and net flows have improved sequentially each month since November of 2022. In April, we wanted to let you know that we are expecting net flows to be in line with the trend from previous years where the tax month was lower than the first quarter average.

Net flows are commonly pressed given the seasonality of tax payments in the month. As you may recall, net flows in April of last year were also impacted by tax payments. And in 2021 and 2022, net flows were impacted by the tax months of May and July, respectively. Gross production looks strong this April, and we’re pleased with the net flows given the seasonality related to the month. Like net flows, in the latter half of 2022, advisors have not been moving their platform relationships at the same rate as they had historically. In contrast to this, in the first quarter of 2023, we achieved 166 new producing advisors, or NPAs, at AssetMark. This was the highest quarterly total since before market uncertainty took hold in earnest in the first half of last year.

In addition, March was also the best month for attracting NPAs in the last two years. Personalized consulting and service have truly resonated with NPA, who look to AssetMark to help them improve their client experience and business growth and scalability. All-in-all, results for the first quarter were excellent and we feel we have a lot of momentum heading through remainder of the year. Before I turn to our growth strategy, I’m also pleased to announce the hiring of Josh Armey who joined AssetMark last month as Executive Vice President of Corporate Strategy. Josh brings decades of experience in enterprise strategy and transformation, having most recently served as the Head of Transformation at Edward Jones. Josh will serve as a member of our executive committee and will work with leaders across the organization to accelerate our strategic growth and maximize our long-term performance.

Now, as I do every quarter, I want to give you an update on how we are moving well forward in each of our four — at each of our five key strategic pillars. On slide four, you can see how we are focused on advancing our growth strategy in 2023. We firmly believe that our record results in 2022 were a testament to having the right strategy in place and then tirelessly executing on that strategy. This slide shows what we’re focused on for this year. Today, I will focus on the items in bold. Moving to slide five, the first component of our growth strategy is to meet advisors where they are. In late 2022, we closed on the acquisition of Adhesion Wealth. Since then, we have been actively working with the Adhesion team on integration, cross-selling opportunities, lead sharing, and most importantly, ways to continue to help RIAs grow and scale.

Adhesion Wealth had a successful start to 2023, winning new clients, building out its technology, and adding new investment model to its model marketplace. Adhesion continues to focus on bringing on new RIA firms to the platform, while expanding share of wallet of existing firms. This quarter, Adhesion added seven new RIA firms, which brought $63 million of assets to the platform. In April, Adhesion saw one of their existing RIA firms add over $100 million to the platform. From a technological standpoint, Adhesion added Adhesion TaxAlpha and Adhesive Alliance in the first quarter. Adhesion TaxAlpha introduces new ways to visualize and demonstrate the value derived from ongoing, active tax harvesting in a Unified Managed Account. Adhesion has a long history of creating TaxAlpha and it now has a new and exciting way to enable advisors to show the value to their clients.

Adhesion Alliance, on the other hand, is a premium program for the Adhesion Asset Manager community, providing them with advisor usage and product adoption insights. This is a valuable offering for asset managers and it underscores what is and is not working on the platform, putting the manager in a position to make better, more informed decisions, while simultaneously encouraging collaboration between Adhesion and their advisor community. Adhesion also added new investment models to its model marketplace this quarter. In the first quarter, Adhesion added managed risk parity suite, dividend equity strategies, core equity strategies, focused all cap strategies, and an ESG large cap core strategy. We are very pleased with Adhesion start to the year, and we look forward to sharing their continued progress during our future earnings calls.

Turning to slide six, the second component of our growth strategy is to deliver a holistic differentiated experience to advisors and their clients. Here, we’re focused on our continuing re-platforming effort, which began with the replacement of our trust accounting system last year. By replacing our trust accounting system, we have been able to grow with scale, save time for advisors and have faster cycle times because of straight-through processing for client requests. This quarter, I want to discuss two more ways we are continuing our re-platforming efforts. First, we are rebuilding eWealthManager, our digital platform designed to power our advisors with a range of features, such as investment analytics, performance reporting, and investment proposal generation.

eWealthManager 3.0 will be a compelling data-driven advisor and investor digital wealth management experience that is reliable, scalable, and fast. It’s focused on the intersection of a modern platform science with scalable and flexible architecture and compelling and intuitive digital capabilities, all supported by data analytics to create a personalized user experience. We believe eWealthManager 3.0 will help AssetMark increased wallet share of existing advisors, attract new producing advisors, and create opportunities to serve new markets, all while we lower the cost to serve. In the second half of 2023, phase one of eWealthManager 3.0 will launch. This phase will include more fulsome advisor insights, new and improved navigation, and a new personalized landing page experience.

Subsequent phases will launch over the next two years. Second, in July, we are implementing a subscription-based billing system responsible for collection of 90%-plus of the firm’s asset-based revenue and for the collection and disbursement of advisory fees totaling over $650 million annually. Our billing services are also highly valued offering to our advisors. The new billing system will provide enhanced reporting capabilities to our advisors with automated billing processing that’s highly scalable. We spent a lot of time and resources building eWealthManager 3.0 in replacing our billing systems. These are recent examples of how we invest in platform modernization and enhancements over time, all within the confines of our capital spend commitment of 6% to 7% annually.

The third component of our growth strategy is to enable advisors to serve more investors across the wealth spectrum, varying life stages, and generation. Let’s turn to slide seven. We continue to help advisors and their clients navigate the prolonged market uncertainty, including recent regional bank failures. Additionally, following last year’s pain in the bond markets, we are seeing strong interest from investors seeking to lock in yields that haven’t been seen this high in years. Our platform has been well-positioned with the breadth of cash and fixed income strategies to help investors address liquidity and diversification needs. Let me share with you a few examples and results from the first quarter. First, we increased the rate on our high yield cash solution, which provides up to $2.5 million of FDIC coverage by an average of 130 basis points.

Additionally, we had gross sales of $369 million in our Savos Laddered Bond strategy, which provides laddered short duration exposure to US treasury and agency securities. We have also provided timely and actionable information so that advisors were prepared to respond to their clients following the bank crisis. In fact, our bank crisis webinar was attended by nearly 700 advisors and even supported our NPA growth efforts as we added nine new producing advisors from this webinar alone. While higher quality short duration has been a particular interest, we expect more investors to add back duration and/or risk at the end of rate increases are nearing. Due to our robust platform offering, we are well-positioned to retain the strong inflows we’ve seen in this space.

We are constantly evaluating our investment offerings to ensure that we provide our advisors a curated suite of investments, enabling them to serve more investors across the wealth spectrum. So, now let’s turn our attention to slide eight and the fourth component of our growth strategy. Last quarter, I briefly mentioned our Investment Consulting program, and I’d like to discuss it in more detail this quarter. The new program provides select advisors direct access to the AssetMark Investment Consulting team for guidance in creating customized model portfolios using strategies available on our platform. The advisor comes away with a suite of investment models customized for their practice to bring efficiencies to their business and a consistent client experience.

The advisor is provided with a comprehensive investment analysis backed by a simple story explaining and clarifying the why behind the proposed model portfolio, all why the advisor made to control of his or her client outcomes and their investment options. We believe this exclusive offering will be a game changer for advisors, helping them differentiate from their competition, also helping them grow and scale their business and stay meaningfully engage with their clients. In the first three months since launch, we have had 13 advisors take part in Investment Consulting, of which over 50% were new producing advisors. We take great pride in our ongoing ability to help our advisors grow and scale. And as I have said before, it is why they win and why we win.

Turning to slide nine, the final component of our growth strategy is to pursue strategic transactions by adding capabilities and assets to improve advisors’ ability to serve investors and expand their businesses. We have approximately $140 million in purchasing power for future M&A opportunities and are doing a great job of increasing our purchasing power each quarter because of our strong cash generation. We are proactively looking at opportunities that will benefit our advisors and their clients. As a last note, and as you may have already seen in our financials, we put up a $20 million accrual for this quarter. As we have disclosed in our SEC filings since 2020, we have been in discussions with the SEC regarding alleged incomplete disclosures relating to our past ICD program and third-party custodial support payments.

All alleged activities under review ceased between 2019 and 2021. After working with the SEC, we are in discussions to resolve this matter and believe that we will come to a resolution soon. Transparency and trust are paramount to AssetMark and its mission of making a difference in the lives of our advisors and their clients. Because of this, we want to provide you with this information today, we will also provide further updates as we are able to share more and once the matter is fully resolved. I’ll now turn the call over to Gary to take us through a deeper dive on our first quarter 2023 results and to provide an update on our 2023 outlook.

Gary Zyla: Thank you, Natalie and good afternoon to all those on the call. As Natalie mentioned, the first quarter was another record quarter for AssetMark. During my remarks today, I will highlight our results for the quarter and then provide an update for our 2023 outlook. Turning on slide 10, first quarter platform assets increased 6% year-over-year to $96.2 billion. Quarter-over-quarter, platform assets were up 5%, driven by market impact net of fees of $3.1 billion and quarterly net flows of $1.6 billion. Year-to-date, our annualized net flows as a percentage of beginning-of-period assets is 7.1%. As you know, net flows are comprised of production or money onto the platform, less redemptions or money off the platform. First quarter production is the highest that has been since fourth quarter of 2021, a strong sign of new money coming on to the platform, while redemption rates are still low, a strong sign of our advisor satisfaction.

All-in-all, we are quite pleased with our net flows in the first quarter, given the current market environment. Let’s just now discuss our advisor metrics. We added 166 new producing advisors, or NPAs, in the quarter. As Natalie mentioned, this is the highest quarterly NPA number since the second quarter of last year, while March’s NPA count is the highest in 24 months. We are focused on continuing to stay close to our existing advisors and doubling down on our in-person marketing events and digital advisor acquisition strategies. We believe focusing on these areas position us well to win new advisors and share of wallet from existing advisors, both of which can positively impact future net flows. On slide 11, we show our engaged advisor count.

Total engaged advisors at the end of the first quarter was 2,976. During the quarter, we added 94 engaged advisors. Of those 94, 56 were core advisors who qualified for engaged status for the first time and 38 were advisors that were back above the $5 million platform asset threshold as a result of market appreciation. Our engaged advisors account for 32% of all advisors using our platform and make up 92% of our platform assets. As always, growing the number of engaged advisors is a key focus for management, as it is crucial to drive further growth of our business and its financials. In addition to asset level and advisor count, the third way we measure our growth, which is not asset-based, in the number of households on our platform. The number of households are up 13% year-over-year to almost 244,000.

Now, let’s turn to slide 12 to discuss this quarter’s revenue, which was a record $177 million. As you know, we focus on our revenue net of related variable expenses. For the first quarter of 2023, our net revenue was a record $133 million, up almost 25% year-over-year. This is driven primarily by spread-based revenue, which was up $30 million or approximately 20 times from a year ago. This more than offset the decline in asset-based revenue, which was impacted by market depreciation. Slide 13 details our year-over-year net revenue walk. As the waterfall shows, net revenue was up year-over-year, driven mainly by spread income, which we just discussed. Year-over-year, yield on spread improved to 388 basis points. Asset-based revenue was down $6.8 million year-over-year, primarily driven by an $8.5 million decrease in revenue due to an $8.8 billion decline in billable core assets and $300,000 as a result of negligible fee compression.

This was offset by $2 million of revenue from Adhesion Wealth, which is not part of our financials this time last year. Subscription from Voyant was up 7% year-over-year — I’m sorry, subscription revenue from Voyant was up 7% year-over-year. Excluding the impact of FX, subscription revenue was up approximately 16% year-over-year. We are encouraged by Voyant’s growth prospects both in existing geographies and in high potential expansion geographies. Voyant increased enterprise licenses by more than 6,800 or 58% year-over-year, while they increased small and medium-sized business licenses by 820 or 15% over the same time frame. Lastly, the other income increased $2.8 million year-over-year driven largely by higher interest income earned on our corporate cash.

We continue to do a great job diversifying our revenue base, which will serve us well as markets continue to fluctuate. Now, let’s discuss expenses. Turning to slide 14, total adjusted expenses increased 12.3% year-over-year to $124 million. Quarterly operating expenses were up 16.7% year-over-year to $72 million, driven by increases in both employee compensation and SG&A. Employee compensation increased $5.6 million or 15.3% year-over-year, driven by an increased headcount of 82, of which about half is from the acquisition of Adhesion. SG&A increased $4.7 million or 18.6% year-over-year, driven by increased travel, events, and volume-related items. As a reminder, our first quarter SG&A expense is elevated as it includes the expense for our largest annual advisor event, Gold Forum.

As always, I will quickly run through our adjustments for the quarter. Excluding the $20 million reserve that Natalie already discussed, we added back a total of $8.2 million pre-tax, which is comprised of four items. First, $3.8 million of non-cash share-based compensation, we anticipate this to increase just under $5 million per quarter in the second half of 2023. Second adjustment to expenses is $300,000 related to acquisitions. Third adjustment is $1.9 million related primarily to reorganization and integration costs. Lastly, $2.2 million of the acquisition-related — lastly, $2.2 million of acquisition-related amortization. In 2023, we have set this to be our quarterly run rate. Now, let’s turn to slide 15 to discuss our earnings in the quarter.

First quarter 2023 adjusted EBITDA was a record $58.8 million, up 32% year-over-year and $6 million more than the then record $52.9 million last quarter. We are extremely pleased with our adjusted EBITDA this quarter, which is a testament to our growing revenue diversification and the flexibility and disciplined management of our expense base. Adjusted EBITDA margin was up a robust 330 basis points year-over-year to 33.3%. Our reported net income in the quarter was $17.2 million, while adjusted net income was a record $39.7 million or a record $0.53 per share. This is based on the first quarter diluted share count of 74.4 million. Our adjusted effective tax rate for the full year is now 24%. For the color, please see the adjusted net income walk on slide 20.

Now, let’s look at the reported first quarter balance sheet. I would highlight two items. First, we’re continuing to do a great job in generating cash. In the first quarter, we generated $39 million of cash from operating activities. We ended the first quarter with $136 million of cash, which is flat quarter-over-quarter, but reflects $25 million we used to pay down a portion of our long-term debt. Additionally, we still have $375 million in our credit facility that is available to the company. Our ability to generate meaningful cash from operations, our strong cash balance, and our credit facility give us a lot of dry powder for future M&A deals, which remains an important focus and a key component of our growth strategy. Second, capital expenditures primarily reflect our long-term investment, focused on creating new capabilities, increasing scale, and improving service.

In the first quarter, our capital spend was $10 million or 5.6% of total revenue. In 2023, we will continue our re-platforming efforts, productivity initiatives, and build other new solutions for our advisors. Natalie discussed this in detail during her prepared remarks. We expect to do all this while maintaining a run rate between 6% to 7% of revenue. Turning to slide 16, I would like to provide some commentary on the meaningful impact that spread continues to make on our financial results and how we look to maintain that. Our ability to earn spread is a direct result of our owning our own custodian, AssetMark Trust Company, or ATC. As you know, spread-based revenue is a function of the amount of cash held by investors at ATC and interest rates.

First, let’s discuss cash balances. In the first quarter, total cash as a percentage of assets at ATC remained elevated at 4.6%, while ICD, or non-discretionary cash, was 3.9%. As previously discussed on past earnings calls, we expect ICD cash as a percentage of assets at ATC to return to more historical levels of about 3.5%. Turning our attention to interest rates. The Fed increased rates two times during the first quarter. These rate increases are highly beneficial for the growth of our spread income, but rates will not stay high forever. As discussed last quarter, we have started to deploy a portion of our insured cash deposits to fixed-term agreements. In the first quarter, we added $125 million of new fixed rate term contracts. And as of March 31, 27% of cash at ATC is in fixed rate term with an average maturity of 1.6 years and a growth rate of 4.5%.

As a reminder, we have the optionality of placing up to 40% cash at ATC into fixed rate term. We will continue to update you on the deployment of cash into fixed rate term on future earnings calls. Finally, let’s turn to slide 17 to discuss our 2023 outlook; we are reaffirming our 2023 guidance. As a reminder, we are extending platform asset growth, 10% plus in 2023, which is driven by two components. First, we have net flows as a percentage of beginning of period platform assets in the high single-digits. And second, we have a market appreciation assumption of 3.5%, driven by the growth in spread revenue, subscription revenue, and a full year of Adhesion revenue, we expect our net revenue growth to be about 20%. This assumes the asset growth was slightly offset by about one basis point of fee compression, which is our regular expectation.

We have set our operating expenses, which consist of compensation SG&A to increase in the mid- to high teens. For clarity, about 25% of the year-over-year increase is due to the full year impact of Adhesion. About a third of the increase is due to volume and the remainder is driven by strategic investments in the talent acquisition, advisor growth and technology initiatives, such as our Advisor Benefits program and billing system replacement. As a reminder, our expense growth is disciplined and closely managed, and we will not let our expenses outpace revenue growth. As always, we are focused on realizing improved margin on our revenue and growing earnings. We expect our adjusted EBIT to be up 20%-plus year-over-year, and we expect margin expansion to be between 50 and 100 basis points for the year.

We will update our outlook again during the second quarter earnings call. With that, I will hand back over to Natalie for her concluding remarks.

Natalie Wolfsen: Thank you, Gary, and thank you to everyone on the call today. I look forward to seeing you all in person at our upcoming investor conferences. This concludes our prepared remarks. I will now turn the call back to the operator to begin Q&A.

Q&A Session

Operator: Thank you. Our first question comes from Michael Cho with JPMorgan. Please proceed.

Michael Cho: Hi, good afternoon Natalie and Gary. Thanks for taking my question. I guess the first topic, I just wanted to touch on was just around the guide and kind of the pipeline you’re seeing in terms of kind of organic growth on the platform. I realized you just posted a 7% annualized. But it sounds like you feel pretty good about the environment looking ahead, as well. So, I’m just trying to get a sense of how you’re seeing the landscape kind of for the remainder of the year? And then also you touched on kind of the production of existing advisors kind of inflecting as well as new advisors. So, I’m trying to get a sense of that split of growth from the existing versus the new advisors as well? Thanks.

Natalie Wolfsen: Great. So, I’m going to start with the first question related to organic growth and what we’re seeing, and then Gary will take the second which is related to how we’re seeing production from existing advisors versus new advisors. So, related to organic growth, we’re seeing a lot of movement in our pipeline in a way that in the second half of 2022 we did not. As we discussed in the earnings calls in the latter quarters of last year, as advisors were turning to serving their clients and giving them information and providing them comfort in the very volatile market environment, they weren’t spending their time — as much time managing their business and growing the business. And this is honestly guidance that we give advisors, the services that you provide in years where things are tense and to the degree to which you are proactive, helps investors stay invested, help them have confidence in their portfolios and then over time, that leads to more business with existing advisors, for advisors with existing investors, and also referrals from their existing investors to investors in their community, so advisors grow both ways.

At the tail end of last year, we started hearing from our advisors in our conversations with them, that they really wanted to move from defense to offense in 2023, and there were some reasons for that. The first is, the bond market is become a little more healthy and understood. The interest rate environment was much better understood, based on the Fed actions to-date. And additionally, investors had their hands around inflation and the geopolitical environment, while all those things were still volatile and concerning, they at least understood the trends and the direction. And so what we’ve seen in some advisors in the first part of 2023 is, them going on offense in partnership with us, more activities related to growth, more activities related to high net worth client, share of wallet campaigns, all the activities that you’d like to see from advisors, as they’re growing in a healthy way.

Related to the specifics of the numbers from existing and new advisors, I’ll just hand over to Gary.

Gary Zyla: Thanks Natalie. Thanks for the question, Mike. So, as we mentioned our net flows lift for the quarter was 7.1% and that’s our best lift in a year. We have seen a nice uptick in our gross production and it’s really on both sides, we talk about our existing business lift that we report, and also our — maybe NPAs, new producing advisors that come on in our best quarter in a year. When you think about the split, what we saw in the first quarter was that 85% of our production came from our existing book and about 15% came from our new producing advisors. This reflects a much stronger contribution from new producing advisors than we have seen, since probably late in the pandemic period and so we’re pretty excited about that trend.

Michael Cho: Great. Thanks so much. And if I could just squeeze one more in on Adhesion, you’ve put up some statistics and some new wins or new clients in the quarter. And I guess it sounds like you’re going to continue to tell us about these types of trends. But I guess just more broadly, can you just tell us the nature of these wins and why do you think they joined and where they might have joined from, or was there kind of white space opportunities that Adhesion is continuing to add into, and this is kind of the pace that we should kind of expect in terms of growth from the Adhesion platform as well. Thank you.

Natalie Wolfsen: Yes, as it relates to Adhesion, the services they provide to financial advisors, to largely RIAs is they help them scale and broadly speaking, automate their trading and investment selection process. So, at Adhesion, the advisor retains discretion, they’re managing the selection of the investments from a model marketplace, where the models in the marketplace give them a starting point, and then Adhesion provides them with the trading and rebalancing services related to that. In addition, Adhesion also provides scalable direct indexing, scalable tax management and other support services for financial advisors. So, these items are highly time-intensive for an individual independent advisor to do on their own, and Adhesion is able to perform those duties for them, the advisors save time and effort, so that they can spend their time growing their business and expanding their services.

And that’s what Adhesion does, and it’s incredibly powerful in the RIA community, because many RIAs don’t have either the time or capacity to do it themselves or the interest to execute on these trading responsibilities on their own. This is a mega trend for RIAs, outsourcing the types of activities and so Adhesion we feel is in a great place in the market, to capture assets from RIAs, as they move towards outsourcing in this fashion. Related to the activities that we see with Adhesion today, we’re very, very happy with what we’re seeing from Adhesion. As this trend grows, we hope Adhesion share of that trend will continue to expand and grow. But clearly, no guarantees at this time.

Michael Cho: Okay, great. Thank you so much.

Natalie Wolfsen: You’re welcome.

Operator: Our next question comes from Jeff Schmitt with William Blair. Please proceed.

Jeff Schmitt: Hi, good afternoon. I think you mentioned client cash as a percentage of custody assets bottoms at around 3.5% historically. Does that include the high yield savings account, because if not, I think they’re around $500 million that would add — I guess that would bump up the percentage to 4% or 4.2% maybe?

Natalie Wolfsen: That’s right. Jeff. The number, did not include our high yield program and you are correct, it would add about $500 million.

Jeff Schmitt: Okay. And then the sweep rate looks to be around 65 basis points. Currently, and correct me if I’m wrong, I think that was fairly consistent with the fourth quarter, but could you see it remaining at these levels, even if interest rates obviously, they moved up again today, they could in June. But do you see that sweep rate sort of remaining around here, or are peers sort of getting more competitive, could that sort of force your hand to increase that?

Natalie Wolfsen: So, related to our rates, we do raise our rates each quarter, commensurate with what’s happening in the competitive environment. So, we raised our rates quite a bit in the high yield solution this quarter, about 150 basis points, as I said in my prepared remarks. In addition, we look at our ICD rates relative to competition, to make sure that our advisors’ clients are in anyway foregoing yields by working with advisors who use AssetMark. And so what you should expect from us is, as the Fed rates increase for our rate generally speaking, although not specifically every single time and the same amount, to increase and absolutely be competitive with the environment around them. Additionally, in our ICD program, we’re going to be implementing tiering and so you’ll see different rates dependent on the balance that the clients have in the program, and this is consistent with our pricing strategy generally across the AssetMark platform, where the larger the client households with AssetMark, the lower the price or the higher the rate.

And so when you look at that 65 basis points, it’s different depending on whether or not you have a small balance at AssetMark Trust or larger balance. And all of that I just want to say — all of those actions — sorry, I just want to say, all those actions are built into the operating plan that Gary went through earlier.

Jeff Schmitt: Got it, great. Thank you.

Operator: Our next question comes from Alex Blostein with Goldman Sachs. Please proceed.

Unidentified Analyst: Hey guys, this is Michael on for Alex. So, yes, a lot of questions on wallet share it seems, looking at the household’s growth quarter-over-quarter, it was I think absent some of the recent volatility one of the slower quarters since pre-pandemic. So, on that topic, like what is kind of the greenway for wallet share expansion? How much of the average advisors wallet you guys currently have and maybe what missing pieces are you adding obviously with Adhesion and some of the other things you’re doing, what do you think you can add in terms of incremental capabilities to kind of capture whatever is remaining there?

Natalie Wolfsen: So, let me start by saying, this was not one of the lower quarters that we had since the pandemic. So, I just want to clarify that. And then, Gary, he is going to give you some details related to that.

Gary Zyla: Hi Mike, how are you doing? So, I think the way we look at it is, we do a survey of our advisors once a year and trying to understand the share of wallet and we serve hundreds of them each year. So it’s never a precise science. But here’s what we take from that, from our engaged advisors, almost 2,900 engaged advisors. We believe generally, we have about 50% of their wallet share and some are at close to 100, of course, and some are much lower. That averages out to about 50%. That 50% has been consistent over time, because as some of them grow obviously being on our platform, we are adding new advisors through that universe and giving them an opportunity to grow. And so if you — basically 90% of our book is from the engaged advisors, and we have about half of their book.

That — of the existing advisor base, you could say we have about half the assets right, in terms of — and our assets are about $100 billion. The other 6,000 advisors who are using our platform, the wallet share is much lower. And every quarter — by the way, we report out the EV lift metric, right, which is not, I guess many of the companies don’t do that, but that is our measure of that production coming in, the money coming in divided by the dates of assets under there. And that lift has generally been about 20%, lower over the past couple of quarters, generally been around 20%. And that is definitely our target for the existing book’s annual lift to our platform.

Natalie Wolfsen: And then Michael —

Unidentified Analyst: Go ahead Natalie.

Natalie Wolfsen: I just had one other thing to add, our net flows lift in the first quarter, which is a combination of the lift from existing business which Gary just mentioned, and also new producing advisors with 7.1%, which makes it the highest it’s been on a quarterly basis since the first quarter of 2022, and much higher than it was in the fourth quarter of 2022, and the third quarter of 2022 at 3.9% and 5.2% respectively. So, that’s what I mean by, we’re actually seeing great performance this quarter, relative to recent experience in EB and NPA.

Unidentified Analyst: Got it, that’s helpful. Thanks. Yes, I was representing the household change, but I think that’s been clarified. For the follow-up, I did want to touch on M&A. You guys mentioned that you’re kind of building up the reserve here. Maybe you can comment on what you’re seeing out there in terms of availability? Obviously, deal volume has been slow, but maybe in terms of missing capabilities that you guys would like to add, and maybe how the ball has been rolling there? Thanks.

Natalie Wolfsen: Yes. So, we continue to see good activity in our M&A pipeline, for capabilities M&A and scale M&A. And as we’ve talked about in the past on past earnings call, at AssetMark, we’re absolutely committed to both capabilities M&A, because we want to make sure that advisors have access to the capabilities they need to continue to scale on our platform, and scale M&A, because we view that as a key way to continue to grow our platform and reduce our cost to serve. As it relates to scale M&A, as markets become challenging, you start to see activity from small cap — for small cap like firms, that are feeling that they may need a partner to continue to compete, and we’re obviously actively engaged in all of those conversations.

You never know if you’re going to be the chosen partner and you also never know if you can come to agreement on price, and as we’ve mentioned before, we will continue to be incredibly disciplined as it relates to pricing. On the capabilities front, we’re still looking for technology capabilities that round out our services in the second pillar of our strategy. Voyant and Adhesion, both help us with the first two pillars of our strategy, and there are other technology capabilities that advisors would like access to in a fully integrated way, to simplify how they provide electronic services to their clients, or how they build and construct, and/or trade portfolio. Lastly, I’ll just say that we also continue to look for capabilities related to the fourth pillar of our strategy.

These are service offerings that we can provide advisors to help them scale and compete. And there’s all sorts of potential targets in this area; advisors need help with their financial — how they financially run their business. Advisors’ need help, especially the smaller ones, with how they implement compliance services. Advisors need help with how they build and create financial plans. And so those are just the high level overview of the services that we continue to look at.

Unidentified Analyst: Thanks guys.

Natalie Wolfsen: Thank you.

Operator: Our next question comes from Patrick O’Shaughnessy with Raymond James. Please proceed.

Patrick O’Shaughnessy: Hey, good afternoon. So, obviously, cash sorting and duration mismatch are terms that are top of mind for investors right now. Given that backdrop, can you walk through how AssetMark is comfortable in terming out your client cash balances?

Natalie Wolfsen: Yes, I’ll start and then I’ll hand off to Gary to add to that. Clearly, given the current market environment and also previous to the current market environment, really starting when the Fed was very clear, the Fed was very serious about raising interest rates, we started looking at our cash portfolio and determining what it was that we could do, and with always top of mind being ensuring that we provide a great rate and the right liquidity for our clients. And the first step of that process was doing a very, very detailed sensitivity analysis. Taking a look at what cash balances look like in different interest rate environment, not just the cash balances at our ICD program, but also how investors view cash investing differently.

So, early in the cycle, in the mid-part of last year, we proactively added short fixed income solutions to our platform, more duration oriented solutions to our platform. In addition to that, we looked at our ICD program in the balances where they were in 2022, relative to where they could be, if there were other attractive rate options in the marketplace, through money funds or fixed income. And we’ve built those assumptions into our operating plan, with the understanding that we’re in the business of serving advisors and their clients. So, we’re asset gatherers. We want those client relationships to grow and we want to make sure that our platform has the solutions that help advisors attract those assets. What that means is that for the fleet of cash in fixed income positions on our platform, we built it in what we think the distribution of those assets will be based on our experience in the past, and that’s in the operating model.

As it relates to the ICD program specifically, in the high yield cash program specifically, and why we feel comfortable adding fixed term to our solution at this time. That’s where the sensitivity analysis comes in for that particular program. We took a look at how balances in the program has changed over time. We also took a look at the percentage of balances that were insured or not insured, and by the way, the vast majority of the balances are insured because our insurance level is of $2.5 million, and what balance movement could look like. Then we took two and three standard deviation events, and with those in mind, we calculated, how much of the portfolio could be fixed term in nature, and that fixed term percentage is conservative to make sure that, again, we’re managing the liquidity and the rate for the client.

The last thing I’ll just say about the work that we’ve done, is we also took a very hard look at duration, given how our balances flow over time. And right now we’re keeping our duration short for two reasons, one is the vast part of the curve that’s attractive right now, you’re being paid to be defensive, but also wanting to make sure that we were conservative about the duration of the portfolio. And then I’ll hand off to Gary.

Gary Zyla: So, just a few more points Patrick and nice to hear from you, again. I think one point is, the ICD program is that cash and we called it non-discretionary in our script, because that there is a requirement to hold 2% of every account in cash. And so while we say it averages about 3.5% historically and it has been much higher than that of recent, 2% will be in cash, and so that as a function of the total asset base — $4 billion?

Natalie Wolfsen: I’m sorry. The 2% is for billing purposes–

Gary Zyla: Yes, I’m sorry, I’m sorry, yes. So, that 2% is there and that will be in cash going forward. Additionally, we have upwards of 20 partner banks, this cash is not on our balance sheet we vet and work with the partner banks we have, which gives us a great diversification regarding that as well.

Patrick O’Shaughnessy: Great. Appreciate that answer. And then today, you’ve spoken about your investments in technology and client service and investment solutions, how is the relative importance of those three factors, in terms of attracting engaged advisors to your platform, how has that relative importance changed over the last few years?

Natalie Wolfsen: It’s interesting, I would say that the importance of technology and broadly speaking services to help investors understand their portfolios and how important portfolio construction and asset allocation is for long-term results, as well as the technology that helps illuminate that for advisors in a scalable way, has increased, relative to the importance of the investment solutions on the platform. If you go back, I don’t know 10 years ago, five years ago, TAMPs were product access points for investment solutions, and now we are a comprehensive wealth management platform, because that’s what advisors need to compete relative to the much, much larger competitors in the market. And so you’ll see us not just adding new investment solutions in our platform to make sure advisors access to what they need to serve their clients, but also investing extensively in technology and servicing, so that these independent financial advisors can remain independent, and so that their clients can have access to a broad set of technology and solutions, even if their advisors are small, relative to other competitors in the market.

Patrick O’Shaughnessy: Terrific. Thank you.

Operator: Thank you for your question. There are no questions registered at this time. There are no further questions. So, I will pass the conference back over to the management team for any further remarks.

Natalie Wolfsen: I just want to say thank you everyone for your time today. It’s great talking to you and we look forward to seeing you at future investor conferences. Have a great day.

Operator: That concludes today’s call. Thank you for your participation, you may now disconnect your lines.