AssetMark Financial Holdings, Inc. (NYSE:AMK) Q3 2023 Earnings Call Transcript

AssetMark Financial Holdings, Inc. (NYSE:AMK) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Good afternoon, everyone, and welcome to AssetMark’s Third 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 third quarter 2023 earnings conference call. Joining me are AssetMark’s Chief Executive Officer, Michael Kim; and Chief Financial Officer, Gary Zyla. Today, we’ll discuss the results for the third 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 Michael 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 colleagues. Michael, take it away.

Michael Kim: Thank you, Taylor. Good afternoon and welcome to our third quarter earnings call and my first as CEO. I’m excited and honored to talk to you today. For those of you that do not know me, let me briefly introduce myself and provide some perspective about why the Board has selected me to lead AssetMark into the future. I’ve been at AssetMark for 13 years and I’ve spent almost 30 years in the financial services industry helping financial advisors and their clients. Prior to taking over as CEO in September, I most recently served as President and Chief Client Officer at AssetMark. In that role, I led the firm’s Client Success Group, which is focused on helping advisors grow and deepening advisors engagement with advisors.

At AssetMark, our mission is to make a difference in the lives of our advisors and their clients. We are an adviser focused company. Every strategic decision we make revolves around what is the best for the advisers. Having the opportunity to lead our client success group for the last decade plus, I have a deep understanding of how advisors and their clients think about what solutions, tools and technology they need to be successful. As a result, the leadership transition has been seamless for our teams, for our advisors and their clients. I’m very excited to continue to set the strategic vision for the firm and to create continued value for our advisors, their clients and our shareholders. Not only I’m deeply committed to our mission, but I’m also deeply committed to our values of heart, integrity, respect and excellence.

These values define how we engage with our advisors, partners and team members. During the first two months as CEO, I’ve been on a listening tour and feedback has been clear. Coupled with my previous experience leading our Client Success Group, I want to share some perspective on my long-term focus, which I believe will enhance shareholder value. Turning to Slide 3. I am focused on three priorities, hyper growth, accelerated capital deployment and enhance scalability. Let’s dig into the details of each of these. First hyper growth, the team and I are manically focused on accelerating the growth of the business. This starts with growing net flows and the number of engaged advisors on our platform. We are committed to return to 10% organic growth and believe that our recent acquisitions, platform enhancements and compelling outsourced offering positions us well to get there.

We are committed to getting to 5,000 engaged advisors by end of 2026. Let me share with you, why this is so important. As you know, engaged advisors make up north of 90% of our platform assets. These low advisors grow faster, have stickier assets and enjoy more of the benefits of outsourcing. If we grow to 5,000 engaged advisors, we’d double the size of the company. Let me repeat that. Over the next three years, we can double the size of AssetMark. Second, I’m focused on accelerated capital deployment. One of AssetMark’s many strengths as a company is our ability to generate cash. It is time we start putting that cash to better use. To start, we are increasing our focus on M&A and partnerships, which I will discuss a bit later in my prepared remarks.

Next, we are increasing our CapEx as a percent of total revenue to 8% to 10% from the previous 6% to 7% run rate. This will allow us to invest more in the business specifically into projects that drive growth and scalability. And speaking of scalability that is my third long-term focus. AssetMark has done a great job scaling with EBITDA margins up over 800 basis points since our IPO and we can continue to scale. One of many areas of focus is automation, especially in our operations function, where we can remove up to $25 million of cost per year while continuing to invest in our already industry-leading service offering. I hope this gives you some insights into what is important to the executive committee and me as we take AssetMark into the future.

I look forward to updating you on these long-term priorities during subsequent earnings calls. Now let’s turn to the heart of today’s earnings presentation. I will highlight our record quarter results and then provide an update on how we are executing on our strategy. On Slide 4, the third quarter 2023 was another record quarter for AssetMark. We ended the quarter serving an all-time high of 251,000 plus households at over 9,300 advisors, of which approximately 3,000 are engaged. Our advisors are extremely pleased with their decision to outsource to AssetMark as evidenced by our all-time high NPS of 72 which we highlighted last quarter. From a financial standpoint, total revenue was record $191 million, up 23% year-over-year, while net revenue was a record of $139 million, up 20% year-over-year.

These all-time high top-line results allowed us to achieve best ever bottom-line results. Specifically adjusted EBITDA was $67 million for the quarter. This marks the sixth straight quarter of record-setting quarterly EBITDA a powerful testament to our diversified revenue mix and disciplined expense management. Adjusted EBITDA margin was a record 34.9% and up 90 basis points year-over-year. Net income was $38 million, up 28% year-over-year, while adjusted net income was $46 million, up 32% year-over-year. Adjusted earnings per share was $0.62 in the third quarter also up 32% year-over-year. Results for the third quarter were excellent. And we feel we are well on track for the best year in our company’s history. Next, I want to give you an update on our strategic execution.

As I stated earlier, it is important to note that our strategy is 100% adviser focused, meaning every strategic decision we make is made with the adviser in mind. Moving to Slide 5. The first component of our growth strategy is to meet advisors where they are. Adhesion Wealth had another strong quarter and continues to focus on bringing on new RIA firms while expanding share of wallet of existing firms. Adhesion added a total of $485 million of assets from new firms through the first three quarters of the year. 75% of RIA firms experienced growth year-to-date with 46% seeing significant double-digit growth. Adhesion added four new managers and 25 models to their platform while adding three new Adhesion Alliance managers. In the third quarter, Adhesion was able to advance their strategic goals, specifically around building out their API toolkit and enhancing their platform with their pilot of Adhesion, TaxAlpha Dashboard.

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. Turning to Slide 6. The second component of our growth strategy is to deliver a holistic, differentiated experience to our advisors and their clients. This quarter, I want to share some exciting news that will allow us to further penetrate the Bank Trust channel. First, let me provide some context. Banks are seeing increased competition from regional RIAs and wirehouse advisors who are competing for a client wallet share and raising the level of service model standards. Today, wealth management services are becoming integral to how banks better serve their clients, get a well-integrated trust accounting and wealth management solution has remained elusive in the marketplace, not anymore, I am pleased to announce that we have entered a partnership with an Accutech company, Cheetah, to better penetrate the $600 billion plus total addressable market.

Cheetah is a modern cloud-based trust accounting system built to serve the evolving needs of banks and their end clients. Together Cheetah and AssetMark will offer a premier integrated trust accounting and wealth management solutions that will allow banks to empower their trust officers and wealth advisors with a full ecosystem of trust accounting and investment capabilities. We plan to invest between $5 million to $10 million of capital as an upfront technology investment in the partnership and expect to start onboarding clients in the second half of 2024. To highlight the potential long-term opportunity, we forecast an incremental $25 billion of platform assets by end of 2028. We could not be more excited about this opportunity, it represents AssetMark’s continued expansion into the Bank Trust channel and integral part of the firm’s growth strategy.

The third component of our growth strategy is to enable advisors to serve more investors. Let’s turn to Slide 7, tax considerations play a prominent role in most wealth management activities. Nearly half of high net worth investors are looking for proactive tax planning support from their financial advisors and studies show that tax management may improve tax after tax returns by over 1%. Last month, we soft launched AssetMark’s Tax Management Services or TMS for a select group of 350 advisors. TMS is a personalized and comprehensive service that enables advisors to unlock new tax efficiencies for their clients at every step of their financial journey. This includes a tax-efficient transition of assets from an existing investment strategy into a new investment strategy, ongoing tax law harvesting, tax efficient rebalances and tax-efficient client direct at activity.

The user-friendly service makes tax management is a straightforward, efficient and seamless process and has key benefits for advisors, clients and AssetMark. For AssetMark, TMS allows us to amplify our financial wellness offering and provide increased revenue opportunity with additional fee of 10 basis points on enrolled AUM per year. We expect to rollout a national launch to all of our advisors in early 2024. Let’s turn our attention to Slide 8 and the fourth component of our growth strategy to help advisors grow and scale their business. This quarter, I want to provide an update on our business consulting offering. Previously, leading our Client Success Group, I had the privilege to oversee our business consulting function and truly believe it is a competitive differentiator for AssetMark.

Today, I want to highlight some of the programs that we have rolled out over the last year and provide an update on adoption. First is AssetMark’s marketing advantage. Since launch, it has been adopted by close to 400 advisors, which is over 150% of our goal. Second is this AssetMark’s investment consulting. We have been extremely pleased with our results here as the program has leveraged — has been leveraged by over 45 advisors with over $2 billion of total business commitment. Investment consulting is one of the key programs that will help us accelerate our organic growth. Lastly AdvisorLink. We have over 100 advisors who have requested access with a majority setup as buyers on the platform. Turning to Slide 9, the final component of our growth strategy is to pursue strategic transactions.

M&A is a key component of our business model and as CEO, I’m highly committed to leveraging M&A to grow our business. I want to provide some color on what we’re seeing in the market and our position. Activity is bouncing back. This past quarter saw a number of deals announced in the wealth tech space and adjacent sectors such as RI consolidation and wealth management, and we are seeing the follow-on effects in sectors of interest to AssetMark. We are also encouraged by increased interest from businesses seeking a strategic partner. We’re in a great position to be successful and capitalize on the warming M&A market. We have a strong balance sheet with significant dry powder and very low debt, which differentiates us from many of our peers. Our story is resonating with potential buyers.

They see significant value in our market-leading footprint additive distribution capabilities, technology and deep corporate resources we bring to the table. Sellers see the opportunity to take their business to the next level by partnering with us. We are also developing creative ways to use our balance sheet to help advisors with succession planning and growth. We see much interest in this area and are excited about the opportunity to deepen our relationship with advisors. Overall, we are in a great position to be an acquirer and making the right acquisitions will be crucial to achieve some of the long-term priorities I laid out at the beginning of the call. I will now turn the call over to Gary to take us through a deep dive on our third-quarter results and provide an outlook — on our 2023 outlook.

Gary Zyla: Thank you, Michael, and congratulations on your new role. It’s truly an honor to be here. And good afternoon to those on the call. As Michael mentioned, the third quarter was another record quarter for AssetMark. During my remarks today, I will highlight our results for the quarter and then provide an update to our 2023 outlook. Turning to Slide 10. Third quarter platform assets increased 26% year-over-year to $99.6 billion. Quarter-over-quarter platform assets were slightly down, driven by the negative market impact net of fees of $2.7 billion, partially offset by quarterly net flows of $1.5 billion. Year-to-date, our annualized net flows as a percentage of beginning period assets is 7.1%. Given current market dynamics, we are pleased about third quarter net flows that make no mistake about it, as Michael said, we are committed to getting back to our 10% plus organic growth and have a strategy to get there.

Turning to our advisors. Advisor Metrics, we added 158 new producing advisors, or NPAs, in the quarter. We are pleased that the quality of these NPAs is much higher than it has been in the past. Through the third quarter, year-to-date NPAs are down 6.4% year-over-year, yet production from this year’s NPAs is up over 50% as compared to last year. This improvement in the first year production from NPAs should lead to them getting to engaged status at a faster rate than previous NPA vintages. We are focused on continuing to stay close to our existing advisors. We just finished our third quarter Premier Advisor meeting with approximately 600 advisors attending across 18 locations. We are focused on winning new advisors and share of wallet from existing advisors, both of which can positively impact future slips.

On Slide 11, we show our engaged adviser count. We ended the third quarter with 2,995 total engaged advisors, down 3,032 engaged advisors in the second quarter. The quarter-over-quarter decline, was a result of the third quarter market appreciation, which took 49 advisors below the $5 million platform asset threshold and was offset though by 12 new organic engaged adviser adds. Our engaged advisors account for 32% of all advisors using our platform and make up 92% of our platform assets, growing the number of engaged advisors and a key focus for management as it is crucial to drive further growth of our business and its financials. As Michael mentioned, we are focused on getting to 5,000 engaged advisors by the end of 2026, which will double the size of the company.

To achieve this, we need to convert more non-engaged advisors to engaged status while also increasing the speed and rate at which we get NPAs to engage stats. M&A is also a crucial part of adding more engaged advisors to our platform. In addition to asset level and advisor count, the third way we measure growth which is not asset base is the number of households in our platform. The number of households are up 13% year-over-year to 251,000. Now let’s turn to Slide 12, to discuss this quarter’s revenue, which is a record $191 million. And we focus on our revenue net of related variable senses. For the third quarter of 2023, our net revenue was a record $139 million, up 20% year-over-year. All four components of our revenue increased year-over-year with spread and other income up a robust 52% and 129% (ph), respectively.

Slide 13 details our year-over-year net revenue walk. Asset-based revenue was up $9.1 million year-over-year, $11.7 million of that increase can be attributed to an $11.1 billion increase in billable assets. In addition to an incremental $2.4 million in revenue from Adhesion Wealth. These increases were partially offset by two headwinds to our asset-based revenue for the quarter for its fee compression of approximately 1 basis point, which is relatively in line with our expectations. And second, higher asset-based expenses due to an expense shift from SG&A asset based expenses. Spread revenue was up $9.8 million year-over-year, driven by yield improvement from 209 basis points to 402 basis points. Of this total yield, our securities-backed lines of credit program, or SBLOC, contributed 10 basis points, excluding the contribution from SBLOC net yield for the quarter was 392 basis points.

Subscription revenue from Voyant was up approximately 25% year-over-year, driven by growth in software revenue and foreign exchange tailwinds. Lastly, other income increased $3.3 million year-over-year, driven largely by higher interest income earned on our corporate cash. Now, let’s discuss expenses. Turning to Slide 14. Total adjusted expenses increased 19% year-over-year to $130 million. Quarterly operating expenses were up 11% year-over-year to $69.5 million, driven by increases in both employee compensation and SG&A. Employee compensation increased $4.4 million or 12% year-over-year, driven by an increased headcount of 60, of which 80% is from the acquisition of Adhesion. SG&A increased $2.6 million year — or 10% year-over-year, driven by increased audit preparation costs.

— I’m sorry, increased audit preparation costs, the addition of Adhesion, SG&A and other professional fees. Now I’ll quickly run through our adjustments for the quarter. In the third quarter, we added back a total of $7.4 million pretax, which is comprised of three items. First $4.3 million in non-cash share-based compensation. We anticipate approximately $4.5 million next quarter and between $5.5 million and $6 million per quarter in the first half of 2024. Second adjustment is $2.7 million related primarily to reorganization and integration costs. And lastly $2.2 million of acquisition-related amortization. Now let’s turn to Slide 15 to discuss our earnings for the quarter. Third quarter 2023 adjusted EBITDA was a record $66.5 million, up 26% year-over-year and more than the — then record $60.4 million we reported last quarter.

As Michael mentioned, this is the sixth straight quarter of record-adjusted EBITDA and is a testament to our growing revenue diversification and the flexibility and disciplined management of our expense base. Adjusted EBITDA margin was also on record, up 90 basis points year-over-year to 34.9%. Our reported net income for the quarter was a record $38.4 million, while adjusted net income was also a record $46 million or a record $0.62 per share. This is based on the third quarter diluted share count of $74.7 million. Our estimated tax rate for the full-year is 24%. For further color, please see the adjusted net income walk on Slide 20. Now let’s look at the reported third quarter balance sheet. I would highlight two items. First, we continue to do a great job at generating cash.

In the third quarter, we generated a robust $54 million of cash from operating activities. In the first three quarters of the year, we have generated over $159 million in cash from operating activities. Now let’s discuss capital expenditures, which primarily reflect our long-term investments in creating new capabilities, increase scale and improving service. In the third quarter, our capital spend was $11.6 million or 6.1% of total revenue. As Michael mentioned earlier, we are planning to increase our CapEx run rate next year to 8% to 10% of total revenue and that we can invest in more growth and scalability projects. Turning to Slide 16. 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 maintain that.

Our ability to earn spread is a direct result of owning our custodian at AssetMark Trust Company or ATC. Spread-based revenue is a function of the amount of cash held by investors at ATC and interest rates, but first let’s discuss cash balances. In the third quarter, total cash as a percentage of assets at ATC was 3.9% while ICD or non-discretionary cash was 3.2%. Cash and the 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 market. We expect ICD cash in the percentage of assets and agency to return to more historical levels of 3.5%. Turning our attention to interest rates, the Fed increased rates once during the quarter. These rate increases are highly beneficial for the growth of our spread income, 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. As of September 30, 39% of cash at ATC is in a fixed rate term with an average maturity of 1.3 years and a growth rate of 4.59%. We have now close to 40% of cash at ATC into fixed-rate term which is currently our target threshold. 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 revised 2023 outlook. Our platform asset guidance is 10%. Year-to-date through the third quarter platform assets were up 9% and full year of platform asset growth will be impacted by the fourth quarter market impact in addition to our net flows.

We are revising our revenue — net revenue to 20% from our previous guidance of 20% to 22%. We launched $2.7 billion of platform assets as a result — on the down markets in the third quarter, and this is — this will have an adverse effect on our fourth quarter revenue. Turning to expenses, we are maintaining our expense growth outlook for the year of 15% to 17%. As a reminder, amounts about one-third of this increase is the result of the addition of Adhesion. This level of expense growth allows us to continue to meaningfully invest in the future of our business while maintaining discipline, so the expense growth will not outpace revenue growth. We are maintaining our adjusted EBITDA guidance at 22% plus in 2023, which we believe is fantastic given the fact that we grew adjusted EBITDA by 27% in 2022.

Lastly, we are targeting adjusted EBITDA margin expansion of 100 basis points for the year. We are extremely pleased by our — about our financial results this year and are on track for the best year in our company’s history. With that, I will hand the over to Michael for his concluding remarks.

Michael Kim: Thank you, Gary, and thank you to everyone on the call today. I look forward to building relationships with all of you on the line, and I’m always open to a conversation with our investors and potential investors. I will be on the road with Gary and Taylor in early December attending the Goldman Sachs US Financial Services conference. This concludes our prepared remarks. I will now turn the call back to the operator to begin Q&A.

Operator: Certainly. [Operator Instructions] Our first question is from the line of Michael Cho with J.P. Morgan. Please proceed.

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Q&A Session

Michael Cho: Hi. Good afternoon, guys. Michael and Gary, thanks for taking my questions. I just want to touch, my first question, on your comments, Michael and Gary, around engaged advisors. So, if I just look over history engaged advisors went from about 2,000 to 3,000 over the course of about four to five years. And Michael, you kind of laid out today that we’re going to add, I don’t know, I think 2,000 in the next couple of years. And so I’m just trying to understand how much of this acceleration is driven by, capabilities and AssetMark’s toolkit today and how much of it is really things from — that you’re hoping to develop in the future. And I think you mentioned M&A as well. So ultimately, I’m just trying to better understand, what gives you so much confidence in this accelerated growth profile looking ahead?

Michael Kim: Yes. Hey, Michael. It’s Michael Kim here. So thank you for that question. Why don’t I get the conversation started, and Gary please add in additional details here as well. So Michael, you’re absolutely right. I mean, the engaged advisors is a top, top focus for our firm here. And as I mentioned during the prepared remarks, the engaged advisors, they represent over 90% of our platform assets. And as we take the march towards 5,000 engaged advisors, that will effectively help us double the size of the company by 2026. And so I cannot stress enough the importance of the engaged advisors. And Michael to your question, when we think about the how part of — how we get to the 5,000 engaged advisors and really accelerating the growth there’s three key areas that we are focused on in terms of driving the number of engaged advisors.

First is reengaging what we call our non-engaged advisors. So Michael, we have actually of over 6,000 non-engaged advisors, those advisors that are less than 5 million. And these are advisors that have already made a decision for one or more of their clients to work with AssetMark. And so this represents — this group represents a huge opportunity for us to reengage them and really share with them the full value of outsourcing with AssetMark. And we believe there’s a tremendous opportunity, from this group alone. At the second time, we — at the same time, the second area is that we’re extremely focused on is really around new producing advisors or NPAs. And Gary alluded to this as well, we believe we have an opportunity to really accelerate the NPAs and their journey towards the engaged status.

We are focused on not only the quantity, but as we talked about earlier today, we are seeing improved quality of our NPAs coming on board our platform. Gary alluded to production higher than about 50% from prior year NPA production. And so we’re seeing signs of improved quality and we want to make sure that we continue that momentum to help us get to the 5,000 engaged advisors. And then the third area is really around M&A. We believe as we continue to focus on our consolidation opportunities as well as capability acquisitions, that our focus on M&A opportunities will help us really drive towards the 5,000 engaged advisor count. So those are sort of the three key areas that we’re focused on. Gary, I’d love to see if you have other details that you can share with Michael here as well.

Gary Zyla: And so Michael, when you talk about how as well, the way advisors engage with us starts with the introduction we call the onboarding process. And then once they are onboarded, we have numerous processes and methods to help them increase their share of wallet with us. And in each one of those steps in the lifecycle of the advisor and the lifecycle of our relationship with them, we are focused on improving them. And there are multiple projects under this initiative but it is a holistic approach to both, like Michael said, the new producing advisors as well as that very large listening (ph) age group

Michael Cho: Okay. No, great. Thank you for the explanation. For just my second question, I want to switch gears just a little bit on the investment side. We talked through a bit about the heightened level of CapEx going forward. And I think you mentioned the Cheetah’s partnership as well. But just curious, where’s the focus in terms of the increase in CapEx and over the next year and a half or so? And then, does the accelerated investment period merit any revisit to the margin expansion framework that AssetMark has operated under for the last few years? Thanks.

Michael Kim: Yeah, Michael. Thank you again for the question. And so we are really sort of taking a very close look at the amount of capital that we have an opportunity to deploy. And then that’s actually one of our top initiatives to really accelerate the deployment of capital and make sure that we get the right return on the capital. And as I mentioned during the prepared remarks that we will be increasing the CapEx budget to about 8% to 10% of revenue from the current run rate of about 6% to 7%. And really there’s actually two primary goals with respect to increase in the investments. One is really to drive growth. You alluded to the Cheetah partnership. Michael, we are very excited about this partnership here with Cheetah.

Not only does it help us expand our footprint into the Bank Trust channel, but with the $5 million to $10 million of additional capital investment in this relationship that will really allow us to bring some of the trust capabilities even to our core channel as well. And so that’s a great example where the capital expense — capital investment will help drive additional growth. The other side of our objective is to really continue to drive scalability. And as I mentioned, automation, especially in our service and operations group, is a key focus for us. We have an opportunity to remove up to $25 million of annual costs per year, while, of course, never taking the foot off the pedal on our already world-class service offering. And so we have an opportunity to really drive both growth as well as enhancing our scale through the capital investments that we discussed earlier.

Gary Zyla: No. I would just echo that last point. We know advisors come to us for service. We talked about last quarter, our NPS score of 72, which is, like Michael said, world-class. And so the investments we want to make, Michael, are to allow us to grow — scalably grow into the future. And as we head that from the first question, [indiscernible] engaged advisors to be able to continue to offer all of them the same amazing level of service that we have now.

Michael Cho: Great. Thank you so much.

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

Jeff Schmitt: Hi. Good afternoon, Michael and Gary. Looking at your fixed rate mix, it’s near 40% now, and then you’re at the net yield threshold of 4% too. So just curious if you’re considering increasing fixed rate allocations. I know you want to maintain flexibility there, but, are you thinking of increasing that and how high could you potentially go there?

Gary Zyla: Sure, Jeff. Thank you for the question. So obviously — not obviously, but our first concern with the cash that we’re managing in the ICD program is to ensure that we have liquidity for every client. And so that’s why we’ve started out in that 40% threshold. We have evaluated going a little bit higher. We could both go higher and we could also extend the duration out past the 1.4 years that we have if pricing and rates really allow us to do that. You’re right that our overall rate is approaching the 4% cap that we’ve talked about. And so as we look for further growth, that will be growth through our high-yield cash offering, other cash alternatives, as well as just our overall growth at our custodian.

Jeff Schmitt: Okay, great. And then client cash balances look to be stabilizing around this $2.9 billion level. Could you speak to that? I mean, are you seeing sorting slowing? Do you think we’re approaching sort of these operational or transactional cash needs? Because I think Gary, I think you had mentioned earlier that that percentage would go up to 3.5%. I presume that’s sort of X the high-yield savings. So maybe if you could speak to that.

Gary Zyla: Yeah. I’ll start Michael, and you can give your perspective as well. But just regarding the numbers, Jeff, so, yeah, the ICD program, which is that kind of non-discretionary cash, is at 3.2%. It actually has declined over the past couple of quarters. Now, in our prepared remarks, we noted that historically, it’s been at least 3.5%, and we expect it to get back to there when we do our long-term planning and when we’re looking out into next year. We believe that it is at its lower rate now, primarily because the strategists are putting more money to work rather than leave it in the ICD program. I think when you think about the cash sorting and how that works, I think that impacts this issue a little bit less because this is non-discretionary cash. It does impact in our overall flows as this money coming onto our platform or into, a bank account, but I believe it impacts this item a little bit less.

Michael Kim: Yeah, Gary. The only other point that I would add is related to cash sorting. We have definitely heard from advisors just in terms of their search for additional yield for their clients. And what they’ve been really delighted with is really around kind of the curated set of solutions on our platform. So whether it be our short-term US treasury ladder strategies and/or high-yield cash, and we’ve recently launched a money market pilot as well. And so those are some of the products and services that our advisors are gravitating towards to really meet the needs of their clients as it relates to the yield.

Jeff Schmitt: Okay. Very helpful. Thank you.

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

Patrick O’Shaughnessy: Hi. Good afternoon. Maybe to follow up on the earlier question on your engaged advisor goals, is there any way to quantify how you get to doubling it or get to 5,000 by 2026 in terms of the expected contribution from M&A market appreciation step up from non-engaged advisors, et cetera?

Gary Zyla: Yeah, Patrick. Let me give you rough math, right? And who knows exactly how it’s going to play out, right? But we’re attracting, let’s call it 700 to 800 million — 700 to 800 new producing advisors a year. And we’re currently converting those to engaged status at about a mid-teens rate. We aspire to double that. And so if you’re going to double that, you’re going to add — that’s going to increase our rate about 100 each year. Then — so you can look over the three-year period that engaged advisors from our NPA group could be in that, let’s call it, rough range, 400 to 500 range. When you look at the non-engaged advisors, the 6,000 non-engaged advisors, if we can capture again, rough math, 10% to 15% of that, you’re talking somewhere between 600 to 900 engaged advisors from that 6,000 group.

And then, as Michael said, M&A is going to play a large part. There are consolidation plans out there. We’ve done that before. We believe we’re a great home for advisors and that fills in the hole. And so yeah, any of those numbers could be a little higher or lower. But that’s sort of how you are breaking out from the paradigm that Michael laid out.

Michael Kim: Hey, Patrick. It’s Michael here. And just to kind of maybe underscore the last point about the M&A, one of the key areas that we’ve been really, really focused on is to ensure that we have that focus on the consolidation opportunities for subscale TAMs and other platforms that can yield scaled access to number of advisors. And so we absolutely do believe that acquisitions is going to be a meaningful part of our march towards 5,000 engaged advisors.

Patrick O’Shaughnessy: Got it. That’s helpful. Thank you. And then obviously, some big news in the RIA space this past quarter was the conversion with Schwab and TD Ameritrade. Was there any impact on AssetMark, either positive or negative?

Michael Kim: Yeah, Patrick. Why don’t I start that, and Gary, please feel free to add any details. But leading up to the Labor Day conversion, one of the custodians that we had a very large relationship with was TD Ameritrade. And maybe just by way of context, given really the open architecture nature of our platform, not only do we have AssetMark Trust as a main custodian, but we also offer Fidelity, Pershing, and Schwab, and of course, TD Ameritrade prior to the conversion as really RIA custodial options. We’ve been planning for this conversion for months and months and months. And on one hand, we were actually quite thrilled to get the conversion completed. On the other hand, we work — we’ve been working very closely with our partners at Schwab to work through sort of the post-conversion details.

And this is for both AssetMark and for — and for Adhesion as well. And so we are going through some of the post-conversion operational kinks. Nothing that is really bubbled up to the level where it’s of major concern. What has been interesting, Patrick, is really the number of new RIA opportunities that our teams have encountered as related to the TDA to Schwab conversion. Whether it be our Adhesion folks as well as the AssetMark folks out in the field. Given the conversion, that has really raised the awareness and really sort of reinstalled the importance of kind of having that platform that is the easiest to do business with. And of course, we take a lot of pride in that ease-of-use experience. And so that has actually led us to a number of new RIA opportunities as a result of this TDA to Schwab conversion.

So obviously, we’ll provide additional updates during future earnings calls. But on the operational front, the conversion went well. We’re working through some post-conversion operational kinks, but on the business development front, sort of many newfound opportunities related to the conversion.

Patrick O’Shaughnessy: Great. Thank you.

Operator: Thank you, Mr. O’Shaughnessy. Our next question is from the line of Dan Fannon with Jefferies. Please proceed.

Daniel Fannon: Hi. Thanks. Good afternoon. Wanted to follow up on the organic growth returning to 10%. Maybe some context as to what’s been a challenge or why you haven’t been there in more recent quarters since Michael you’ve been there. And then also if the bulk of doubling or a large percentage of doubling engaged advisors going to come through M&A, we’re still trying to bridge the organic side of the story here and why that’s going to reaccelerate.

Michael Kim: Yeah, absolutely. And thank you, Dan, for the question here. And Gary, why don’t I get the conversation started and please chime in here as well. So Dan, you’re absolutely right. I mean, our organic growth focus and our commitment to getting back to the 10% plus level, it is definitely one of our top, top initiatives. And as you know, when we think about organic growth, it is really about both share of wallet growth from our existing advisors, and the same-store sales, and of course the new producing advisors in new store sales that we’ve been able to garner over the years. Yeah, when we think about how do we drive both share of wallet growth as well as new producing advisors, there’s probably three key areas that we are extremely focused on.

One is really around the product and the platform enhancements. You heard us reference capabilities like tax management services, TMS, as an example. Not only will it yield additional 10 basis points of revenue opportunities for us, but we absolutely believe that TMS will unlock kind of the asset opportunities for our advisors, whether it be sort of growing the existing clients of our advisors but also the ability for our advisors to acquire new clients using a service like TMS. And of course, our ability to attract new producing advisors to our platform leveraging these types of services. I mean, these are all going to yield to that incremental organic growth that we’ve been talking about. Second area is really around continued RIA focus. Adhesion is we are building up great momentum within Adhesion.

We alluded to over $480 million of net new assets just from their new advisors alone this year and the pipeline looks great. And so we absolutely believe that Adhesion is going to be a key part of our 10% plus organic growth rate. And then of course, as we’ve been talking about sort of the accelerated capital deployment, not only M&A opportunities, but examples like the Cheetah partnerships that we alluded to, we absolutely believe that that’s going to drive — help us drive towards that 10% plus organic growth.

Gary Zyla: Yeah. Hey, Dan. This is Gary. Hope you’re doing well. Meetings is flying by. So I wanted to point out a couple of things, Dan. First, yeah, when we were talking about the engaged advisor growth, what I was trying to lay out was just sort of, around 600 are going to come from our new producing advisors somewhere. Let’s call — I said 600 to 900 would come from existing. And so if you take those two together that should be about two-thirds to three quarters of that gap we have for 2,000. And so I know I mentioned that because I think I heard you say something that a majority of the growth would come from M&A. And I don’t mean to convey that. The majority of the growth from engaged advisors are going to come from new producing advisors as well as our existing book.

Talking about the existing book, our — we have a statistic in our key operating metrics that we don’t talk about enough but it is something we always show which is the production lift from our existing advisor book. This quarter it was 18.7%. Last year at this time it was 14.9%. We feel great about that improvement, of course, year over year, but that number should be over 20%. And what Michael was talking about in terms of the initiatives we’re taking to what we’re investing in and — but even to add to that, finding solutions for cash is going to be really key over the next 18 months or so as more and more folks are [indiscernible] in cash, and Michael alluded to a number of initiatives that we have already on that, that should be a real key component in increasing that share of wallet growth.

Daniel Fannon: Thank you. That’s helpful. And then just as a follow-up, the $25 million in cost that you see in potentially removal from the cost base due to automation, what is the time period you think that might be realized? And then also in the context of, how you’re thinking about growth for next year for expenses. And I know you haven’t given formal guidance yet but just thinking about the setup for next year versus maybe where we’ve been the last couple of years.

Michael Kim: Yeah, Dan. Let me get the response started. And again I’ll look to Gary to provide additional details. So when we think about kind of the increase in CapEx spend to 8% to 10% of revenue, automation is going to be a key part of that allocation. And so, what we’re really focused on is for those processes, those operational transactions, we want to make sure that we automate as much of that as possible while at the same time, of course, continuing to deliver that world-class service experience. Part of what we’re thinking about is over the next three years or so, be able to implement enough of the automation to ensure that we take out — approximately about $25 million of annual costs. Key thing that I just want to stress though is that we want to make sure that all of our advisors continue to receive the best service experience possible.

That is the hallmark of AssetMark, and we want to make sure that they are continuing to receive the best service experience, but behind the scenes, through this type of automation, that we’ve realized the expense savings that we’re committed to. Gary?

Gary Zyla: Yeah. Thank you, Michael. And Dan, to address the second part of your question, which I think Michael was just talking about how our long-term aspirations for scalability, I think you asked, how does it look into more near term into 2024? And we’ll talk about a 2024 outlook at our next call, I’m sure. But just to give you some thoughts, right, our expenses have grown materially over the past few years partly driven by our two acquisitions, of course, and some really material investments we made. I would expect our operating costs to grow somewhere, certainly in the single digits next year. We are going to have a real focus on making sure that we are investing in what we need to invest in, while also making sure that we are pausing — not pausing, that’s the wrong word. We are being very thoughtful about that expense growth. While at the same time, on the capital side, growing our investment in those long-term spends that we can make.

Daniel Fannon: Great. Thank you.

Operator: Thank you, Mr. Fannon. Our next question is from Michael Bensi (ph) with Goldman Sachs. Please proceed.

Unidentified Participant: Hey, guys. This is Michael on for Alex Blostein. So maybe just a follow-up on some of the M&A questions. It sounds like you are — you guys are obviously more focused on consolidation and — consolidation opportunities near term. But maybe you can kind of talk about what you’re seeing on the non-consolidation more capability-focused side. And to what extent — to that end, to what extent would you guys leverage your stock as a currency? Obviously, you spoke to the 550 of purchasing power you have, but to the extent that you guys have public stock that you can use, how would you factor that into your kind of M&A outlook there?

Michael Kim: Yeah, Michael. Thank you for the question. Again, I’ll get the conversation started, and Gary will share additional details here. So when we think about the M&A and really under the broader context of accelerated capital deployment, Michael, you’re absolutely right. Consolidations and capabilities, those opportunities remain a core part of our focus as it always has been. At the same time, Michael, I do believe that we have an opportunity to expand our focus. And so, as examples, we talked earlier about our new partnership with Cheetah, and I — we believe that there are other partnerships — partnership opportunities out there where leveraging our capital, leveraging our balance sheet, we can go ahead and connect better with those firms, ultimately to drive growth.

I think there’s also firms out there where, based on sort of the synergies that exist, we may have opportunities to make some minority investments. Again, we are evaluating different opportunities on that front. And then, lastly, we’re also looking at various different advisor growth opportunities where, to the extent that we can strategically partner with the right firms to help them drive their growth, we believe there’s opportunities for us to leverage our balance sheet to help them grow as well. Gary?

Gary Zyla: Yeah, Michael. Just to your question about the stock and whatnot. The way we look at our dry powder, we have an unused line of credit of $375 million and we’re going to end the year with a little bit over $200 million, probably in excess cash or something around $200 million of excess cash. And so, that’s probably going to be our main source of capital for acquisitions. That’s about almost $600 million there. We have used our stock for one purchase for Voyant in a modest way, and I guess that’s not due in the future, but I would think of it more as cash acquisition.

Michael Kim: Michael, the other thing that I just want to mention here is that as part of our overall corporate development team, we’ve also added two senior officers to the team here as well. One really focused on new deal acquisition opportunities, and the other officer focused on the integration as well. We’re also collaborating with a number of other executives on the team to ensure that we have the best implementation and integration possible. So you’re absolutely right, we are extremely excited and focused on not only deploying capital in the right way, but really identifying the right opportunities and talking them into the AssetMark ecosystem.

Unidentified Participant: Great. Thanks, guys. And maybe as a quick follow-up, just in shifting gears a bit, in light of the recent DOL proposal, kind of wondering what you guys are hearing. I know it’s early days, but here to the ground last time around, we obviously saw a shift into advisory accounts, kind of pre-trading the proposed DOL rule last time. So anything you guys are hearing on the ground on that front, obviously early days, but do you guys — any commentary you might have around that would be great. Thanks.

Michael Kim: Yeah. Thanks, Michael for the question there. And I think, as we all know, there is a new proposal that I believe has been submitted to the White House for their review regarding the latest version of the DOL Fiduciary Rule. I’m not sure if there’s a lot of clarity, Michael, in terms of what that newest version of the proposal looks like. We’ve been in active conversations with number of different industry folks, our council regarding the interpretation. And I think the industry, at large, is sort of in a wait and see mode here. But even with that, our belief is that all advisors are fiduciaries and they have an obligation to put the best interests of the client at the center of everything that we do. And frankly, that is so consistent with how we think about supporting advisors.

And so we absolutely welcome the fiduciary rule. We absolutely support the advisors in their — in fulfilling their fiduciary responsibilities to the clients. And so, obviously, as we learn more about the latest DOL proposal, we’ll update not only this group here on their future earnings calls, but our advisors and our clients as well. And so we look forward to learning more about the finer details of that proposal.

Operator: [Technical Difficulty] question-and-answer session. I will now turn the call back to Michael Kim for closing remarks.

Michael Kim: Okay. Very good. Well, why don’t we wrap up with a big thank you to all of you that have joined us here today. We appreciate all your support and your engagement, and we look forward to seeing you on the road very soon. Thanks, everybody.

Operator: Goodbye. That concludes today’s AssetMark Financial Holdings, Inc. 3Q ’23 earnings conference call. Thank you for your participation. You may now disconnect your lines.