AssetMark Financial Holdings, Inc. (NYSE:AMK) Q4 2022 Earnings Call Transcript

AssetMark Financial Holdings, Inc. (NYSE:AMK) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Good afternoon, everyone, and welcome to AssetMark’s Fourth Quarter 2022 Earnings Conference Call. . 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 Fourth Quarter 2022 Earnings Conference Call. Joining me are AssetMark’s Chief Executive Officer, Natalie Wolfsen; and Chief Financial Officer, Gary Zyla. Today, they’ll discuss the results for the fourth quarter and provide an update to AssetMark’s business outlook for 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 will 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, and good afternoon, and welcome to our fourth quarter earnings call. I hope everyone is doing well today. Before we begin, I’d like to formally welcome and human wealth to the AssetMark family. As the market Adhesion have a shared mission and we couldn’t be more excited to have him join our team. I would also like to thank our over 9,200 adviser clients in nearly 1,000 teammates. 2022 is a record year for AssetMark and it would not have been possible without the loyalty of our clients and the dedication of our team. As we start 2023, we are the top independent as measured by platform assets as well as the top TAMP as measured by advisers, having just won Wealth Advisors top as measured by TAMPP award in January.

I could not be prouder of the year we had in 2022 and how we have started off in 2023. My prepared remarks today will focus on our evolution and growth in 2022. I will then provide a detailed analysis of each of our 5 growth pillars, highlighting the progress we are making on each. Finally, I’ll preview our strategic focus in 2023. Gary will then discuss our financial and operating results for the fourth quarter and introduce our 2023 outlook. Starting on Slide 3. In 2022, we continued our evolution from a TAMP to a holistic full-service wealth management platform. On December 16, 2022, we closed the acquisition of Adhesion Wealth to complement our end-to-end outsourcing offering. In addition, we continue to optimize our digital ecosystem to provide advisers with a differentiated experience that champions client engagement and drive adviser efficiency.

To further enable our advisers to serve diverse clients across the wealth spectrum, we expanded our investment platform to include improved income planning capabilities, personalized investment solutions and enhanced tax loss harvesting services. As advisers increasingly focused on serving their clients, we expanded our turnkey business programs and invested meaningfully in our personalized consulting services, both of which foster adviser growth and efficiency. Since we put, we executed on our strategy, which allowed us to achieve record results in 2022. Now let’s turn to Slide 4 to highlight these results. While doing so, I’d also like to take a step back and provide some perspective on how we’ve grown since our IPO in 2019. In 2022, we served more advisers and investors than ever before, supporting over 9,200 advisers who use our platform to help more than 241,000 investor households.

Since our IPO in July of 2019, we have added more than 85,000 households, approximately 1,400 total advisers and 750 engaged advisers. Additionally, we achieved record financial and operating results and matched our all-time high Net Promoter Score. Full year net revenue for 2022 was a record $456 million and is up more than 20% year-over-year and almost 50% from our IPO. 2022 adjusted EBITDA was up 27% to nearly $200 million, and adjusted net income was up more than 26% to $130 million. We also continue to scale our business as evidenced by our ability to expand adjusted EBITDA margin 270 basis points in 2022. Since our IPO in just 3 years, we have doubled the earnings of the company and expanded adjusted EBITDA margins a robust 600 basis points, well above our historical guidance of 50 to 100 basis points a year.

Now let me turn your attention to our growth strategy. As I do every quarter, I want to give you an update on how we are moving the ball forward in each key pillar. Starting with the first component on Slide 5. We’re meeting advisers where they are. In December, we closed on the acquisition of Adhesion Wealth welcoming more than 560 advisers and close to 16,000 households. Adhesion, the industry’s second largest model marketplace with over 400 asset managers provides its clients with outsourced overlay portfolio management services, client engagement technologies and tailored managed account solutions for TAMP and RIA enterprises. At the heart of both Adhesion and AssetMark is the proven concept that outsourcing leads advisers to a better quality of life, ability to grow and scale and better investor outcomes.

Adhesion will greatly amplify our ability to serve the rapidly expanding RIA market, allowing us to serve different adviser profiles and to significantly increase our total addressable market. RIAs will no longer have to choose between fully leveraging our curated investment solutions for fully relying on fusions model marketplace. They can now choose to do either or both at AssetMark. We believe both full outsourcers and those that are leveraging the marketplace will benefit from our consulting services community-like community of like-minded advisers and the open architecture nature of our offering — Adhesion has a strong plan for growth this year, and we will look forward to sharing our progress during future earnings calls. Now turning to Slide 6.

The second component of our growth strategy is to deliver a holistic differentiated experience to advisers and their clients. We’re pleased with the growth of Voya in 2022, especially during the second half of the year. Excluding foreign exchange pressures, revenue from buoyant was up approximately 13% year-over-year, driven by an uptick in both enterprise and adviser consumer licenses. Enterprise Advisor licenses are up more than 50% year-on-year, driven by a new deal with the retail arm of TD Bank — I’m sorry, TD Bank in Canada, which added more than 5,000 licenses for the quarter. Voyant continues to gain traction in existing geographies, including the U.K. and Canada, and they are also progressing well in high potential expansion geographies.

For example, they’ve experienced excellent momentum in Australia with strong year-over-year license growth. We’re excited about Voyant’s prospects and the diversification of revenue it brings to AssetMark. Third component of our growth strategy is to enable advisers to serve more investors across the world spectrum, varying life stages and generation. Let’s turn to Slide 7 to discuss this more. There’s no denying that 2022 was a difficult macro environment for advisers and their clients. Inflation surged to 40-year high, causing the Fed to increase rates 7x throughout the year. This led to historic losses in bond markets in highly volatile global equity market. Advisers needed timely education and actionable solutions to lead their clients through these difficult times.

In response to this environment, we launched our market volatility toolkit, which helps advisers get informed, feel confident and stay in front of their clients’ questions and concerns. Since launch, the toolkit has had over 5,600 — I’m sorry, has had over 9,600 page views from over 1,800 unique users. Our events also continue to be highly valuable for our advisers. In 2022, we held over 70 in-person events with over 2,300 advisers in attendance. Our 2022 event Net Promoter Score was the highest it’s been since 2018 at . Additionally, just next week, we will be hosting over 600 of our top advisers at our annual Gold Forum. This event is our largest ever, topping last year’s event attendance by nearly 40%. We also leveraged webinars in 2022 to provide timely information given the ever-changing market.

Last year, we hosted 49 webinars with over 8,100 advisers attending. Not only did we do an excellent job of being there for our advisers, we also added new investment solutions to our platform, expanding our eligible client wallet. In April, we launched 4 new ESG strategies as part of our value-driven investment program. Since launch, we’ve had over 2,100 proposals submitted totaling $194 million. In July, we reopened sovereign fixed income latter strategy, a proprietary strategy of AssetMark. This strategy aims to smooth out fluctuations in equity markets, inflation and interest rates using a disciplined buy-and-hold approach. Since reopening, we have already had over 2,900 proposals submitted totaling over $834 million. In October, we launched 3 new market volatility strategies for advisers to leverage during uncertain times.

It’s been just a few months since launch, but we’ve already had over 900 proposals submitted totaling $82 million. We will continue to educate our advisers and provide them with the best solutions possible to enable them to serve investors. Now let’s turn our attention to Slide 8 and the fourth component of our growth strategy. While 2022 was challenging for investors, it was equally challenging for our advisers and their businesses. Over the last year, we have invested heavily into business programs to help advisers grow and scale. This is largely driven by our business consulting team, which provides our advisers individualized guidance by helping them to identify actual opportunities to increase their efficiency and to grow in scale over time.

As I have mentioned in previous earnings calls, I firmly believe that our business consultants and the programs they support our competitive advantage for AssetMark and are one of the key reasons why visors continue to win. Over the last year, we grew our business consulting team over 40% while also launching programs to help with some of our advisers most pressing needs. For example, in January 2022, we launched WealthBuilder Prospecting this launched this tool has been used by over 600 advisers with strong lead generation and conversion metrics. Last February, we launched AssetMark Marketing Advantage, celebrating its 1-year anniversary this month, marketing advantage has been used by hundreds of advisers during the first year. Finally, we expanded our Advisor Acceleration Academy, which I discussed last quarter.

We hosted a total of 3 classes with over 280 advisers for the year. We just finished our last class in December, and the results from all participants were off the chart. Finally, we kicked off 2023 with our investment consulting program. A pilot program right now, this investment consulting provides select advisers direct access to advisers investment consulting team so that they can benefit from guidance in creating customized model portfolios that leverage the strategies available on our platform. We take great pride in our ability to help advisers grow and scale is why they win and then we win. Turning to Slide 9, which is the final component of our growth strategy. We pursued strategic transactions by adding capabilities and assets that improve adviser’s ability to serve investors and expand their businesses.

Even after purchasing Adhesion for $46 million, we still have about $450 million in purchasing power for future M&A opportunities. We are also doing a great job of increasing our purchasing power each quarter because of our strong cash generation. As always, we are proactively looking at all opportunities that we feel will benefit our advisers and their clients. Now let’s turn to Slide 10. While 2022 was a record year, there were challenges, and we are not taking our foot off the gas. Investors need more guidance, support and advice than ever before. A recent study found that 44% of investors agree that they need more advice than they received in the past. In 2023, in response to this and other trends, we’ll continue to focus on executing our growth strategy.

In short, we will expand our offering with Adhesion. We will continue our replatforming efforts. We will expand our fixed income and SMA offerings, and we will focus on helping advisers grow and scale their business through enhancements to our adviser benefits program and our service capabilities in addition to our investment consulting program, which I discussed a little earlier. Our strategy is working. We are well positioned to help advisers grow which in turn will help asset market growth. I cannot be more excited about the opportunity ahead. I’ll now turn the call over to Gary, who will take us through a deeper dive into our fourth quarter 2022 results and discuss our 2023 outlook.

Gary Zyla: Thank you, Natalie, and good afternoon to all those on the call. I want to echo Natalie’s welcome to the Adhesion Wealth team. We are so excited to have join the AssetMark family. As now we mentioned, 2022 was another record year for AssetMark. During my remarks today, I will highlight our fourth quarter results and share with you our 2023 outlook. Starting on Slide 11. Fourth quarter platform assets decreased 2.2% year-over-year to $91.5 billion. Quarter-over-quarter platform assets were up 15%, which includes $6.9 billion from the acquisition of Adhesion Wealth and market impact of of $4.3 billion and quarterly net flows of $908 million. Net flows for the full year of 2022 were $5.6 billion and 2022 net flows as a percentage of beginning period in assets was 6%.

Net flows continue to be pressured by lower production relative to last year as money continues to sit on the sidelines due to market volatility and those assets that are coming on to our platform are coming on at depreciated levels. But that said, redemption rates are still lower than a second, a strong sign of our adviser satisfaction. All in all, we are quite pleased with our net flow is for the year, given the current market environment. Let’s now discuss our adviser metrics. We added 143 new producing advisers or NPAs in the quarter. We are focused on continuing to stay close to our existing advisers and doubling down on our increased marketing events and digital adviser acquisition strategy. We believe focusing on these areas positions us well to win new advisers and share of wallet from existing advisers, both of which will positively impact future flips.

On Slide 12, we show our engaged adviser count, total engaged advisers at the end of the fourth quarter was 2,882. During the quarter, we added 281 engage advisers. This increase is driven by our acquisition, market appreciation and core adviser growth. Specifically, of the of the 281, 185 were from our acquisition of Adhesion, 52 were our miners that moved back above the $5 million platform asset threshold as a result of market appreciation and 44 were core advisers who qualify for engaged status for the first time due to their organic growth on the AssetMark platform. Our engaged advisers account for 30% of all advisers using our platform and make up 92% of our platform assets. As always, growing the number of engaging advisers is a key focus for management as it is crucial to drive further growth of our business and its financials.

In addition to the asset level and advise accounts, the third way we measure our growth, we keep not activated gives the number of households on our platform. The number of households are up almost 15% year-over-year to 241,000. As Natalie mentioned, the acquisition of Adhesion added nearly 15,000 households to our platform. Now let’s turn to Slide 13 to discuss this quarter’s revenue, which was a record $164 million. As you know, we focus on our revenue net of related variable expenses. For the fourth quarter of 2022, our net revenue was a record $124 million, up 20% year-over-year. This is driven primarily by spread-based revenue, which was up $26 million or 15x from a year ago. This more than offset the decline in asset-based revenue, which was impacted the market depreciation.

Slide 14 details our year-over-year net revenue walk. As the waterfall shows, net revenue went up year-over-year driven mainly by rent income, which we just discussed. Year-over-year yield on spread improved over 300 basis points to 327 basis points. contributing to our increase in net revenue and a $1.2 million reduction in asset-based expenses. As a reminder, there is an ongoing savings that is primarily driven by restructuring agreements with providers. Asset-based revenue was down $8.3 million year-over-year, primarily driven by the $6.2 billion decline in billable assets. The year-over-year fee compression was 95 basis points, of which half was driven by Adhesion. Subscription revenue from Voyant was flat year-over-year, primarily driven by foreign exchange pressure.

Excluding the impact of FX, subscription revenue was up approximately 13% year-over-year. As Natalie mentioned, we are encouraged by Voyant’s growth prospects, both in their existing geographies and in high potential expansion geographies. The other income increased about $2.2 million year-over-year, driven largely by higher interest income earned on our corporate cash. Before discussing our expenses, I want to emphasize the stability of our revenue during the past 2 years under very different market conditions. In 2021, we had the sixth best year for U.S. equity since 1990. This strong growth helped us add over $9 billion in platform assets from market impact. We experienced a then record revenue number with asset-based net revenue accounting for 96% of our total net revenue.

In 2022, was quite a different story. Market impact caused a $14 billion loss of platform assets in the year, an asset-based net revenue as a percentage of total net revenue fell to 83%, yet 2022 was another record revenue year for AssetMark driven by over $55 million of spread-based net revenue. For the restate, the last 2 years have been 2 completely different market environment. And in each year, we have been able to grow revenue to record numbers. We are excited about the resiliency of our revenue model as Voyant revenue continues to grow, it will provide further revenue diversification that it is not correlated to equity market or industry. Now let’s discuss expenses. Turning to Slide 15, total adjusted expenses increased 6.2% year-over-year to $118 million.

Quarterly operating expenses were up 7% year-over-year to $69.2 million, driven by a $4.5 million increase in SG&A. The increase in SG&A was primarily driven by increased travel and event costs. Compensation expense was flat year-over-year. We increased our headcount by 12% year-over-year, and that cost was offset by lower variable compensation. always, I will quickly run through our adjustments for the quarter. We added back a total of $9.3 million pretax, which is comprised of 4 items: First, $3.8 million of noncash share-based compensation, we anticipate this to increase to just under $5 million per quarter in the second half of 2023, at which point we will likely be at the ongoing run rate from share-based noncash share-based compensation.

Second adjustment to expenses was $2.1 million of expenses related to acquisitions, primarily for Adhesion Wealth. This includes onetime costs such as label and professional fees. The adjustment is $1.6 million related primarily to reorganization and integration costs. Lastly, $1.8 million of acquisition-related amortization. In 2023, we expect the quarterly run rate of this about $2.2 million. Now let’s turn to Slide 16 to discuss our earnings for the quarter. Fourth quarter 2022 adjusted EBITDA was a record $52.9 million, up 38% year-over-year. We are extremely pleased with our adjusted EBITDA this quarter, which is a testament to our growing revenue diversification and the flexibility and disciplined management of our expense base. Adjusted EBITDA margin was up a robust 550 basis points year-over-year to 32.3%.

In the full year, we grew adjusted EBITDA margins 270 basis points to 32.3%, well above our target and our annual target of 50 to 100 basis points. recorded net income for the quarter, $25.6 million and for the full year was $103 million, more than 4x reported net income for the full year 2021. Adjusted net income for the fourth quarter was $34.3 million or $0.46 per share. This is based on the fourth quarter diluted share count of $73.9 million. Our adjusted effective tax rate for the full year is now 24%, up from 23.5% due to the growth in pretax income outpacing the growth of our tax credits and deductions. For , please see the adjusted net income walk on Slide 21. Now let’s look at the reported fourth quarter balance sheet. I’ll highlight 2 items.

First, we continue to do a great job of generating cash. We ended the fourth quarter at $136 million in cash and this asset paying $46 million in cash for Adhesion. , we still have a $375 million in our credit facility that’s available to the company. Our cash balance, our strong ability to generate cash and our credit facility gives 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, which primarily reflect our long-term investments focused on creating new capabilities, increasing scale and improving service. For the fourth quarter, our capital spend was $11.3 million or 6.9% of total revenue. In 2022, capital expenditures were 6.2% of total revenue, well within our previous guidance of 6% to 7% of total revenue.

Our capital projects, primarily reflects the constant focus we have in improving our business within the combine of our capital spend parameters. The largest capital investments in 2022, focused on our continued replatforming efforts and productivity initiatives. In 2023, we will continue our replatforming efforts, productivity initiatives and build other new solutions for our advisers. We do all this while maintaining a run rate between 6% and 7% of total revenue. Turning to Slide 17. I would like to provide some commentary on a meaningful impact that spread continues to make in our financial results and how we look to maintain that. Our ability to earn spreads as 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 can held by investments at ATC and interest rates. First, let’s discuss cash balances. In the fourth quarter, total cash and the percentage of assets to ATC remained elevated. Over time, we expect it to revert to a more normalized level without 3.5%. Turning now attention to interest rates. The Fed increased rates 2x during the fourth quarter and once more in January. These rate increases are highly beneficial for the growth of our spread income. The rates will not stay high forever. As a result, we have started to deploy a portion of our insured cash deposits to fixed-term agreements. In the fourth quarter, we added $750 million of new fixed rate term contracts. And as of December 31, 21% of cash ATC is in fixed rate terms and that added maturity of 1.78 years and a growth rate of 4.39%.

As a reminder, we have the optionality of placing up to 40% at ATC into fixed rate terms. We will continue to update the straight on the deployment of cash into fixed rate terms on future earnings calls. Finally, let’s turn to Slide 18 to discuss our 2023 outlook. Our financial model starts with asset growth, the continued adoption and growth of our club company and the growth of SaaS-based revenue from Voyant. We have already discussed trend and subscription-based revenue. So let me focus on asset factors. As discussed in my earlier prepared remarks, core net flows continue to be pressured by lower production. Our expectation of platform asset growth in 2023 is 10-plus percent, which includes organic growth in the high fuel and a modest market list of 3.5%.

Driven mined growth in spread revenue, subscription revenue and a full year of Adhesion revenue, we expect our net revenue growth to be in high teens to low 20s. This assumes the asset growth was slightly offset by about 1 basis point of fee compression, which is our regular expectation. We have set our operating expenses, which consist of SG&A, a compensation and SG&A to increase in the high teens. Our clarity about 1/4 of the year-over-year increase is being the full impact from Adhesion. About 1/3 of the increase is due to volume and the remainder is driven by our strategic investments into talent acquisition, adviser growth and technology initiatives, such as our adviser benefits program and billing system replace. As a reminder, our expense growth is disciplined and closely managed, and we will not let our expenses outpaced our revenue growth.

As always, we are focused on realizing improved margin on our revenue and growing earnings. We expect our adjusted EBITDA to be up 20%-plus year-over-year, and we expect margin expansion between 50 and 100 basis points for the year. And with that, I will hand it back over to Natalie for her concluding remarks.

Natalie Wolfsen: Thank you, Gary, and thank you to everyone on the call today. I look forward to seeing you in person at upcoming investor conferences. This concludes our prepared remarks. I’ll now turn the call back to the operator to begin our question-and-answer.

Q&A Session

Operator: . Our first question is from Gerald with Jefferies.

Gerald O’Hara: Maybe one to just kind of talk about the solution set. And I’d just kind of be curious specifically what the — what you’re hearing from advisers and clients with respect to kind of alternatives on the platform and where that kind of solution set might be evolving within your ecosystem? Or maybe how you’re kind of thinking about it as just sort of a solution in the broader picture?

Natalie Wolfsen: Alternatives are clearly a very important need for high net worth and ultra high net worth investors and as well as if you broadly define the term alternative investments, volatility managed solutions for all investors. And so at AssetMark, we’ve implemented alternatives on our platforms in 2 different ways because we view these needs as being very different. For the smaller investor, the mass of lean below, we implement alternative sleeves within our market-based portfolio so that advisers and their clients could talk about how much volatility they’re comfortable with and then implement the portfolio where the sleeve of alternatives and sized appropriately to the risk needs. We expanded that offering last year, as I mentioned in my remarks and added 3 solutions towards the second half of last year.

In addition to that, for larger RIAs and then also for larger investors who are served by those RIAs, they have need for true qualified purchaser alternative. And we have a partnership where we deliver access to those alternative investments, fully diligent to our advisers who serve investors who have those needs. And that solution is cluttered for RIA.

Gerald O’Hara: Okay. Great. And then maybe just a follow-up, Gary, I appreciate your color on cash, credit facilities and just overall capital management. I don’t know if this is maybe more towards Natalie, but as — can you kind of remind us a little bit on — with respect to the M&A possibilities, what capabilities you might find most attractive as we sort of look past the Adhesion deal, and congratulations on closing that at the same time.

Natalie Wolfsen: As Gary and I both mentioned, we couldn’t be more excited about welcoming the Adhesion family to AssetMark — as it relates to capabilities, as you know, we have 2 types of acquisitions. We’re really excited about capabilities acquisition and scale acquisition. We didn’t ask about scale acquisition, but I just wanted to mention it because it remains an important part of our strategy because we know once advisers become part of our ecosystem, we can help them grow and succeed. Part of how we do that is we have the right capabilities in our platform that are geared towards helping advisers scale their business and enhance their service levels to their clients. And so the capabilities we are looking at fall into 2 categories.

The first is where are they spending their time and effort in a way that doesn’t add value to their client relationships. That’s how we can really help advisers scale where they can turn that percentage of their time to working with clients and helping those clients achieve their goals. And there are lots of different aspects of this. The marketing and lead generation, compliance exercises technical key parts of their technology that takes them a lot of time and effort, like performance reporting and performance calculations. These are all areas that because they take adviser so much time and effort, we would love to do more of. And then as it relates to the second part, what we try and do is we try to enhance the advisers dialogue with and interaction with our clients.

So that, that interaction sets that adviser part. And that’s one of the reasons it was so important for us to purchase buoyant because the financial planning and the goal is at the heart of the advisers’ conversations with their clients. And so there are other aspects of the advisers dialogue with our clients, which take a lot of time and are difficult and require specialty skills in those areas would be areas that AssetMark is interested in. So just some examples, tax management would be an example of that direct indexing would be an example of that investment selection would be an example of that. All of those areas could be interested to AssetMark and others that I didn’t mention. So hope that clarify.

Gerald O’Hara: Yes, absolutely. Maybe just a real quick one for Gary. Apologies , this will be the last I promise. But you mentioned sort of fixed rate term and the sort of average, if I heard it correctly, 1.7 years. Any reason why you wouldn’t maybe try to stretch that a little bit longer? Or maybe can you kind of just help us sort of understand what the suite zone is there for the cash management in terms of fixed-rate contracts?

Gary Zyla: Yes. Sure, Terry. And you can ask as many questions as you want. We’ll be here all day. But the way we entered into this process, we create sort of the layers of a laddered approach. And we ended in some context, 1 year from 2, summit 3 right now. Due to the — there is a slight unpredictability to our cash balances, right? That cash balance goes up and down with the assets on our platform and also the market environment. And so we are being, let me say, cautious as we’re entering the program in terms of the tenure of the contracts initially to make sure that we can review the process and make sure we kind of learn from what we’re doing. So for now, in the medium term, we’re probably going to stick to this sort of 1Q and 3-year ladder. — and see what that takes. And then we’ll evaluate it in a year or so.

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

Jeffrey Schmitt: The TD Bank partnership with Point looks like a great win for the company. And I’m just curious how you differentiate Voyant in the marketplace relative to competitors, just as you kind of roll that out more. What’s your — what’s the pitch there, I guess?

Natalie Wolfsen: Absolutely. So a couple of things. The first thing I want to clarify about on is that Voyant is a leading financial planning provider outside the U.S. And so they have really great market share in the U.K., in Canada, starting in Australia and then beginning to gather market share in the U.S. And there’s a few ways that Voyant has distinguished itself outside the U.S. The first is the flexibility and depth of its technology and the degree to which that technology can be customized by enterprise clients so that the example you used the TD example, they can use voice technology to create a financial planning system that suits the needs of their advisers and how they would like the proves to have financial planning conversations with our clients.

Flexibility includes language, tax regime workflow for the adviser and the type of financial planning that is delivered as well as the degree to which that particular institution can connect their own financial products to the plant. And so outside the U.S., in the enterprise market, it’s really the flexibility and richness of the technology. In the small business market outside the U.S., the way that they differentiate themselves is the richness of the tax integration in the financial planning system, the degree to which the small business can leverage the technology off the shelf, meaning the simplicity of it. And then lastly, the training that Voyant provide to the financial — the small financial market or small adviser, the small advisory market.

Inside the U.S., they differentiate based on all those things. In addition to that, the fact that they can create a great conversation between the adviser and their clients, which talks about the consequences of cash flow decisions clients are making every day to their ability to achieve their long-term goals. And that single user interface is so incredibly powerful for the adviser and to the client, the adviser because they can help the client understand their ability to retire based on the spending of it they have today. And for the client because they can be comfortable that they’re spending the right amount and still reach their long-term goals. So it’s really an incredible technology, and we’re very, very excited to have it as part of the AssetMark offering.

Jeffrey Schmitt: Okay. Great. And then building on the question about fixed rate balances and I understand your concern about sort of where that percentage of client cash is going to shake out. But even if you sort of move that up to a 40% mix in fixed rate, I mean, it seems pretty conservative. So I guess my question is, are you seeing the demand out there to move it up to that? And I guess can we expect you to be pretty aggressive in doing that just given the unique rise in interest rates here?

Natalie Wolfsen: I’ll start this one and then handover to Gary, if he has anything to add. We are seeing interest in our fixed-term deposits in the marketplace, which is great. And as Gary mentioned, our most important value in our cash program is making sure that clients have the liquidity they need at the insurance level that we’ve promised. And so we’re going to focus on that first because that’s the primary reason for the program. And then secondly, on the yield that the program delivers to the investor and then the spread that it delivers to AssetMark. And so we’re definitely seeing demand for the balances that we can provide, and we’ll continue to manage that closely, keeping in mind our first principle, which is obviously the client outcome.

Operator: Our next question comes from Alex Bolstein with Goldman Sachs.

Unidentified Analyst: This is Michael on for Alex. So I guess for the first question, kind of keying in on organic growth here. Since September, the annualized growth rate that you guys put out in the monthly has been 5% below 5%. Before that, the average for 2022 was closer to 8% and then last year it was like closer to double digit or above. So I guess what factors maybe have contributed to that slowing growth rate other than the market impact and lower production. Is there a specific channel that you guys might have been seeing a slower organic growth coming from? And any other color you have there would be helpful.

Gary Zyla: So I’ll start, Michael, this is Gary. Now to your last question, the nonspecific channel let me would attribute this team. overall and overall in the industry, we’ve seen it in our competitors, et cetera, there is a slowdown in the movement of money. And when we think about our net flow net flows for us are purely the money in, what we call production and the money out, the redemptions. Like we mentioned, our redemption rate, the money going out has been very favorable, consistent with our very high NPS scores we have with our clients. We believe once our have money on our platform, we are getting the service and the technology that’s really appealing to them and helping them grow their business. But we are seeing a slowdown of production coming in.

And so that enough exactly bring what you said, our net flows rate down from the high single digits to the or so that we’ve seen in the second half of 2022. We’ve seen, as we say green shoots that give us the encouragement for the outlook that we gave you, which was we believe that our net flow growth rate will be in the high single digits in 2023. But that is a process. That’s a process in the market kind of opening back up.

Natalie Wolfsen: No worries to what Gary said. When there is uncertainty in the market, there can be all sorts of contributions to uncertainty. Recently, we had the pandemic, we had the credit crisis as ties mirror and around election — advisers and their clients pause to take stock of the situation they’re in and to make sure that they’re comfortable with their portfolios and comfortable with the risks that they’re taking. It’s a natural human response. And in my view, the best companies and the best advisers take that time to serve their clients. And in 2022, where you had record high inflation and completely unexpected and historic losses in the bond market, our advisers because they’re great advisers were taking that time to serve their clients.

As things become more certain and as investors and advisers have taken stock, then you start to see the momentum return and you never know exactly when that’s going to happen. But based on my experience, if you spend that time serving your clients, is what AssetMark did in 2022 and what our advisers did you always benefit from the resurgence of interest — and so that’s why one of the green sheets that Gary mentioned earlier and why we’re excited about 2023. The last thing I’ll just say is 2022 is a little bit of a math problem as well because your beginning period assets were inflated and the flows throughout the year were impacted by the markets decline. And so about 4 percentage points or so of that loss is — was contributed to by just the map of the higher beginning balance relative to the flow…

Unidentified Analyst: That’s helpful. I guess for a second question, getting back to the kind of spread-based revenues. So obviously, bank demand for deposits has been rising. I guess maybe an update on what the spread on the floating portion of the cash might be? And if you have any update on where cash balances kind of stand today halfway through 1Q ’23?

Gary Zyla: Sure. So our — the — I make your right number, Michael. So on a net basis, for the quarter, we earned 3 — just under 3.5 points 3.5% on our ICD program, which is the majority of the cash that we disclose every month or so. And so the cash balance at the end of the quarter was about $2.5 billion. And we earned, like I said, about 3.5% on the ICD. And so that 6 term number I gave you, which is the gross number of 4.39 is what is in excess. Now as we disclosed, there are the caps that we will earn about 4% on our cash. Everything above that will go certainly to the end investor. And so we are approaching that cap, but part of our process in moving to some fixed rate term is to ensure that we can maximize earnings by ourselves and of course, our end clients when rates return probably from more normal levels in either end of this year and into next year.

Operator: Our next question is from Madeline Belden with JP Morgan.

Unidentified Analyst: This is . I wanted to dig a little bit deeper on the organic investment priorities you mentioned as part of your 2023 growth strategy on Slide 10. 22 was a choppy year yet you still expanded margins quite substantially. So since ’23 is still experiencing a bit of that market choppiness. Curious how you’re thinking about the priority areas for these investments? And if you’re delaying or even accelerating any particular areas within the current market conditions…

Natalie Wolfsen: Thanks, Madeline, and nice to meet you over the phone. So as it relates to our priority investments, we’re very disciplined about ensuring that our expense growth doesn’t outstrip revenue growth. And as a result, we have multiple lists of potential investments we can make depending on how the year unfolds around this. If we have a great year as it returns to as it relates to revenue growth, we’ll expand our investments to make sure that we’re investing as in accordance with the revenue growth. And if the year unravels to be less positive, we make sure that we invest in what we think are the highest priority areas for our future growth. And that’s part of the investment discipline we have at AssetMark. It doesn’t mean that at any stage, we’re not investing for growth.

We’re investing for growth all along. It just really depends on how much we want to put our foot on the gas. So in 2023, we really feel like the most important areas for us to grow and the most important drivers of growth, and therefore, the most important areas of investment are Adhesion and may be sure that we create a shared client experience between AssetMark Adhesion. And the reason we believe that is because in doing so, we expand our total addressable market by nearly 60%. We also believe that this intersection of open architecture model marketplace with more curated and diligent solutions gives advisers one place, one experience for the whole of their business versus having to manage 2 partnerships. That’s the first area. Second area is where we know that in times where markets are choppy, taxes are extremely important.

And we are going to extend the tax management services we deliver to our advisers to deliver to their clients. And we believe that this will be highly impactful because it will give advisers a source of return in their conversations with their clients. And in addition to that, it will expand the eligibility of nonqualified assets on our platform. The third area that we’re investing a lot in is making sure that we have the investments on our platform that advisers and their clients need across market cycles. And so we’re going to expand our fixed income offering because right now, now that the fixed income market is healing and there’s yield in the marketplace, again, demand for a robust suite of fixed income solutions is expanding and expanding really materially.

We’re also continuing to invest in our productivity. We want to make sure that our solutions are straight through and automated as possible to save adviser’s time to make sure that the services we deliver to them are accurate and that our service organization can focus on the high-impact areas of their advisors business. And then lastly, we’re very, very much focused on making sure that the initial experience of an adviser with AssetMark is extremely good. And that’s blocking and tackling for us. But in 2023, we’re very much focused on that onboarding experience and making sure it’s a smooth as possible. And then one last thing I’ll just mention because I think it’s important and it’s not so important for 2023 specifically, that very important across time.

AssetMark is going to continue to replatform and we’re going to invest in that. Last year, we changed our cost accounting system, which created a lot of efficiency and scale in our custodian. This year, we’re very much focused on the new billing system, which will provide advisers with a lot more flexibility in how they build our clients. We’re working on expanding and expanding the capabilities we provide through our adviser portal, Wealth Manager, which we’ll be delivering at the end of this year and through the following year, and then we’ll also focus on trading, which sounds like a lot, but we’re going to do all of this within the 7% of revenue guidelines that we have talked to you about in previous earnings calls and also this one.

Unidentified Analyst: Great. And then just moving to the top line of things. We’ve seen household growing pretty steadily in a consistent direction past few quarters. Can you provide any incremental color on what’s driving that underlying organic growth, excluding Adhesion? Any metrics that you can share that we better appreciate the potential AUM and revenue opportunity here.

Gary Zyla: So I’ll start . So household is a great metric to look at because again, it’s not AUM leased. And so during this market volatility, including the upmarket in 2021 and the down mark in 2022, it can skew like the actual progress we’re making. And so the number of households is purely a function of new advisers coming on to our platform, opening up new accounts for households as well as our existing advisers, their organic growth and they’re increasing their share of well on our platform. That is growing about 15% a year is indicative of the underlying growth of the business. As markets come back or go down, the assets will catch up or lag behind the household growth, but it is part and parcel to our overall growth strategy of both NPAs, new advisers as well as growing share with our existing advisers.

Natalie Wolfsen: And then adding to that, some capabilities that AssetMark has that makes us attractive to new households that our advisers are attracting. The first thing I would just call out is we are — have a proven ability to help advisers serve higher and higher net worth individuals. We have a lot of training, a lot of resources, investment solutions, partnerships that help advisers move upmarket. And so a good percentage of our household growth is due to that capability. We also have a proven ability to help advisers move from commission to fee. So we’re there managing the money in a commission orientation to where they’re outsourcing it in a fee-based orientation. And we have sample tools, training, materials, resources for advisers to use to do that.

And so that also contributes a lot to helpful growth. We also hope advisers serve small businesses. One of the reasons it’s so important that we have a retirement offering. So you start with the planned part of the business and then you grow to the personal part of the investors, the advisers’ clients business. And so that contributes to household growth. And then last but not least, we also have solutions that help advisers with the next generation of their clients, smaller solutions or getting started solutions, and that also contributes to growth.

Operator: There are no further questions. So I’ll pass the call back over to the management team for closing remarks.

Natalie Wolfsen: All right. Well, thank you, everyone, for joining our second quarter earnings call. We really appreciate you spending time with you and look forward to talking — sorry, fourth quarter second fourth quarter earnings call. We really look forward to seeing you next quarter. Goodbye..

Operator: That concludes the conference call. Thank you for your participation. You may now disconnect your lines.