AssetMark Financial Holdings, Inc. (NYSE:AMK) Q2 2023 Earnings Call Transcript

AssetMark Financial Holdings, Inc. (NYSE:AMK) Q2 2023 Earnings Call Transcript August 5, 2023

Operator: Good afternoon, everyone. And welcome to AssetMark’s Second Quarter 2023 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 Hamilton: Thank you, Hannah. Good afternoon, everyone, and welcome to AssetMark’s second 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 second 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. With that, I’ll turn the call over to my colleagues. Natalie, take it away.

Natalie Wolfsen: Thank you, Taylor. I hope everyone on the call is having a great summer. Today, I want to start with a discussion of our record results for the quarter and then provide a detailed analysis of our five growth pillars, highlighting the progress we are making against each. I will then turn the call over to Gary, who will discuss our financial and operating results for the second quarter and then provide an update about our 2023 outlook. Starting on Slide 3, the second quarter of 2023 was another record quarter for AssetMark. We ended the quarter serving an all-time high 247,000 plus households and around 9,300 advisors, of which over 300 are – of which over 3,000 are engaged. In addition to growing the number of advisors that we serve, we just completed our 2023 Net Promoter Score survey, which we do annually, and we received an all-time high Net Promoter Score of 72, eclipsing the previous record set last year by five points.

From a financial standpoint, total revenue was a record $183 million, up 21% year-over-year, while net revenue was a record $136 million, up 23% year-over-year. These all-time high top line results allowed us to also achieve our best ever bottom line results. Specifically, adjusted EBITDA was $60 million for the quarter, and this marks the fifth straight quarter of record-setting quarterly EBITDA, a powerful testament to our diversified revenue mix and disciplined expense management. Net income was $33 million, up 30% year-over-year, while adjusted net income was $41 million, up 27% year-over-year. Adjusted earnings per share was $0.55 in the second quarter, up 25% year-over-year. We are extremely pleased by these results, and I’m also encouraged by some of our forward-looking indicators, including organic growth and new advisor additions.

Our second quarter net flows of $1.7 billion marked the highest quarter since the first quarter of 2022, while our 188 new producing advisors, or NPAs, are the highest since the second quarter of last year. At AssetMark, we continue to focus on driving new advisors to our platform, while capturing share of wallet from our existing advisors. All in all, results for the second quarter were excellent, and we feel we have a lot of momentum heading into the second half of the year. Now, as I do every quarter, I want to give you an update on how we are moving the ball forward in each of our key strategic pillars. Moving to Slide 4, the first component of our growth strategy is to meet advisors where they are and where they are going. Adhesion Wealth had another strong quarter and continues to focus on bringing on new RIA firms, while also expanding share of wallet on existing firms.

Adhesion has added a total of $243 million of assets from new firms during the first half of the year. Additionally, Adhesion did an excellent job of growing share of wallet from existing firms on the platform. In fact, 88 of Adhesion’s 110 firms grew during the second quarter. Adhesion also added new investment models to its model marketplace, which is currently the industry’s second largest. In the second quarter, Adhesion added four new managers and 75 new models to their platform. Adhesion’s future strategic focus is on the RIA and enterprise client experience through platform and product enhancements and on partner building initiatives. Adhesion is focused on five key areas. First, we are expanding their market penetration with a focus on attracting new firms and expanding wallet share with existing firms.

Second, Adhesion is focused on developing the asset manager community through programs such as Adhesion Alliance, a premium program for the Adhesion Asset Manager community. This solution provides asset managers with advisor usage and product adoption insights. In the second quarter, Adhesion added six new managers to the Adhesion [indiscernible] program, which now has 290 models and 38 managers. The third area of strategic focus for Adhesion is enhancing direct indexing and tax transition capabilities. Here, we are specifically focused on expanding into new markets with our SMAs. In addition, we are enhancing tax transition capabilities with improved reporting and a new tax alpha insight module that shows tax impact within the context of direct indexing.

Fourth, Adhesion is galvanizing partnerships through its API toolkit, which will extend Adhesion’s APIs for partners, allowing expanded platform assets. This is a critical capability to support Adhesion’s clients who have invested their own resources to build out their own tech stack. These tools will allow our clients to embed the capability of Adhesion’s award-winning managed account platform, while at the same time, not losing the autonomy and control that they may need. Lastly, Adhesion is focused on continuing to upgrade their advisor platform, specifically the RIA desktop user experience and the manager and strategist portal. Adhesion continues to receive accolades throughout the financial services industry, most recently being named a final in the model marketplace subcategory for the 2023 WealthManagement.com Industry Awards.

We are excited about the advantage that Adhesion gives us in the RIA market and look forward to sharing their continued progress during future earnings calls. Now, turning to Slide 5, the second component of our growth strategy is to deliver a holistic differentiated experience to advisors and their clients. This quarter, I want to provide an update on Voyant. It has been two years since we have closed the acquisition of Voyant. And while their growth is slower than originally modeled, we are seeing steady growth in all of their markets. Let’s discuss these geographies in a bit more detail. I would like to start in the UK Voyant is realizing strong growth in the small business market in the UK. Driving this demand is the rollout of the Financial Conduct Authority’s Consumer Duty regulations, which set higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first.

Robust financial planning helps advisors demonstrate that they are complying with these new regulations. Ireland also remains a valuable geography for Voyant, and we continue to see growth in small and mid-sized licenses in this country. Next, let’s discuss the Canadian market. As we’ve discussed previously, while enterprise license expansion has been very strong, growth in Canada has been a bit delayed as it took Canada much longer to reopen post pandemic. Accordingly, growth in this geography has been slower than originally modeled. Next, let’s turn our attention to the U.S. market. Voyant continues to win approvals from broker dealers, allowing us to market and sell our financial planning software to their advisors. Reviews of Voyant’s retirement income solution is encouraging.

Even so, the adoption of Voyant in the United States has been slower than we originally expected. Lastly, in Australia, Voyant is seeing excellent momentum from small and mid-sized firms. This is a newer geography for Voyant, and strong word of mouth is driving our growth there. Excluding foreign language pressures, revenue from Voyant was up approximately 17% year-over-year, driven by an uptick in both enterprise and advisor consumer licenses, the former up 59% year-over-year. While we are pleased with Voyant’s growth across their markets, their growth has not accelerated at the pace we originally modeled before acquiring the company. We are actively working to further accelerate Voyant’s growth. And currently, we are investing in an expanded sales strategy, a dedicated Voyant PR program, expansion of Voyant’s financial well-being program, including a new well-being dashboard, and select unbundling of comprehensive financial planning tools for new financial advisors.

As always, we look forward to providing you with further updates about Voyant’s progress as the year continues to progress. The third component of our growth strategy is to enable advisors to serve more investors across the wealth spectrum, varying life stages and generation. Now, let’s turn to Slide 6. We recently completed our annual share of wallet study with over 900 respondents, of which more than half were engaged advisors. Expanding the share of wallet from our existing advisors is one of the many ways we can accelerate our growth. This study is invaluable as it allows us to see the assets that are held off our platform by advisors who work with us. Two key points emerged from this year’s study. First, we have a total business opportunity of $380 billion across our advisor base, up from $375 billion last year.

The bulk of this opportunity is with advisory assets and commission assets. And while we don’t support commission assets on our platform, we have a proven history of helping advisors move from a commission-oriented to a fee-based business model. Second, we continue to do an excellent job capturing share of wallet from our engaged advisors, who are those with over $5 million in assets on our platform. Our 2023 share of wallet study shows that we have 86% of our engaged advisors TAMP assets, 61% of all of their advisory assets and 39% of their total assets. Each one of these percentages are up from our 2022 share of wallet study. This year’s study underscores that we are capturing assets from our existing advisors and still have a long runway of growth opportunity ahead of us, which we believe we are well positioned to capitalize on.

We are consistently 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, while positioning us to capture more share of their clients’ wallet. Now, let’s turn our attention to Slide 7 and the fourth component of our growth strategy, to help our advisors grow and scale their businesses. According to a recent Cerulli study, 106,000 advisors plan to retire over the next decade, representing 37% of industry headcount and 39% of total assets. Among advisors retiring in the next 10 years, 26% are unsure of their succession plan with 95% of those advisors’ surveys citing that finding a qualified buyer is a challenge for them.

We just completed our pilot AdvisorLink in response to this demand. AdvisorLink is a private succession marketplace that will help AssetMark advisors discover succession solutions within the AssetMark community. AdvisorLink provides a secure private platform for our advisors to post and search for opportunities among embedded advisors and facilitates agreements from beginning to end, making the entire process less complicated for both advisors. We believe that AdvisorLink not only solves the critical need facing the industry, but also promotes the retention and recruitment of advisors on our platform. Numerous advisors participated in our pilot and the feedback was very positive, highlighted by the ease of use and simple navigation. We look forward to launching the solution in the next few weeks.

We take great pride in our ongoing ability to help our advisors grow and scale. And as I’ve said before, it is why they win and then why we win. Now, turning to Slide 8, the final component of our growth strategy is to pursue strategic transactions by adding capabilities and assets that improve advisors’ ability to serve their investors and expand their businesses. As we’ve said before, we have approximately $500 million in purchasing power for future M&A opportunities and are increasing our purchasing power each quarter because of our strong cash generation. We are proactively looking at all opportunities that will benefit our advisors and their clients, and we’ll continue to be disciplined acquirers, while we search for new opportunities.

Now, before turning the call over to Gary, I want to circle back around to the $20 million accrual we put up last quarter. The case is still under review, and we remain confident that the accrual we put up in the first quarter will be the maximum amount. We will provide further updates as we are able to share more and once the matter with the SEC is fully resolved. I will now turn the call over to Gary to take us through a deeper dive on our second 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, second quarter was another record quarter for AssetMark. In my remarks today, I will highlight our results for the quarter and then provide an update for our 2023 outlook. Starting on Slide 9, second quarter platform assets increased 23% year-over-year to $100.8 billion. Quarter-over-quarter, platform assets were up 5%, driven by market impact net of fee of $2.9 billion and quarterly net flows of $1.7 billion. Year-to-date our annualized net flows as a percentage of beginning period assets is 7.3%. As you know, net flows are comprised of production or money onto the platform, less redemptions or money off the platform. Second quarter production is the highest than it has been since the fourth quarter of 2021, a strong sign of the money coming onto the platform, while redemption rates are still low, a strong sign of our advisor satisfaction.

With advisor satisfaction, we further highlighted our record NPS, which Natalie discussed. All in all, we are quite pleased with our net flows in the second quarter. Let’s now discuss our advisor metrics. We added 188 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. 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 strategy. 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 flows. On Slide 10, we show our engaged advisor count. In the second quarter, we eclipsed 3,000 engaged advisors for the first time in our company’s history, ending the quarter with 3,032 total engaged advisors.

During the quarter, we added 56 engaged advisors. Of those 56, 28 were core advisors who qualified for engaged status for the first time and 28 were advisors that moved back above the $5 million platform asset threshold as a result of market appreciation. Our engaged advisors account for 33% of all advisors using the 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 growth, which is non-asset based, is the number of households on our platform. The number of households are up 13% year-over-year to almost 248,000. Now, let’s turn to Slide 11 to discuss this quarter’s revenue, which was a record $183 million.

As you know, we focus on our revenue net of related variable expenses. For the second quarter of 2023, our net revenue was a record $136 million, up 23% year-over-year. This is driven primarily by spread-based revenue, which was up more than $22 million from a year ago. This more than offset the decline in asset-based revenue, which was impacted by market depreciation. Slide 12 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 396 basis points. Of this total yield, our securities-backed line of credit program, or SBLOC, contributed 10 basis points. Excluding the contribution from SBLOC, net yield for the quarter was 386 basis points.

Asset-based revenue was down $1 million year-over-year, primarily driven by $1.6 million decrease in revenue due to the $1.5 billion decline in billable core assets, and $1.4 million as a result of fee compression, which was offset by $2 million of revenue from Adhesion Wealth, which was not part of our financials this time last year. Subscription on Voyant was up approximately 13% year-over-year. Subscription revenue from Voyant was up approximately 13% year-over-year. Excluding the impact of FX, subscription revenue was up approximately 17% year-over-year. Lastly, other income increased over $3.4 million year-over-year, driven largely by a higher interest income earned on our corporate cash. We continue to do a great job of diversifying our revenue base, which will serve us well as market conditions fluctuate.

Now, let’s discuss expenses. Turning to Slide 13, total adjusted expenses increased 18.5% year-over-year to $129 million. Quarterly operating expenses were up 21% year-over-year to $73 million, driven by increases in both employee compensation and SG&A. Employee compensation increased $7 million or 20% year-over-year, driven by increased headcount of 94, of which a little less than half are from the acquisition of Adhesion. SG&A increased $5.8 million or 24% year-over-year, driven by increased travel, events and volume-related items. As always, I will quickly run through our adjustments for the quarter. In the second quarter, we added back a total of $9.7 million pretax, which is comprised of three items. First, $4.2 million of non-cash share-based compensation, we anticipate this to increase to approximately $5 million per quarter in the second half of 2023.

Second, adjustment of $3.6 million related primarily to reorganization and integration costs, 50% of this related to one-time strategic projects that are now being led by our new Head of Strategy. 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 14 to discuss our earnings for the quarter. Second quarter 2023 adjusted EBITDA was a record $60.4 million, up 22% year-over-year and more than the then record $58.8 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 20 basis points year-over-year to 33%.

Our reported net income for the quarter was a record $32.9 million, while adjusted net income was also a record at $41.2 million, or a record $0.55 per share. This is based on the second quarter diluted share count of 74.5 million. Our adjusted effective tax rate for the full year is now 24%. For further color, please see the adjusted net income walk on Slide 20. Now, let’s look at the reported second quarter balance sheet. I would highlight 2 items. First, we continue to do a great job of generating cash. In the second quarter, we generated a robust $66 million in cash from operating activities. In the first half of 2023 alone, we have generated over $105 million in cash from operating activities. We ended the second quarter with $187 million of cash on our balance sheet.

We still have $375 million in our credit facility that’s 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 as a key component of our growth strategy. Second, capital expenditures reflect our – primarily reflect our long-term investments focused on creating new capabilities, increased scale and improving service. For the second quarter, our capital spend was $11.2 million or 6.1% of total revenue. In 2023, we’ll continue our re-platforming efforts, productivity initiatives and build other new solutions for our advisors. We expect to do all this while maintaining a run rate between 6% to 7% of revenue.

Now, turning to Slide 15, I would like to provide some commentary on the meaningful impact that spread-based revenue continues to make on our financial results and how we look to maintaining it. 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 balance. In the second quarter, total cash as a percentage of assets at ATC was 4.0%, while ICD or non-discretionary cash was 3.2%. Cash as a percentage of platform assets has been on a downward trajectory as more and more strategists put money to work in the equity and fixed income markets. Unless something drastic happens in the capital markets, we expect ICD cash as a percentage of assets at ATC to return to the more historical level of about 3.5%.

Turning our attention to interest rates, the Fed increased rates once more during the second quarter and just raised rates again during their July meeting. These rate increases are highly beneficial for the growth of our spread income, but rates will not stay high forever. As discussed in previous quarters, we have started to deploy a portion of our insured cash deposits to fixed-term agreements. In the second quarter, we added $250 million of new fixed-rate term contracts. And as of June 30, 38% of cash at ATC is in a fixed rate term, with an average maturity of 1.63 years and a growth rate of 4.59%. As a reminder, we have the optionality of placing up to 40% of 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.

Turning to Slide 16, we are well hedged when rates will begin to decline. On this slide, I want to try to give you a sense of our sensitivity to future interest rate declines, as most of the market assumes rates will start coming down in 2024. To start, we are expecting total 2023 net spread revenue of approximately $120 million. 2024, we modeled three different interest rate scenarios with some basic assumptions: one, the average cash at ATC will grow approximately 10% year-over-year; two, ATC cash in fixed-rate term will be approximately 35%; and three, the change in variable gross rate will happen in the midpoint of the year. Given these assumptions, if interest rates go down 50 basis points, we expect 2024 net spread revenue to be effectively flat with 2023 results.

If interest rates go down 100 basis points, we believe spread income – spread revenue will be down 5% to 10% from 2023 total. Lastly, if rates go down 200 basis points, we expect the impact on our 2024 net spread revenue to be down 10% to 15% year-over-year. Now, this is very rough math, of course, and there are a lot of variables could be different. And hopefully, this gives you a sense of our thinking for next year and the positive impact of our fixed-term deposits. Let’s turn to Slide 17 to discuss our revised 2023 outlook. We previously guided to a 10% platform asset growth because of our annual market assumption of 3.5% in annual growth outlook. We are increasing our platform asset growth to 15-plus percent because of a stronger market impact, deeper advisor engagement and better-than-expected organic growth.

This, coupled with the fact that we have billed and collected approximately three-fourth of our asset-based revenue for the year, gives us confidence in increasing both our top and bottom line 2023 outlook. We are increasing our revenue growth expectations from a range of 18% to 22% to 20% to 22%. Turning to expenses, we are revising our expense growth outlook for the year from 16% to 18% to 15% to 17%. This level of expense growth will allow us to continue to meaningfully invest in the future of our business, while maintaining discipline, so that our expense growth will not outpace our revenue growth. As a result of our increase in revenue growth outlook and revising our expense growth outlook, we are increasing our adjusted EBITDA outlook from 20% plus to 22% plus.

Based on the growth outlook I just laid out, we feel confident in our ability to expand adjusted EBITDA margins by 50 basis points to 100 basis points. We are extremely pleased about our financial results for this year and are on track for the best year in our company’s history. With that, I will hand over to Natalie for concluding remarks.

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

Q&A Session

Operator: Certainly. [Operator Instructions] The first question is from the line of Michael Cho with JPMorgan. You may proceed.

Michael Cho: Hi, good afternoon Natalie and Gary. Thanks for taking my question. My first question is just quickly on the guide, Gary, that you laid out. Just high level, you basically tightened the revenue growth guide to the higher end of the range and tightened lower the OpEx growth guide to the lower end of the range. Just curious, anything to call out on the expense and then investment side in terms of cadence and anything that might have even pushed out to 2024? Again, I’m just curious, you increased revenue growth, but then first down OpEx growth, so just curious if there’s anything else to call out there.

Gary Zyla: Sure, absolutely, Michael. And nice to hear from you and hope you are doing well. On the operating expenses, what we have focused on this year is making sure we are well set up for the future. We always do that, but markets have been pretty favorable this year, a lot tailwinds this year, but we want to make sure that we are prepared, as we talked about, interest rates turning around perhaps at some point. So, we’ve been very cautious in our hiring this year. We’ve added net about 3% to 4% of our headcount this year, which is conservative by our standards, and we’re certainly adding where we need to in terms of both investing in growth, as well as investing in our strategy, investing in new products, company and whatnot.

But that’s particularly an area where we have been a bit more cautious and a bit more conservative in investing. And as we see this, let this year develop and get into next year, we may start again investing at the level that we were investing perhaps in 2021 and 2022.

Michael Cho: Okay, that’s great. Thank you for that Gary. And then, just a follow-up on Voyant, I appreciate the update there, very helpful. And I know you touched on some of the nuances between the geographies. But if we just look at, you call out the U.S. and Canada. I guess, excluding kind of the pandemic effects, I was just wondering if you can just kind of flush out in terms of what are some of the hesitations toward increased adoption that you’re seeing in the marketplace today for Voyant. Thank you,

Natalie Wolfsen: So, I’ll take that one. As it relates to Voyant in Canada, we continue to see really good enterprise advisor license growth at enterprises where Voyant has long-standing relationship or an existing relationship. The large enterprises, the large banks in Canada are extending those financial planning program throughout their enterprise, which was something that we had thought would happen and had planned for, although earlier, in earlier years of our model, when we acquired Voyant. What’s been a little slower than expected in Canada is the small and medium business license growth. And the same thing the inverse is true of the U.S. So, in the U.S., the enterprise license growth has been delayed and slowed relative to planned, and the small and medium business total licenses have grown, although growing modestly.

And so, what we’ve done in the early part of this year is we’ve changed the marketing program. We have a plan for enhancing our sales efforts. We’ve expanded the product development work they’re doing in Voyant to just make sure that we have a solution that appeals to the broadest possible spectrum of enterprises, small and mid-sized businesses. And we haven’t yet seen the return on those investments because they started, as I said, earlier this year.

Michael Cho: Great. Thanks guys.

Operator: Thank you, Mr. Cho. Our next question is from Dan Fannon with Jefferies. You may proceed.

Dan Fannon: Thanks. I just have a question on cash. Looking at the monthlies, it looks like April was the low, not surprising given tax season. But I think in your commentary, Gary, you mentioned getting back to the 3.5% versus, I believe, closer to 4% now as a percentage. So, just want to get a sense of how you’re thinking about client behavior and what’s been happening, if anything has really changed. It seems like it’s slowing, but just want to verify that and then kind of how you’re thinking about it going forward.

Gary Zyla: Yes. So first, I’ll take a step back, Dan and [indiscernible]. The cash – most of that client cash is not directly directed by the end investor. Remember, most of our platform is driven by the strategies of the strategists that investors lend. And so, when money gets put to work, it’s those strategists deciding to take the cash and put it to work in their mutual fund or ETF vehicles and whatnot. And so, given that, as the market becomes more stable, generally, we return to this sort of 3.5%. During market volatility, one way or the other, cash will either spike up when the strategists decide to put a safety little bit, or it’ll spike back down when they kind of see a bit of a – or anticipate collectively a bit of run in the market.

And so, the absolute dollars are going to be up and down. As our overall assets grow, the dollars of cash should continue to grow because they still stay somewhere in that, let’s call it, anywhere from 3.2% to 3.8%, but on an average 3.5%.

Natalie Wolfsen: And then, the only other thing I would add to what Gary said is the behavior we’re seeing in the market from our strategists and advisors now, a behavior we anticipated as market recovers, and so it’s consistent with the modeling we’ve done in our operating plan.

Dan Fannon: Understood, that’s helpful. And then, of the 188 new producing advisors, can you talk about the channels they are coming from or sources of that growth and if it’s that different than what you’ve been seeing in recent quarters?

Natalie Wolfsen: The 188 new producing advisors are actually coming from a variety of channels, everything from events to referrals from existing advisors, to growth academies we do with OSJs, where they invite advisors who are affiliated with them and they learn more about AssetMark, through to digital lead generation, where we send out to the marketplace thought leadership and advisors respond to that thought leadership, either related to investments or how they run their business or key issues impacting their clients, and that is a source of leads for us. And so, all of those channels have worked well for us in the past and certainly in this last quarter, and we are absolutely focused on making sure we have a diversity in our lead generation going forward.

Dan Fannon: Thank you.

Gary Zyla: Dan, I want to jump back on that cash question. Dan, if I can jump back on the cash question because I do want to make it clear too. Total cash that we reported is net of the ICD cash, the insured cash deposit program, which we target at 3.5%, plus our high-yield cash program, which – that is more discretionary and that’s where end clients decide to put money into a higher-yield account. And from the cash received reported, even this last quarter, it’s about the total, and if you do the math, about 3.97% of our total assets at AssetMark Trust Company. But the ICD cash is about 3.2%. Our high-yield cash is somewhere up about 0.75%. And so, why I mentioned that is, as we look forward in the outlook I was giving you, we’re actually expecting our cash balances to increase as a result of the ICD cash growing to – going back to its historical level of 3.5%. Does that help?

Dan Fannon: Understood. Thank you. Yes.

Operator: Thank you, Mr. Fannon. Our next question is from the line of Jeff Schmitt with William Blair. You may proceed.

Jeff Schmitt: Hi, good afternoon. So, organic growth is up from last year. Could you maybe discuss how much of that is being driven by some of these new initiatives, I think, from last quarter, the new tax strategies, investment models, the investment consulting program? Is that rolled out to everyone? And can you see what type of production bump that may be driving?

Natalie Wolfsen: So, when we look at all the initiatives that we’ve launched over the last, say, 18 months, we absolutely track the assets that are generated by each of them. Some get immediate traction and grow quite quickly. Some examples of that would be the fixed income solutions that we launched last year. Many advisors and their clients were looking for safety and yet they still wanted yield on their portfolio. And so, those solutions in that part of our market grew quite quickly. And then others take a little longer to gain traction, and that’s a little bit by design because it takes a little while for advisors to get comfortable with the solution and it also takes a little while for them to fully implement it and adopt that in the platform.

So, an example of that would be investment consulting, where while the program is meeting our objectives, it just hasn’t and never was expected to have an immediate impact, more of a longer-term impact. Other areas of our platform, where we’ve had a lot of success is the additions to our high-net-worth program, our continuing efforts to help advisors move from commissions to fees and to enhance their practice, and then, obviously, moving from A shares held direct to advisory. We have extensive programs to help advisors migrated in that way. So again, the good news here is that we have a portfolio of new solutions, some in technology, some in services, some geared towards share of wallet gain and others geared towards attracting new segments of the advisors, which are the first of our – first four of our five pillars, and we have initiatives that are producing results across all four as it relates to our new producing advisors, and that’s what we want to see.

We want to see a variety of different attraction points for AssetMark with new producing advisors.

Jeff Schmitt: Okay, very helpful. And then, the eWealthManager update, is that still on track for this year? And could you maybe give us an update on kind of what you’re modernizing there? I think you’ve referenced in the past like an insights engine that I don’t know if you cross-sell products through that or use AI. Maybe if you could just give us an update on where that stands.

Natalie Wolfsen: Absolutely. So we’re in the midst of re-platforming at AssetMark, and obviously, re-platforming our advisor workstation. eWealthManager is a big part of that. Before I go into the timing and the early planned launches, I do want to say that this is something that we’re funding within our 6% to 7% budget that we have for capital expenditures as a percentage of revenue. And this fall – late this fall, early winter, we are planning to launch Phase 1 of that eWealthManager redesign. And Phase 1 includes a new login, a new navigation and then enhanced advisor insights, where they can look at their clients’ activities with their accounts and their portfolios and determine whether clients are engaging and likely to contribute more to their relationship with their clients or disengaging and require outreach from the financial advisor, also give some insights into their business, insights into their portfolios’ performance and other things.

But that’s just Phase 1. And again, we’re hoping to launch that sometime between the end of October and beginning of November. If for whatever reason, we feel it’s not ready, it might drift into January, just because launching a new technology solution at fiscal year-end is not a great idea, it’s not a great service for financial advisors. And then Phase 2 aims at enhancing how advisors interact with our technology to invest or redeem from the portfolios that they’ve put in place for their clients, and to do that in a much more effective, efficient way for their practice, as well as redesigning how we provide status to our advisors about their client activities, and then there are various phases afterwards. We have about five phases that we’ve outlined for financial advisors.

And at the end of the five phases, the platform – the new platform will be complete for now. As you know, with technology, you’re never really finished. And so I’m sure, at the end of those five phases, there will be another five phases we want to complete with new services to our advisors.

Jeff Schmitt: Okay, great.

Natalie Wolfsen: And then, you asked about AI.

Jeff Schmitt: Yes.

Natalie Wolfsen: And I do want to say, we are doing R&D around AI for our operations and our technology team. We’ve done some testing with some interesting results so far. And then as it relates to those advisor insights, absolutely, there is machine learning embedded in those insights to the benefit of the advisors and their clients. So, apologies for missing that the first time around.

Jeff Schmitt: Yes. No, thank you. Very helpful.

Operator: Thank you, Mr. Schmitt. Our next question is from the line of Patrick O’Shaughnessy with Raymond James. Your may proceed.

Patrick O’Shaughnessy: Hey, good afternoon. So, AssetMark reported four net new total advisors in the quarter and 66 over the past 12 months. Given that – I agree that engaged advisors are certainly more important to your model at this point, but at what point does the lack of net new total advisor growth become a concern and a headwind for your pipeline of engaged advisors?

Natalie Wolfsen: So, Patrick, absolutely, we would like to have our total number of advisors growing and growing quickly. More important to us though is that when advisors come in our platform, they engage with us and then they grow on our platform because it’s when they do that, that they see the full benefits of AssetMark, their business grows, the number of clients they serve grow, and therefore, AssetMark grows too. And so what you saw this quarter within the net four advisors is, some clients at the bottom end of our platform that had maybe tried AssetMark out with one or two accounts leaving the platform and then more clients than ever engaging with us. In addition, we’re really excited because this 100 – this class of 188 new producing advisors is actually of the highest quality that we’ve seen in a while, the most likely to become engaged.

And then the last thing I’ll just say is we implemented, beginning this quarter, a set of programs on our platform that are geared specifically towards reengaging the distinguished advisors and ensuring that the 188 new producing advisors achieve their full potential. And so, I’m glad you mentioned that because it’s something that we’re actively working on right now. And there are some green shoots in terms of the quality of the new producing advisors and the rate with which those disengaged advisors became engaged in the second quarter. The last thing I’ll just say is we’ve also really started focusing on getting advisors to – NPAs to $1 million and then a specific engagement program after the $1 million to get them to $5 million.

And we’re seeing good results from that too.

Patrick O’Shaughnessy: Got it. Appreciate it, thank you. And then, Gary, maybe a question for you. I think if I heard correctly earlier, you mentioned you’re expecting 3% to 4% headcount growth for the year. So, if I look at your expenses, I think, compensation and benefits is probably turning to be up mid-teens for the year and general and administrative and professional also probably up mid-teens. Can you maybe help us bridge between 3% to 4% headcount growth and the total company expense growth outlook?

Gary Zyla: Sure. And your numbers are right on. And now, when I say that we were at 3% to 4% year-to-date, so I would say more our total growth for the year. Total growth for the year will be close to probably to 7% or so. And then when you think about year-over-year expense now, Patrick, the 40 or so folks or 4% of our folks from Adhesion had joined us right at the end of December. So, if we take our organic growth and what we’ve done so far this year, add that 35 people onto [indiscernible], that’s 3.5% year-to-date. So soon, that’ll be about 7% for the full year since we’re adding. If we add that four points also from the Adhesion group that came on at the end of December, you’re talking about high headcount [ph] from the end – beginning of December, growing about 11% for the total year.

And then when you think about the average for the full year of last year versus this year, you’re getting something closer to the mid-teens in terms of both the headcount, as well as our normal salary increase is about 3% to 4% that will be effect and ready to go.

Patrick O’Shaughnessy: Very helpful. Thank you.

Operator: Thank you, Mr. O’Shaughnessy. [Operator Instructions] There are no additional questions showing at this time, so I will turn the call over to Natalie for any closing remarks.

Natalie Wolfsen : Thank you. And thanks, everyone, for attending our second quarter earnings call. We’re looking forward to seeing you next quarter.

Operator: That concludes today’s AssetMark Financial Holdings, Inc. 2023 earnings conference call. Thank you for your participation. You may now disconnect your lines.