Q4 2019 Earnings Call

Can you and everyone and welcome to the Assetmark fourth quarter 2019 earnings Conference call. At this time all participants are on 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 tailor Hamilton head of India.

Mr Relations. Please go ahead Mr. Hamilton.

Thank you good afternoon, everyone and welcome to ask Mark Sports quarter 2019 earnings Conference call with me today or asset marks Chief Executive Officer, Charles Goldman and Chief Financial Officer, Gary's, Iowa today, They will discuss the results for the fourth quarter and full year 2019. They also provide an update on our 2020 outlook.

And our introductory remarks, well open up the call for questions. We also have an earnings presentation, the Charles and Gary will reference during their prepared remarks. It can be accessed on our IR web site <unk> IR dot Assetmark dot com.

Before we got started I'd like to note that certain statements made during this conference call are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

These forward looking statements represent our outlook only at the date of this call actual results could differ materially.

We don't undertake expressly disclaim any obligation to update or alter our forward looking statements, whether as a result of new information future events or otherwise further information on these and other factors that could affect our financial results is included in filings it make with the FCC from time to time, including the section titled risks factors in our quarterly report on form 10.

You for the quarter ended September Thirtyth, 2019, which can be found on our website.

Additional information also be set forth. Our annual report on form 10-K. The year ended December 30, Onest 2019, which we expect to file in mid March.

Additionally, during today's conference call, we'll be discussing that revenue adjusted EBITDA adjusted EBITDA margin and adjusted net income all of which are non-GAAP financial metrics. These non-GAAP metrics are not calculated in accordance with gap and maybe calculated differently than similarly, titled metrics presented by other companies a discussion of why we use non-GAAP financial matters.

Next and quantitative quantitative reconciliations of adjusted EBITDA adjusted EBITDA margin and adjusted net income for the most directly comparable GAAP measures will be available in our press release and our annual report on form 10-K for the year ended December 31st 2019, both of which will be available on our Investor relations website and with that I'll turn the call over.

My colleagues Charles take it away.

Thank you Taylor for that are excellent information really appreciate it and thank you all for joining the conference call for our fourth quarter earnings.

It was a great quarter for asset Mark and a word guide to tell you all about a Gary and I are here to share our operational and financial results.

Starting on slide three we're going to focus on five key messages today I'll discuss messages, one and two well Gary will cover messages three through five.

First I'd like to spend some time discussing the year as a whole 2018 was a noteworthy year PRASM work highlighted by new product launches to acquisitions listing on the New York stock exchange and tremendous growth.

Second I want to provide some color on the future opportunities that we see across channels.

Third Gary will discuss our platform asset growth in the fourth quarter, where we realized our 11th consecutive quarter of net flows over $1 billion and our twentyth consecutive quarter with positive net flows a true testament to our strong organic growth story.

Thanks, Gary will discuss our growing cash balances, which bolstered spread based revenue despite declining interest rates.

Lastly, Gary will focus on the rest of our fourth quarter results highlighted by double digit year over year growth in revenue adjusted EBITDA and adjusted net income.

Turning to slide for 2019 was indeed, a busy in momentous year for asked a mark.

As I think you all know our mission is to make a difference in the lives of advisors and their clients, if we do that well and better than our competitors the operational and financial results will follow 2019 was a great example of that.

We added several new products to our platform to enhance our advisors capabilities and to help their clients reached their long term goals in January we added high yield cash our FDIC insured enhanced solution for larger cash balances.

In February we launch guided income solutions designed to provide a consistent source of income for those moving into retirement and in September we launched novelist personal portfolios targeted toward emerging high net worth investors.

We also enhanced our technology stack this year, focusing on innovation and development of new tools and services in 2018, we invested $47 million and the development of technology and on our dedicated technology team.

We expanded our sales and service team this year, while driving scale into this important area of our business.

We continue to build strong relationships with our advisors hosting live events, webinars and creating thought leadership materials.

In 2019, we hosted over 100 advisor events, including our inaugural women's summit designed to encourage inspire and connect communities of women in this industry.

The event was attended by over 50 50 female advisors.

These platform enhancements and advisor interactions helped us at almost $16.8 billion in platform assets and attract 894, new producing advisors 393 engaged advisers and over 28000 households in 2019.

Financially we continue to realize strong results and had continued success driving scaling the business evidenced by our growth in our adjusted EBITDA margin of 180 basis points in 2019.

We also advanced our M&A strategy. This past year in April we closed the GSPC acquisition, bringing $3.8 billion in assets over 200, New advisors and 5.2 million an annualized post synergy adjusted EBITDA to our platform.

In August we announced the acquisition of of Yes, Ob us will bring over $2 billion and assets approximately 300, new advisors and an estimated 3.5 to 4 million in annualized post synergy adjusted EBITDA to the platform.

We have received all regulatory approvals and are on track to close the obvious transaction next week.

Well 2019 shaped up as the best year in the company's history. We believe we're just beginning the scratched the surface of this immense opportunity that's right in front of us.

Turning to slide five I want to spend some time discussing our current position in the market, our future opportunity and how we plan to capitalize on it.

We operate across four major channels, which comprise 15.3 trillion trillion with the tea and asset of which 4.9 trillion is addressable by US with platform assets of 61.6 billion, we have only penetrated a little over 1% of the market.

Simply put we have a long runway of growth and a clear strategy and each channel to continue to gain market share.

Let me spend a moment walking through our channel opportunities in how we think about each of them.

First the independent broker dealer channel, which includes independent broker dealers as well as insurance broker dealers, which makes up the greatest portion of our platform assets.

Our target advisor in this channel are those with the propensity to outsource truly sizes the market for advisors under 250 million. However, we do have advisors meaningfully over that size, we use that 250 million as data to help guide our strategy.

There's a lot of opportunity in the IBT channel as we have current as we currently have less than 3% market share.

I've spent a lot of time in the past talking about our strategy. So I won't go into great detail here in short our focus in this segment is to execute on our strategy strategic pillars. So that we bring on new advisors and grow share with existing advisors in this very important channel.

While the RBC channel is.

Makes up the greatest percentage of assets on our platform, we have focused on introducing new products and enhancing services and capabilities to expand into the are a bank trust in retirement channels as well.

The expansion into these adjacent segments will help us extend our mission of making a difference in the lives of advisors and their clients. We view channel expansion has a long term investment where growth comes across multiple years in the are a channel. We are targeting our a's who are suffering from all the same problems is broker dealer.

Visors, all raise manage all the money themselves do all the due diligence combined different technologies and conduct all the middle office functions.

If you're a larger are a you typically have your own CIO or investment analysts and are better able to support these operations in house.

Smaller Andres do not have the same scale and can't hire these positions in house. So they are the ones that are most likely to see value and outsourcing tasm work.

We expect that our launch of advisor managed portfolios planned for later this year will allow us to better serve our A's and help grow our market share in this area.

Next is the Bank Trust channel, which is fairly new to asset Mark.

The total addressable market and Bank Trust is approximately $500 million billion dollars excuse me and is made up a regional and community Bank Trust assets.

Announced agreement to acquire Ob EPS provides us well, we believe to be a low risk entry points into this channel.

We have the opportunity to analyze Ob us as client base to understand the specifics of how those advisors managed portfolios, how they use technology and how what that technology suite looks like.

It gives us a chance to really study and understand the bank Trust opportunity and then bring our set of capabilities to those advisors and their investor clients.

Lastly, let's discuss the retirement channel, which complements all of our other offers by offering a retirement solution. We provide our advisors a more complete outsourcing model, which allows us the opportunity to gain additional share of wallet.

We help advisors, who are not experts in this space working with entrepreneurs that are already their clients to build small form 10-K, and four three d. plans.

We launched our Revit.

Excuse me, we launched our revamped retirement services in 2017. Since then we have improved our investment offering to include a broader investment lineup improved prospecting and reporting for advisors advisors and investors and have built a dedicated experienced team to support adviser training and to provide plan sponsor support.

We plan to enhance our marketing strategies and data analytics to educate advisors on how to prospect win and service retirement plans.

As you can see we have a lot of runway in front of us.

Now, let's move onto our next topic as I plan to do every quarter I wanted to discuss at a high level. The thoughts we have on the macro environment and the general industry.

The markets in the fourth quarter provided a nice tailwind to our business as the S&P 500 ended the fourth quarter up 8.5%.

For 2019, the S&P 500, sore, 29% the strongest annual return since 2013.

Using trade tensions fed cuts in a durable economic data supported this rally.

However, the strong calendar year returns must be viewed in the context of the low starting point following the almost 20% sell off in the fourth quarter of 2018.

Starting from the 2018, Hi on September September 20 of the S&P 500 has returned a more modest 10%.

Gary will provide greater detail on how the market's affected our financial performance in 2019, and the impact of fourth quarter market appreciation on our first quarter 2020 financials.

Well, we have experienced increased volatility over the last few days and we certainly have done exactly that we believe that markets will grow over the long term that is critical in terms of how we manage the business.

The bond market was also a big story in the fourth quarter of 2018.

Over the FOMC cut rates again, reducing the fed funds target by another 25 basis points. This marked the third and final cut of 2019.

While we have not model any further rate cuts into our 2020 outlook. We are actively following updates from the FOMC and analyzing the dot plots.

As a quick reminder, as I said a minute ago, we do not run the business on the ups and downs or the market.

Rather we pay close attention to market movements as we manage our financial results and continue to invest in our clients and the business generally.

Lastly, I want to provide some additional color on the recent press release, we issued earlier this month announcing the transition of third party mutual fund strategies on our platform to institutional share classes.

As a more currently offers several third party mutual fund investment strategies that use our retail share class and beginning in May advisors will have access to the same strategies using institutional share classes, which have lower operating expense ratios.

This change impacts 15 mutual fund strategies, which are invested across approximately 200 different mutual fund positions assets in the impacted strategies now represent less than 9% of our total platform assets. We estimate the revenue impact in 2020 will be approximately 7 million dollar.

First which is less than 2% of expected revenue for this year.

Before we discuss the rationale for this decision. It is important to note that this decision will not to repeat not affect our previously communicated revenue growth expectations in 2020.

So we have long been or proponent of greater pricing transparency and lowering the total cost of investments for end investors. This change will result in a lower overall cost of investment for the vast majority of client assets held in the impact of strategies, helping investors reached their financial goals.

Our long term pricing strategy is to make the decisions necessary to remain competitive and to grow our a AUM, which drives scale into our platform.

While these decisions may result in incremental yield compression beyond the normal compression, we see from mix shift we believe there in the best interest of our advisors their clients and therefore our company.

Okay. So given that let me now handed over to Gary to go over our fourth quarter and full year results. Gary. Thank you Carol and good afternoon to all those on the call today I will follow a similar outline and I gained during our previous earnings call I will start with a discussion of our platform assets then talk about our revenue sense adjustment.

And then our earnings from there I will discuss our balance sheet and other key financial highlights at the end in my remarks, I will also provide an update on our 2020 expectations.

I'd like to begin on slide six of our earnings presentation, we have experienced robust growth now platform assets. Some of the past five years, realizing a 21.7 cagar over that time in the fourth quarter of 2019, we grew platform assets again increased 37% year over year and.

6.4% quarter over quarter $61.6 billion, marking an all time high for asset Mark.

And you can see from the graph, we realize the majority of this growth margin gains advisers on those with over $5 million of assets on our platform.

As we've discussed previously the growth of engage advisors on our platform in the key indicator for the overall growth in the business.

Life for the content platform assets from engage advisors were 89% of our total assets in the fourth quarter five years ago platform assets from engage advisors were only 79% of our total assets.

Turning to slide seven during the fourth quarter, we had net flows of $1.1 billion and realized $2.6 billion at market gain net of fees.

As disclosed in our 2019 annual summary of net flows in the fourth quarter, we experienced approximately $600 million of outflows due to block GSPC visor managed business, leaving the platform.

The advisor managed block was not core to the economic pieces of the GSPC acquisition and yields nominal revenue Nat and Mark.

As of December 31st 2019, only $613 million some GSPC advisor managed business remains.

Of which over half with advisors, who are actively engaged in asset mark.

That said net flow is excluding PFP sees advisor managed business more positive $1.7 billion in the fourth quarter.

Fourth quarter, Martin 11th consecutive quarter, when net flows of a $1 billion and the 20 eightth consecutive quarter with positive net flows but not in perspective, we have been organically growing our platform assets for seven consecutive years.

As a reminder, organic growth excludes acquisitions end market impact.

For the full year, our net flows the 12% of our beginning of year platform assets well ahead of our long term target of 10%.

Strong momentum for 2019 has carried into 2020 per our am K report January net flows were $472 million.

In addition to our focus engaged by there is another key indicator for our growth our new producing advisors on our platform we're NPK.

Let me think amount on $1.7 billion net flows in the fourth quarter about two thirds came from the gauge advisors, while one theory came from NPK.

In the fourth quarter, we added 213 mph and ended the year, adding 894 mph.

As we think about total advisor base ended December 31st we had over 7900 advisors on our platform of which 2230 when define as engage advisors.

Our engage advisors can cause do you need 28% of our total advisors up from 24.3% in the fourth quarter 2018.

Charles mentioned when discussing our strategy across multiple channels, adding new advisors to our platform and expanding share wallet from existing advisors, a two key tenants in our organic growth story.

Now, let's turn to slide eight to discuss the corners earnings.

Entering the fourth quarter assets were at $57.9 billion, leading to reported revenue of $111 million up 14% year over year or 10.6% when excluding the impact of the GSPC acquisition.

As discussed we focus on revenue net of related variable expenses when the fourth quarter of 2019, our net revenue of $76.9 million was up 17.8% year over year or 14.1% when excluding the impact of GSPC.

The full year, our net revenue was $286.9 million up 17% from the full year 2018.

Our net revenue yield on total platform assets in the fourth quarter was 53 basis points inline with our expectations and down one basis points quarter over quarter and two basis points from this time last year.

Two basis point year over year decline was solely driven by the addition of lower yielding GSPC assets as the yield from our core business remained flat year over year. As a reminder, the yield the GSPC assets is lower than asset March core business, primarily due to two reasons.

First the DTC businesses customer need and a third party and non asset Mark and second question, a GFT sneeze platform assets, our advisor Manning, which yield nominal revenue to ask Mark.

The clarity and transparency that calculation of our annualized revenue yield net variable expenses as shown on slide 11 in the appendix of earnings presentation.

Let's turn to two main components of our revenue asset base and spread based net revenue.

In the fourth quarter asset base net revenue was up 19% year over year in $68.4 million driven primarily by the growth in platform assets.

Our net yield asset base net revenue was 47 basis points in fourth quarter 2019 versus 48 basis points in fourth quarter 2018 decline driven by the addition of Dfc mentioned above and product mix shift.

Good day net revenue is the interest that we earn on client cash held at the asset Mark Trust company in the fourth quarter 2019, we realized $7.2 million spread based net revenue.

Up 18.6% year over year.

The increase in spread based net revenue was driven by higher cash balances offset by declining yields.

Our average client cash in the fourth quarter was $1.73 billion on which we received a blended annualized yield of 1.65%.

Straight base net yield contributed five basis points to our overall yield.

End of year cash APC with $1.8 billion of which 218 million was in high yield cash.

Before we turn earning let me one to our adjustments to expenses in the fourth quarter. We added back a total of $23.4 million pre tax which is comprised of four items.

First.

$14.1 million, a noncash share based compensation second $5.1 million of amortization related expenses related to our 2016 sale third $3 million expenses associated with our acquisition and integration NPL PC, and lastly, $1.2 million of add backs related to the eye to eye.

Ill readiness and reorganization costs.

As we mine and we believe the expenses associated with the acquisition of GSPC should Ses at the end of 2020 stepping down the back half of the year the incentives associated with our IPO should end this quarter.

For additional color and adjustment sends reconciliation table per income statement line item can be found on slide 12, new dependence on our earnings presentation.

Now, let's discuss the earnings in the quarter.

The net income in the corner with $19.7 million with 27 cents per share and increased 22.7% year over year in the this is based on the fourth quarter diluted share count 72.4 million.

The year over year increase in adjusted net income was driven by higher adjusted EBITDA of $7.3 million and lower taxes and $380000, both partially offset by higher amortization of $1.5 million an interest related items $700000.

Marginal tax rate for 2019 was 25.3%.

In addition, adjusted net income we view adjusted EBITDA as an equally important measure of a company's health for adjusted EBITDA, We add that the same extend sytem set the amortization related item.

EBITDA was $29.3 million in the fourth quarter funny, 19 up 33.1% year over year, reflecting strong year over year growth in a topline and improve margins for the full year adjusted EBITDA was $109.9 million up 23.5% year over year adjusted EBITDA margin for the quarter.

It was 26.4% up 22.6 up from 22.6% margin in the fourth quarter 2018.

380 basis point year over year margin increase was driven by three items.

First our core business continues to scale second the acquisition of GSPC and third to continue shift less intensive investment vehicle, which reduced our asset base expenses.

We ended the year when an adjusted EBITDA margin of 26.3% up 180 basis points compared to the full year 2018.

Now, let's not getting reported fourth quarter balance sheet I would highlight three items first cash continues to serve as a position of strength. We ended the fourth quarter with $96.3 million in cash our cash position grew $13.1 million quarter on quarter, driven by our operating activities.

Second cash second capital expenditures, primarily reflect our long term investments in technology to create new capabilities increased scale and improved service for the fourth quarter, our capital spend was $6.2 million or 5.6 percentage whole revenue for the full year 2019, or Pat will stand was 22.5 million.

Or 5.4% total revenue.

Lastly to balance sheet items available for sale investments at fair value and other long term liabilities increased this quarter by $6.9 million due to the inclusion of the asset liability associated with asset marks deferred compensation plan.

Now I would like to provide an update on our 2020 out which we announced during our third quarter earnings call and refine interim winter 2019 investor presentation.

Turning to slide nine our platform assets experienced a robust 2.6 billion dollar lift from the market in the fourth quarter, helping us entering the year with higher platform assets at that level than originally forecasted.

As we've previously stated we do not believe in short term guidance as there are too many variables and our and I could add about control and we managed the business for the long term nonetheless, due to the higher asset levels as a result of strong market performance.

And our transition from third party mutual funds at U.S retail share class when institutional share class fuel would be helpful to discuss our 2020 expectations again.

For clarity at previous comments on our 2020 outlook included in revenue impact unit transition to a lower cost mutual funds. Therefore, this will not have any effect on our revised 2020 expectations. However, the fourth quarter market impact will.

Semi moderate growth in the at in the markets impacting us 3.5% net of fees and no changes to the fed funds rate in 2020, we expect our full year net revenue.

To grow in the low teens year over year.

We are slightly increasing our expense growth target to 9% to 10% the previously communicate 8% to 9%.

On the adjusted EBITDA front, we are revising our expectations upward now targeting growth in the 15% to 20% range versus the previously announced 15%.

While we are expecting year over year growth in adjusted EBITDA in the first quarter, a greater portion of our EBITDA growth from the year suspecting importers to Q4.

The reason that the first quarter includes additional expense due gold form our annual multi day event for our gold and platinum advisors.

For the year, we are targeting a 100 basis points of adjusted EBITDA margin expansion, which is above our long term target of 50 to 70 basis points calculated on our reported revenue.

Regardless of the short term market impact we firmly believe that the measure success for aftermarket is the continued organic growth in the business and we will continue to focus on that targeting on net flows to be above 10% beginning of your assets.

These 2020 at stages do not include the impact of old BS and our financials, which we expect to be accretive as Charles mentioned, we're expecting three and a half to $4 million in annualized post synergy EBITDA.

Additionally, we signaled that 2020 will be a year of investment and we are targeting a capital spend of about 7% of our expected revenue. The vast majority understand is on continued investment and enhancing our compelling technology offering.

Well the onetime investment to replace that record keeping system and ask Mark Trust company.

Also included in the capital spend in an investment of approximately $4 million in support infrastructure growth across all of our offices.

We look forward to providing vendors update in the future and now I'll hand, it over to Charles provide some concluding remarks, well done Gary. Thank you and thank you to all are listening to our call. Today, we're really pleased with our fourth quarter end full year results were excited about the opportunity in front of US we look forward to continuing the dialogue to.

Esters and with those who are interested in learning more about the Assetmark story, so with that let me turn it back to the operator, we'll open up the lines for questions.

Ladies and gentlemen, if you would like to ask a question at this time. Please press star followed by the number one key on your telephone keypad, we'll pause for just a moment somehow the Q and a roster.

And your first question is on the line of Alex both stand with Goldman Sachs. Please go ahead.

Hi, guys. Good afternoon couple of questions.

So I guess first a couple of cleanups just around the institutional share Clos, which.

Sorry, if I missed it, but how much and assets dot actually impact.

And the $7 million number that you said it had an impact on revenue set an annual number.

And again I'm, assuming this is largely going to impact like the net asset based fees not not the gross or just maybe some clarification there.

Sure Alent and thank you for calling and this is Gary.

The the block of business is about $5.5 billion are currently in retail share classes that will be converting to institutional net $7 million.

Impact is for the current year as we announced in this transition we made around in June and so you can effectively imply it's about a half year impact.

And yes, Saf year impact for from that from the shift.

Got it and are there any other.

Either share classes or just kind of I think about the assets that are on the platform that you can put into sort of quote unquote less shareholder or investor friendly rappers.

No that could switch to other kind of clean shares over time that could put incremental pressure on the revenue yield for asset Mark So, let's kind of keep them movement from active to passive aside from this so obviously the switch from mutual funds Cts will put some pressure on it but just within the mutual fund complex or do you think this is basically cleanup.

Yes, Alex.

Charles if the at the risk of correcting what you just said, they're less shareholder friendly I think the way we think about it is we're trying to put together a platform that's very shareholder friendly and makes a lot of sense for investors.

A big change that we're seeing in the industry is a move away from implicitly priced.

Product to explicitly price product and it has all the companies I know you cover.

Theres many that have a lot of MTF non transaction fee share classes.

That stood out there and I think theres, a a pretty good debate.

In the industry about whether or not those are in the investors best interest or not whether transaction fees are not on our platform. What this does it shifts.

The pricing to two explicit price versus inside the product.

And because we see opportunity to continue to drive scale and growth in our platform as we normally do we'll look at competitive situations and trying to try to lower price to drive growth. So just I hate to correct on that but I think it's important we still maintain about $3 billion of.

Products that are in retail share classes on the platform and those are related to.

A proprietary products that don't have a corresponding institutional share class and so my suspicion is overtime that will change today, we don't have an institutional share class to do it with so it's about $3 billion.

Great Thanks for that.

And then switching gears, a little bit to the expense guidance and the current environment. Obviously, the backdrop on the macro sites changed quite a bit relative to the fourth quarter.

So I guess the first question is the 9% to 10% expense guidance for the year.

Does not take into account any additional rate cuts I think the curve is now implying about two cuts for the rest of 2020 and kind of who knows what markets will do so.

Can you give us a sense, how low that expense growth could be for 2020, if you have to readjust your expectations for the macro backdrop.

The prior guidance was a little bit below but give us maybe some sort of range in terms of how far back you'd be willing and able to pull back this year in a tougher revenue backdrop.

Sure thousand this is Gary and let me start and kind of frame up how we think about minutes right. So.

I know, you're just talking about rates. The first looking at in the marketing ranked in the market has had some pretty big moves over the past week or so.

So year to date I think the S&P market has that come down about 3% to me. It was up on February now and now down and if you remember weve pop that we are kind of our portfolio in the 60 40 portfolio. So what I had about a 50 beta to the S&P and so we tend to our assets are down about 1.5%.

And right now.

[music].

Year to date.

Generally we mentioned that we expect we planned form a gradual market growth about 3.5% a year.

And so.

If the markets kind of stay where they are or this kind of trend.

This level maintaining the sell through the ending the quarter, we might be off about 2% of what we expected to be yet for the quarter for the quarter.

So that means going into the quarterly billing them first quarter you'd have that impact.

The benefit of our business, we bill in advance and we've already Colette in that first quarter revenue already.

And by doing quarterly we can adjust to the market shifts later in the year et cetera.

We whether or not and.

Shifting to the view on interest rate.

Ill now a lot of thinking about where I think the market Dan we think the rates might be going down the general feedback from the fed is sort of a different tune actually that.

Like eight and we are following that guidance on that assumption in our outlook.

And so that's what are coming from.

Even the Charles maybe to answer a little more about macro how we view the investment in the company.

So so Alex and I think its importance, we said on the road shows as well.

We've said in every one of these calls we're not going to have a knee jerk reaction to markets were long the market were long investors. We believe you take share in down market cycles.

At that others, others make the mistake of stop investing it to try to hit some kind of crazy number that is not our goal at all we also.

Believe that we have great visibility into our revenue because the billing in advance. So we're not going to sit here and speculate and then cut cost or do one thing or another because of that we will however be sensible thoughtful and manage the expense base, which we can do overtime.

As we see things that we think are more sustainable over to sort of three days into.

The Corona virus market I don't know Theres. Some some name for what's going on you know to try to nitpick react to that doesn't make says I do hear your question, though which is what could you do and I'll, let Gary answer that a little bit, but I want to be careful that we don't want to guide you into thinking that we will do that.

And my only comment to that and out as you know if you think about a 9% increase in spend in 2020.

And I know, it's really very rough but.

Figure somewhere loan somewhere around half of that in the volume increase that we're planning the other half of that increase is going to me the investment in the business right and so to the Ecolink I'll point, we are investing in growth and we don't plan to not invest in growth, but if you're thinking of what are the levers to pull how that should help me give me a little guidance.

Got it all right that's helpful framework. Thanks.

Thanks, Craig.

Question is from the line of Chris Shutler with William Blair. Please go ahead.

Hi, guys good afternoon.

Charles I wanted to get your thoughts on the competitive landscape assume your competitors in the and the PTAB space aren't growing their business is nearly as fast as you guys are so.

I'm wondering if you're seeing any of those competitors make any changes to their solutions or the way that they're going to market because it back to you.

Thanks, Chris.

Great question.

So so it's interesting.

We're seeing is most of the other traditional Tam so so whether their product base tams are more platform you like we are the growth rates have been vastly different than our own. We do see however, the broker dealers that are building internal tabs. We go through all of their Eightv season, and really study there they are more.

Auto marketplaces, what they're doing well.

While they're not growing nearly as fast as we are they're growing sort of maybe I think about probably about 60% or so as fast as we are and we do see that activity, increasing and so let me kind of split the world into two pieces. The smaller players that don't have the ability to invest in sales force.

And not just people, but an optimization of the salesforce in making that salesforce truly better.

In marketing that supports that and compelling or any technology frankly, they're just wiring things together when they are basically offering which most of them do more of a proprietary investment architecture, and it's slower and more difficult to kind of.

Bring new things to market, we're seeing that that those are models that are suffering and I think is quite hard to make changes in those things quickly and we are paranoid people, we worry about our competitors everyday.

But those those folks are structurally in a different place and one of the reason we think scales matter so much in the business.

The broker dealers on the other hand, which which are both our partners and sometimes our competitors. What we see is sort of two groups. There wasn't one group that we partner with that really understand open architecture that are really focused on how do we bring choice to independent advisors independent advisors are independent for reason they want choice.

Tenants and they want to the broker dealers want to compete but they also want to have third party choices and we work really well with them and we see nice nice growth there, even though they're investing and then there are others that are starting to build more closed marketplaces and or be more predatory in their approach and I would say.

We still see very good growth in those those networks.

The real opportunity for us is to keep investing to keep getting better. We know advisors. One service. We know they want technology, we know they want better investments, we keep doing those things and then deliver practice management with that we think we can win and and maintain the growth rate.

And we think we can help Frank frankly, the broker dealers get better at what they do so I don't know if that answers. Your question. Chris is that was sort of on but that's a little bit how we see the marketplace.

Okay Thats helpful. Charles.

In a different direction here can you maybe walk us through how you think about.

So on the topic of M&A theres been a lot of different things in the press, but maybe just.

Help us think through.

Your framework, if you were to do any larger scale M&A in particular, what are the criteria that you look at.

Great Great question. So so our M&A strategy for those who are familiar with it is two basic ideas. One is consolidation. That's the deals that we've done there basically consolidating economics consolidating acquisitions, where the economics or.

Basically bring the platforms together take a lot of cost out what we've also seen though and all of the ones that we've done that that are now vintage that have been around a little bit as we see that those advisors grow much faster on our platform and fast faster than the platform at our platform average when they join as they get all the capabilities that we have.

So we like that kind of model the second is capabilities.

We haven't done to capabilities acquisition, the tended to be quite expensive they tended not to fit strategically in this our to go into that too much here on this call, but we could talk about that if the that's of interest.

The larger scale that you're talking about today, we all know that theres a lot of rumors around the industry.

We remain quite interested in growth and we think that.

Scale and growth matters, our framework going into a larger deals we were to do and we understand that it's not going to be single high single digit kind of EBITDA multiples, they're going to be higher, but we will look at them and make sure that we feel like they enhance our growth.

Trajectory that they bring some level of capabilities.

And that they are very accretive to shareholders and that they are financed well and so so yes. That's the general framework that we think about.

Alright, Great and then last one just to clean up question on the.

Steel I just wanted to confirm that said the post synergy adjusted EBITDA will be about $3.5 million. So I guess first is that correct and then second of all how much of that would you actually expect to hit the BNL in 2020.

So you have the number right.

And then the number we sat with three and a half the $4 million of adjusted EBITDA on an annualized basis.

And as Charles mentioned.

We have cleared all the regulatory hurdles, we hope to close the deal soon and so I went prorate that number.

To that kind of 10 nine have 10 10 months that we would have.

Okay fair enough. Thank you.

Your next question is from the line of Ken Worthington with JP Morgan. Please go ahead.

Hi, good afternoon.

The production lift from existing advisors, a it keeps growing its at the highest level. We've seen is it possible to kind of dig into that a bit deeper and figure out what's really being driven by the market and what is being driven by more organic or other drivers.

Let me take 10, as Charles but having the call. Let me start and then ill, let Gary Gary Jim and there is no market in that right. So remember we exclude market from all calculations, except for when we say and Theres market in a red so what we're trying to always make sure you see is.

The actual lift coming from the advisors and so.

What's happening there at a high level is we continue to see the value of outsourcing driving advisor growth.

So what we're able to do is help advisors get better at what they do and win more advisors become engaged advisors.

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And do more with us they are able to then increase the time they spend with existing clients, bringing in that next all from their existing client and then of course growing with new clients.

If you look on our public website I believe Taylor is the study of outsourcing that we publish that was done by third party that can help a little bit with how advisors or thinking about growth rates in some facts behind that but but at the end of the day for us, making advisors better at what they do and getting them out of managing money and figuring out what.

Portfolio accounting system to use and all those kinds of things it's really the key.

The other thing I would just point out is that that predict that particular.

Ratio you also have to take into account that at the beginning period assets right and so we did start last year at kind of a low level and so if you started at a higher level that numbers, just going to move around a little bit because of that.

Just to sum the thing about in your model.

Yes, and I assume that that's a number that really should just continue to increase overtime and if that's correct is there a natural ceiling, where you would expect that too.

Not cross.

Yes, so I wouldn't expected to increase overtime in some sort of linear way I think there's two factors to think about one is the one I just mentioned it does matter with the denominator is and so the denominator is is a.

Phenomenally high number you'd expect that in the next year, it's going to be it may be slightly lower.

Our experience is that that number has fluctuated because of that sort of the 20 to mid twenties.

And I think it's probably a reasonable way to model it kind of in that low twentys.

It.

The other factor that I think you might think about is the engaged advisors. The more engaged advisors as a percentage of the total you'd expected to go up a little but it's not the kind of thing that's going to grow 10% per year that kind of idea.

Great Great Mccann connections have done a data point of view right. So John's point right now in a nominee or resets every year as our assets grow and so even if you just maintain the same percent lift year over year. Your gross number will be growing at the same rate into your assets right.

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Out what about maintenance strategies is to broaden our platform in a smart way to attract more share wallet, which drives up this present and sell it may pop or or grow a little bit but in that mid 20 range that we feel great Rick.

Do you think about how we talk about our net flows number of 12%. This this number is more of a what's that gross number coming in from your existing book and that minus what goes out gets you to that sort of 12% number.

All right.

Great. Okay, great. Thank you very much that's it for me.

Thanks Kelly.

I'll follow up questions on the line of Alex Blostein with Goldman Sachs. Please go ahead.

Great. Thanks for taking the follow up any Charles I was hoping to get a little bit of better understanding of the opportunity you see for ask Mark in the are a channel you talked a little bit about the new offering you're rolling out I think later this year.

What do you find most differentiated about this offering versus what are you could get from their custodians or maybe some of the smaller custodians, where they are due been did they are doing business with right now.

Do you expect this business to come with the custody business and some cash may be as well just trying to better understand kind of how this could ultimately change the business model for us markets.

Yes, thanks, Thanks US great question so.

Let's start with the core problem. The core advisor problem is so if you're in IBT rep.

You are overwhelmed with managing money, putting together technology also you're choosing outsource.

Outsourcing has been something that's happened in the IB de world.

In the insurance broker dealer world for a long time, and that's really where all the tams came from while about 15% or so of our assets are with either hybrids or for a phase the traditional our idea is tended not to outsource.

The term I think you know every body on the call probably knows Revpas pm.

When you look at what an IBT rep is doing when they're managing their own money, we call. It Revpas PM. When you look at an all right today and say whats the equivalent is just our ita.

Most or I would say all our eyes, 99% plus our managing their own portfolios are doing their own research due diligence if theyre doing any of that they are constructing models. They're trading models do you through spreadsheets or through some some technology, they're going direct to their custodian they've got a litany of tech partners in all the rest of it are.

Our belief and its theres good research and good experienced a lot of is come from that channel is that the our idea is that are really under 250 or under three or 400 million. Those all razor drowning in the same problems and when we talk to those are raised when we go to conferences, where we engage with them when we talk.

After the Iras that are already on our platform. We understand that this model actually fits the big problem is that they are managing money and they're not going to lock stock and barrel change everything that they are doing somebody with $50 million book is not going to come over year and change everything have all the tax impact give up their value.

You proposition the there has to be some kind of way to get them here and that is what we're sort of code name, what we haven't I know the branded yet, but assetmark institutional it's that feeling of.

A different kind of experience here for that are a that wants to manage some of the money themselves, but is going to be willing and has a mindset or a persona to outsource and so your question is is what why is that different than what it custodian will offer.

Custodian can offer all the although access to mutual funds and on trading and whatever they want they can do all of that but they can't do the other part and no one really can deliver the the value outsourcing proposition that we have and so it's really that we need advisors that are willing.

Mentally and have this the style that says cheese I want to move to outsourcing I want to manage some my own but I want to moved outsourcing. So we're not trying to compete directly with the custodial platform on straight trading.

Brokerage account features that's not what we're going to do that's not where we're going to win.

The second part of your question on custody will be opened on custody. So I suspect and we believe a significant part will come to our custodian about 80% or so of our growth today is going to our custodian why.

Although we try to manage the service model across all custodians, we do that work for everybody with the service experience is just outstanding at our custodian and so advisors tend to choose that choice. We suspect we will see a lot of that in the in the in the Amp and the amp offer but it will all.

Also allow other custodians as well because we want choice. We're all about open architecture and choice. My belief, though is we will see we will see quite a bit of that growth in our custodian.

Great. Thanks for taking the Paul.

Sure attitude.

And we have a question from the line of Patrick will follow with Raymond James. Please go ahead.

Hey, good afternoon.

So you guys added more engaged advisors during 2019 than you had a total advisors, which implies that you lost a handful of non engaged advisors. During the year I think some of that was GSPC related but what should we make it that dynamic and to what extent. This as a mark tried to advisers on a lower asset levels in order to increase that over time.

So hey, Hey pack that got nice to hear from yen.

Great question. So this is Gary.

We ended 894, new advisors in the year.

You know.

Why we talk about engage advisor number.

And that lift of 390 393.

Is that when Thats, where economics really comes from and so now.

While we have 7900 advising on our platform you can understandably.

It's understandable that there is a good number of the 894, new advise that come on they will turn on and off right.

Our hit ratio on that if we if we convert 20% to 30% vote into engage advisors have a great economic outcome for asset market that we strive for but you can understand the other 60% to 70% in going to turn off over overtime in a year or two or something that is that what you're seeing at the bottom of that which is why.

We certainly do report the number Pablo advisors and 7100, but all we focused on making sure we are growing and looking at the end game.

Patrick its chose.

I think I would add that when we think about the way we can talk the business today versus how we used to conducted and how frankly, many others conduct the businesses.

Used to be a product sales so people would come to asset mark to access a product or access the strategist or something that's not a good outcome for us Thats why this engaged statistic really matters. We're looking for somebody is adopting a business system and so when somebody comes for product as you know when you look at.

Other platforms and you look at redemption rates from those that are reporting them on bigger platforms.

The churn is in the high Twentys percent range. So so if you buy a product you should expect that the price going to come in and out of favor in our business within engage advisor, we expect those advisors not to turn off or leave we expect them to transfer.

To a different strategy and that's why being a platform matters much much more than being a product shop.

It's just a really key concept and so when you think about the bottom part of our the smallest product picker advisor that comes on board.

Do they come on now, which we hope they don't are they came on five years ago. That's an advisor we don't mind, losing because we can't serve that advisor really well we were really trying to serve advisors that are committing to us. So we can commit to them. It works out much better for everyone.

Got it I appreciate that and then.

Heard correctly, you mentioned that you expect capital expenditures to be around 7% of revenue in 2020, and I think you gave a lot of due to underline that is that kind of a good run rate to think about going forward. So in 2021 and beyond or are you kind of looking at 2020 is being a period of elevated capex.

So we our our our present in 2019 with about 5.5, 0.6%. Thank you John 5.6% and.

I would I wouldn't say that both 2020 and 2021, Patrick can be in that 7% level.

There's a lot in front of US we have the resources Q.

Really make them really enormous strides both in the technology basing our advisors and the technology in the back office that will help us scale better.

Long term, we think more of this 5% level, but the net couple of years it should be at 7%.

Patrick maybe a little clarity on the what part of that.

So as you know and businesses like these you often have to not often occasionally have to invest in.

Larger systems that scale for the future and those investments or.

10 to 15 year, lifecycles or more and we're just in that cycle. Now we have have had a set of core systems in the back back part of our office things that are not exposed to advisors. These are things that advisors will never know or care about it doesn't do anything for them, but for us in terms.

Of scalability of our operations in terms of of.

Security sapiens down it these are things that have to change and we're in that process now and it does to your process.

Great. Thank you.

Thanks.

And we have no further questions at this time.

Great.

Once again, we love this time, a chance to chat with you. Thank you very much for taking your time, we know it's a lot of effort I am always amazed I read a lot of your research reports and I'm starting to listen to a lot more of these calls just to see other other companies to them and boy what a lot of work those view who write about these things do so thank you for that work for.

Other investors.

On the call. Thank you for your trust in US we will continue to do our best to deliver client value that return shareholder value, we'll talk to suit.

And this concludes today's conference call you may now disconnect.

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