Q1 2020 Earnings Call

Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank you for your patience.

[music].

Good afternoon, everyone and welcome to US It marks first quarter 2020 earnings conference call. At this time all participants are in 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 Investor Relations. Please go ahead Mr. Hamilton.

Thank you good afternoon, everyone and welcome to ask marks first quarter 2020 earnings conference call joining.

Joining me remotely or asset marks Chief Executive Officer, Charles Goldman Chief Financial Officer, Gary's dialogue.

They they will discuss the results for the first quarter and provide an update to ask marks business outlook for the remainder of 2025.

Well I wonder introductory remarks, well open up the call for questions. We also have an earnings presentation, the trials and Gary for reference during their prepared remarks. It can be accessed on our IR website IR ask Mark Dot com.

When we get started I'd like to know 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 do not undertake an expressly disclaim any obligation to update or alter our forward looking statements by the result of new information future events or otherwise.

Further information on these and other factors that could affect our financial results is included in finally make with the FCC from time to time, including the section titled risks factors in our annual report on form 10-K on file with the FCC and available on our Investor Relations website and in our quarterly report on form 10-Q for the quarter ended March 31st twice.

20, which we expect to file next week.

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 got and maybe calculated differently and similarly titled metrics presented by other companies.

Discussion of why we use non-GAAP financial metrics and quantitative reconciliations of adjusted EBITDA adjusted EBITDA margin and adjusted net income the most directly comparable GAAP measures are available on our press release and our quarterly report on form 10-Q for the quarter ended March 31st 2020, both of which will be available on our Investor Relations website.

Right.

And with that I'll turn the call over to my colleagues Charles take it away.

Okay. Thank you Taylor and good afternoon, everyone and thank you for joining or first quarter earnings conference call I.

I know everybody knows these are challenging times and we really appreciate you taking the time to be with US today. Most of all we really hope your family or friends. Your colleagues are all safe and healthy.

During this covert crisis.

Before we begin our prepared remarks, I want to start by saying that our hearts go out to those families who have been impacted by covert 19, either directly or indirectly I also want to call out the work of the many health care professionals first responders and individuals where the frontline's battling this pandemic. Thank you for your courage.

And your selflessness.

Lastly, I want to take our leadership team and all the associates at asset Mark for their dedication to our clients I'm incredibly proud of how Assetmark has rallied in the face of this crisis and were 24 seven to ensure the safety and well being of each other and to continue to serve our clients at this time agreed need.

We're doing our part to held flat in the curve, we have cancelled all in person events and eliminate are all business travel all of our 700 plus associates are working from home and have the necessary technology and infrastructure to mitigate business disruption and to maximize our abilities to serve advisers.

Real quickly implemented new technology tools to help all of our employees stay connected and be protect a productive while they work at home.

Okay, Let me start on page three.

Well, we're going to focus on five key messages during the call today.

With an emphasis on how cobot 19 is impacting asked them work operations financials and strategy.

Before we address that Gary will take you through the Q1 2020 results, which were highlighted by strong top and bottom line growth and record net flows of $1.8 billion. We will also be providing you with data that we do not normally disclose to provide you with more context. During these uncertain times well now.

Creating a new obligation for future disclosures.

After hearing from Gary I will discuss how we're currently running the company, which we believe will position position us to win now and in the future. Our platform is built for these times in this environment.

This is an opportunity to stand out from competitors by doubling down on our mission of making a difference in the lives of advisors in their clients.

As you see in our third key message, we entered the crisis in a position financial strength and we remain in a position of strength as we manage the business through cobot 19 and into the post coveted environment.

Next I'll provide some color on advisor behavior, and what insights we can extrapolate from that behavior to help us better serve advisors and their clients.

Lastly, I will end the call discussing what we expect going forward and with that I'll hand, the call over to Gary to go over our first quarter results Gary.

Thank you Charles and good afternoon to all those on the call.

These are challenging times and I like Charles cannot be powder, how our associates have rallied together and self and sneak committed to making a difference in the lives of our advisors and their claims.

Honored to be able to support our advisors during these uncertain times.

As usual I will start with a discussion of our platform assets and talk about a revenue incense adjustment and then our earnings from there I will discuss our balance sheet in a few other key financial highlights.

Starting on slide for the first quarter 2020 platform assets.

Key $6 billion up 12.7% year over year.

Down 9.1% whatever corner.

Weighing on our platform assets during the fourth quarter when the market downturn.

We realized market impact when the quarter net if he a negative $9.5 billion.

Translates to declined 15.4% around platform assets in the quarter compared to 20% decline in the S&P 500 during the same period.

Despite the market downturn as you've seen in our monthly am Kb ports, we realized record net flow was a $1.8 billion in the first quarter and and a $2.1 billion of assets to our platform and the acquisition of Ob S. financial which closed in late February.

First quarter, marking the twelveth consecutive quarter with net flows over $1 billion and the 29th consecutive quarter positive net flows.

Annualized net flows as a percentage of beginning of period assets with 11.9%.

End of our long term target of 10%.

When we think about a $1.8 billion net flows in the first quarter about 70% came from injection to by June 30% came from new producing advisors and P. AIDS.

That's Charles will discuss later in the economic impact at Cobiz 19 will be most materially felt in the second quarter 2020.

Next week, we will release, our April am K report, which will show over $400 million in net slow it's in the month in ending platform assets just shy of $60 billion. While this is a good signs continue strength, we are cautious in their outlook in the near term.

Turning back in the first quarter, our key operating metrics was strong.

And a 217 Npis highest total second quarter 2019.

Total advisor base at the end in the first quarter, the little more 8400 advisors.

Late 2138, well defined as engage advisors.

As a reminder, we define and engage advisor and one with over $5 million in assets in our platform.

You may realize our engaged can buy your count down 92 quarter over quarter.

While we added.

Seven engage advice from the acquisition of Mobiuss.

And an additional 71, new engagement by using the corner.

We did have 228 advisors drop I'm engaged status.

Mostly driven by market depreciation.

A little over 80% of those 228 advisors dropped below the $5 million engage advisor threshold into the $4 million to $5 million range as a result of marketing.

This decline was a function of the mark in the not a function of the relationship with us.

All right 2000, <unk>, our 2000 engage advisors, who maintained and engage status during the market downturn over 60% contributed positive net flows dropped platform in the first quarter, another positive metric and our strong organic growth.

Now, let's turn to slide five to discuss the quarter's earnings.

And during the first quarter, our assets were $61.6 billion meeting can reported revenue of $114.9 million.

24.5% year over year.

Or 20.9% when excluding the impact in key MPC and all the acquisition.

As a reminder, a large majority of our revenue for the quarter is based on the beginning of asked beginning of quarter asset level.

As previously discussed we focus on our revenue net of related variable expenses in the first quarter of 2020 or net revenue of $78.6 million was up 23.3% year over year.

Were 19.5% when excluding the impact of GMP CNO yet.

Now, let's turn to the components of our net revenue.

The first quarter asset base net revenue was up 28.5% year over year $70.6 million driven primarily by the growth in platform assets.

Our net yield asset base net revenue 45 basis points in first quarter 2020.

Persons 49 basis points in first quarter 2019.

The decline was primarily driven by the addition of <unk> PC you know B.S., what's your customer need it fidelity and platform fee compression as as a result of product mix shift.

Spread based net revenue the interest that we earn client cash held at the asset markets company.

In the first quarter 2020, we realize $6.7 million spread based net revenue down 5.8% year over year.

The decrease in spread based net revenue was driven by declining yields partially offset by higher cash balance.

Average client cash over the first quarter with $1.97 billion on which we received and blended annualized net yield.

1.37%.

Spread based net yield contributed four basis points to our overall yield although down two basis points year over year.

End of first quarter cash asset markets company was $3 billion up 60% quarter over quarter.

Oh, the $3 billion in cash and Mark Trust company.

$381 million in our high yield cash program.

Which increased inbound 75% quarter over quarter.

Given the fed rate changes in March.

Given the fed rate changes.

In March which happened later in the quarter.

We saw a small impact to our yield.

For the quarter down 29 basis points in the fourth quarter 2019.

For content spread based net yield averaged approximately 60 basis points in April and is currently around 30 basis points as of today.

Lastly, other revenue was down year over year, you can the declining rate environment affecting our net yielding assets by approximately one basis.

For clarity and transparency.

The calculation ever annualized revenue yield net variable expenses as shown on slide 10 independent summer earnings presentation on slide 11 of the pendants and the walk from our first quarter annualized net yield on assets to first quarter 2020.

Before we turn to earnings let me run through adjustments to expenses in the first quarter. We added back and told them Q1, 20, Oh, sorry, we added back and hold of $22.1 million pretax which comprises four items.

First $13.2 million noncash share based compensation.

Second $5.1 million, you amortization related expenses throughout 2016 sale.

Third $3.6 million, an acquisition related expenses associated with our acquisition and integration of GMP seen over yes.

And fourth zero point $2 million, an add backs related to reorganization cost business continuity plan costs.

In response to Colby 90.

In the second quarter, we it's that this is tends to be between one and $2 million.

I was reminded we believe we get sensors associated with the acquisition. The G. I can see shoots Steve but at the end of 2020 stepping down in the back half the year.

For additional color and adjusting it stands reconciliation table per income statement line item can be found on slide 12, new pen mix of our earnings presentation.

Now, let's discuss our earnings for the quarter.

Our adjusted net income for the quarter was $17.7 million like 24 cents per share an increase of 26.3% year over year.

They just in the first quarter diluted share count of 72.5 million.

Year over year, increasing our in adjusted net income was driven by higher adjusted EBITDA of $5.6 million and lower interest cost and $1.9 million offset by higher amortization of $1.5 million in higher taxes of 1.1 no.

Our marginal tax rates in the first quarter 2020, 25.4%.

In addition to adjusted net income we view adjusted EBITDA as an equally important measure about companies help.

Adjusted EBITDA, we add back and saying, it's been signed and set the amortization related item.

Our first quarter 2020, adjusted EBITDA was $28.1 billion up 24.8% year over year, reflecting strong year over year growth in our top line.

Adjusted EBITDA margin for the quarter was 24.7% inline with expectations and up slightly from the first quarter of 2019.

First quarter had minimum margin expansion over the first quarter 2019, because several because of several investments into business.

First.

$1.6 million and recurring cost need to IPO as he was still a private company first quarter of 2019.

Second $1.1 million and investments in capabilities.

He was sentenced from increased friend and 40% from increased headcount and use it professional services.

Lastly, $1.5 million and increases in core SNA cost due to an increase in the event attendance such as our annual gold form event subscription another item.

As a reminder, a model in normal times is to invest incremental profits back into the business, while achieving 50 to 75 basis points of margin expansion.

During this time of depressed asset level, we will be less focused on margin expansion and I've always fully focused on the need to serve our clients and maintain our organic growth.

Now, let's look at them for now let's look at the reported first quarter balance sheet highlight two items.

First cash continues and serving the position of strength.

Ended the quarter with $80.2 million in can't even after a 100% cash proceeds will be as financial.

Moving the production of old B.S., our cash position grew 5.5% quarter over quarter driven by operating activity.

We still have a 20 million our credit line as available to the company needed.

As discussed in previous conversations we collect most of our revenue in advance at the beginning of the quarter, increasing or can't holding for context at the end of April our cash balances now $120 million, which reflects the cash we collected in the quarter and part of that will fund their remaining operations for the quarter.

Second capital expenditures, primarily reflect our long term investments in technology to create new capabilities increase scale and improve service and the first quarter. Our capital spend was $6.5 million were 5.7% or total revenue.

Next turning to our 2020 outlook.

Given these impressive unprecedented times and the significant economic economic uncertainty in introduces we've made the decision to withdraw our 2020 expectations for the time being.

Once we believed that we have sufficient visibility to provide revised expectations, we will do so.

Before I hand, I wanted to point you to slide six which includes deal highlights on our February acquisition, Oh, Yes financial as well the impact only has had on our financial in the quarter.

This summary should make transparent impacting the acquisition on our key metrics in the quarter.

We want to formally welcome to 20, plus associates and the old vs advisors to me ask them or family.

With that I'll hand, it back over to Charles to continue his prepared remarks.

Thank you Gary appreciate that so turning to page seven I want to provide you with some thoughts on how we're running the company during this time.

As I said and always say, we are focused on our mission to deliver on the promises our mission implies we remain focused on our consistent strategy defined by three differentiating strategic pillars are.

Our platform through a combination of compelling technology personalized services and curated investments is built to help advisors during the good times in the not so good times.

Let me share with you, how we're making a difference the lives of our advisors and their clients now more than ever first is our fully integrated and compelling technology platform.

From January 1st 2015 to March 31st 2020, we invested $209 million and technology capital and operating costs.

The recent investments in our technology and the innovations that we have made are paying dividends. These include our portfolio construction analysis tool that assists advisors, and creating and monitoring investor portfolios, which is more important than ever as advisors and their clients navigate volatile markets.

A streamlined account opening solution that reduces the time to onboard new accounts to our platform and lastly goals based investor portal that serves as a hub for communication between advisors and their clients.

Second as you know, we deliver personalized and scalable service. This is really where we get to shine for our clients and do the best for them every day.

We're continuing to provide white glove service, even as we are receiving increased call volumes in demand.

Let me put that into perspective for you in March of this year, our trading volume increased by 341% versus the average month in 2019 <unk>.

Additionally, inbound cost increased 21% in March compared to January and February.

We've been able to maintain outstanding service levels, even with these heightened volumes when volumes were at their highest our servicing operations team cancel time off in work nights and weekends to stay current.

As we faced and overcame each challenge of suddenly moving or workforce remote recaptured and communicated those lessons that might be helpful to advisors and their staffs.

They moved to remove work.

We're staying close with our advisors and ensuring that they and their staff feel confident appreciated and well cared for in this environment.

We've increased our outbound calls by 23% and our outbound emails by 22% to make sure our clients are proactively supported.

We have also leveraged webinars to connect with their advisors. Since early March we have hosted over 125 webinars with over 7100 attendees.

Over the last two months our sales organizations has had calls or videoconferences with 99% of our engaged advisors and 88% of 2019 in 2020, new producing advisors.

We continue to be inspired by stories from our advisors about how awesome work is helping them stay focused on running their businesses and helping their investors stay focused on their goals.

Our final strategic pillars, our holistic and curated investment platform.

Our platform offers a wide range of well suited products that help our advisors quiets reach their long term goals as a result of this breadth of solutions, we are seeing money move within our platform accelerated rate.

This means advisors are finding what they needed asset mark instead of somewhere else, which is evidenced by our strong netflow performance through April.

This is a huge competitive advantage for us, especially when you compare us to any single strategy Tim.

Our redemption rates remain a pre crisis levels and we are seeing reallocations on the platform as advisors are evaluating the risk tolerances of their clients.

Additionally, new products, such as high yield cash, which we introduced in 2018.

Also allow us to keep more dollars on the platform.

Simply put.

We are therefore advisors and our advisors are loyal to our platform investing in our platform has proven to pay dividends and we firmly believe that a combination of technology service and investments differentiate us in the market, resulting in a competitive advantage.

Let me flip to page eight.

Well I want to talk about our financial position [noise].

That's a mark entered this crisis in a position of strength and we remain well capitalized with a resilient balance sheet low net debt and the ability to generate cash.

At the end of the first quarter, we added over $80 million of cash on our balance sheet.

We have $123.7 million of debt that matures in 2025, and our annual interest costs is low at $6.3 million since 2016 refinanced the company primarily through cash flows from operations over the next 12 months, we expect that our cash and liquidity needs will continue to be met by.

Cash generated by our ongoing operations.

Well, we are pleased with our financial position, we understand that these are very uncertain time, so scenario planning is critical.

We have planned for multiple scenarios and we have taken aggressive action to manage our businesses. The situation continues to evolve.

We have evaluated downside base, an upside scenarios with different market assumptions with the downside tied to the depths of the 22.

2007, 2008 global financial crisis.

Even in our downside scenario, we were able to generate positive cash flows with no additional expense or capital cuts.

Let's discuss how our revenues being impacted and the proactive decisions. We've made on the expense side to date.

As Gary mentioned in the first quarter, our platform assets decreased by 9.1% driven by a negative market impact net of fees of $9.5 billion, which was partially offset by strong net flows and the acquisition of of yes.

We expect our yield on assets inclusive inclusive of movie has to be 45 basis points in the second quarter.

Revenue will be down quarter over quarter due to billing or second quarter revenue on platform assets of $56 billion versus the 61.6 billion rebuild that at the first quarter, obviously, the directions that the market, including the positive market experienced in April will have a significant impact on the revenue.

We collect and the second half of year.

[noise] also causing a reduction in our revenues the lower spread income due to the fed funds rate target of zero to 25 basis points, we forecast second quarter net yield on cash to be down about 100 basis points from the first quarter of 2020.

To combat this new revenue reality, we have taken actions to reduce expensive expenses to ensure we are cash flow positive well being well positioned for growth.

And that's the key idea cash flow positive wall being well positioned for growth.

Through a variety of cost measures, including the elimination of a handful of rules reduction of travel events conferences as well as volume related items, such as variable compensation trading costs, we have eliminated $22 million from our operating expenses from our 2020 budget.

We've also reduced our capital budget by about 20% percent by decreasing third party spend for projects and postponing some of our office build out.

In addition to positioning the company to win in the short term and the long term the leadership team and I are also adopting to the near normal post crisis.

We believe that there will be fundamental strategic changes to our business, we're trying to define and evaluate those changes over the next few months into broad areas.

First strategically.

Consumers and advisors will behave differently post this crisis one of the areas. We will be focused on is the changes we expect an investor behavior risk tolerances product preferences, and the nature of how investors want to interact with advisors will all likely change.

Additionally, we believe advisors.

Advisor behavior will change this change is driven by both investor demand and changes to advisor economics you.

Use of technology preferences for outsourcing partner selection and need for business consulting we expect will increase.

Over the next few months, we will analyze these assumptions and adjust our investments to best position out some mark.

Our advisors and their clients to succeed.

Second our changes in the way people work employees will not return to the office as if the crisis never happen.

We believe remote work will be a reality.

Over the coming months, we will be analyzing what types of functions should be remote versus in the office, our remote employees and different rules and functions can best be manage and how to sustain an improved the culture.

But our advisors, our associates and our shareholders value in us today.

Of course, these changes will have an impact on a real estate footprint.

[noise] understanding these potential changes in how we can meet new and changing needs will be a necessity and it will also be an opportunity that we intend to take advantage of.

Moving to my next theme I want to share what we're hearing from advisors right now.

First advisors are more focused than ever on making sure that their clients have the right risk profiles and portfolios or structure to match those risk tolerances.

Advisors reallocate, we've seen a de risking of portfolios at the beginning of the first quarter, 39% of assets on our platform were in fixed income and cash as of April 21st fixed income and cash represented 44% about some of the platform.

Second the demand for good quality information by our advisors is higher than ever as our work is providing timely insights for advisors and their clients. In addition to the Webinars that I mentioned earlier, we have a dedicated web page on cobot 19, and the markets, providing our advisors market updates commentary and business console.

Thing.

Feedback on all of this content has been fantastic.

Lastly, advisors are seeking technology and tools to communicate with clients.

We are offering free enterprise in video communication licenses to our engaged advisors. We have also negotiated discount rates on strategic partners, specifically those technologies that aid marketing and lead generation to help our clients grow their businesses even in this environment.

Asset markets delivering on its promise of being there for advisors. Our platform is making advisers life simpler so they can focus on serving their clients.

We've met with our client Advisory board platinum clients and our other advisors and small groups and we are receiving emails from our advisors daily they are telling us about the value that we're creating for them and their clients.

One of our advisors in Florida email I'm relying on asset Mark heavily in all facets. During this time Assetmark remains the best decision I've made my professional life and other advisor in Maryland common that every day more confident that our business is secure because of our partnership with us and Mark have to tell you. It's wonderful to hear first.

Ken and to engage with advisors to here that we are making a difference for them right now.

[noise]. So let me give you a few thoughts on what we expect going forward as we plan for the near term future. We all know that it is difficult if not impossible to predict what is going to happen.

The environment is uncertain and any prediction is perilous, we do expect than in the short term the macro environment will be challenging, but this creates an opportunity for us to continue to be there for our advisors and capture market share by investing in the services and capabilities that advisors need.

Asset Marx management team has a long history of managing financial services companies through volatile times, including the financial crisis of seven and eight.

While the coven 19 pandemic is without precedent and has created significant uncertainty we remain convinced that a proactive proactive actions that we've taken so far and the planned actions. We have described today will position the company for long term stream.

So before we turn it over for a final questions I thought I would just thank everyone on the call today I wanted to mentioned the tremendous responsibilities that my leadership team and I feel for our associates and our advisors the bar to be an effective leader is higher now than ever my leadership team and I.

I will make informed decisions that will be in the best interests of our 8400, plus advisors and 700 plus associates by doing this we believe we will create and deliver long term value to our shareholders.

So with that I'll conclude my final remarks, and turn it back to the operator for questions.

[noise] anybody there.

Operator.

My apologies you would like to ask a question at this time. Please press Star then the number one on your telephone keypad.

Our first question comes from Alex Blostein from Goldman Sachs. Your line is open. Please go ahead.

Alex you may be a mute.

Oh, sorry about that can you guys hear me now.

Well I know my [laughter] I know all sorts issue they operate end phones, Nowadays I hear you.

Thanks for taking the question. So one wanted to get your thoughts Charles on the outlook for organic growth side and the current environment. So you guys. Obviously provided a pretty robust update on April with $400 million are still net inflows and obviously pretty challenging market conditions.

Longer term it seems like Youre still quite excited about the opportunity for outsourcing and everything NASA Mark brings to the table, which which makes sense, but curious where do you expect more of that kind of near term as the backdrop remains pretty uncertain.

Yeah, Alex Thanks for the quest, great to have either call and get your your voice.

You know right now, we're seeing about a 20% reduction in activity.

So to basically gross sales and as we look at our various metrics in the final. That's what we're seeing you know, it's very hard for us to predict much out path say a month or six weeks just given the uncertainty of how businesses are going to open or not the return of of co.

Of it in a big way or not.

But what we are seeing is about a 20% reduction the other thing that we're hearing from advisers and we've had as I mentioned, a just a myriad of meetings advice are active much more active than then frankly I think we might have thought they'd be in seeking out new clients and working on new business both from there exists.

Thing advisors existing clients, rather and from new clients, where we are seeing a lot of activity out there and the last point I would remind you is that you know the you know given that markets are down and now back up. Some are these the same you know million dollar account is now coming in at 900000 rights of that market impact on.

Assets coming in this is also in picking that that 20% of the 20% kind of include both you know what we're seeing in terms of.

Activity and slightly lower asset values.

Got it that's helpful and I guess, you mentioned that 20% reduction sort of grow sales, how does that impact redemption rates as well because it's feels like there might be slowing down as well as advisors are focusing more on their customers and managing their portfolios and maybe redeem unless so therefore the impact on net might be less than 20 is up the right way to think about it.

Oh, Yeah, I think as.

Well a couple of different points. So we are seeing low redemption rates were really pleased by seeing the activity on the platform with people rebalancing portfolios transfers and things like Dot Oh, we really really like what we're seeing there.

And the redemption rates are quite quite quite solid.

No I remember one of them there there they are different metrics right. So the redemption rate is on the whole book of course, and and you know growth.

Rate of gross sales is.

Generally talk about it on the full book, but yeah, we are seeing lower redemption rates.

Great and then a follow up just for Gary.

So again understanding the uncertainty in the environment, but pulling the margin guidance given the fact that assets are back at 60 billion and you guys identified $22 million up expense reduction maybe is a little bit surprising so maybe give us a range of expense outlook you guys might anticipate for 2020, I'm, obviously not necessarily you know.

When you guys to a specific margin target, but this way, we can kind of try to extrapolate out where where the margins could ultimately go.

Sure. So let me clarify he has been talking through redemption rates and what not yet we've we've seen our redemption rate really what we had very little redemption rates over the past two years may have been very consistent through March and April redemption dollars have gone down because nads rate and the lower base.

But yeah just to be clear that did the rates are very low and they're consistent they are consistent can that low rate we've had over the past.

Yes.

Your question, Alex about Eric and outlook you know.

Well, what we primary cut back on that $22 million or what you might not know, mostly and where it needs in large part.

Temporary cutbacks travel event et cetera variable compensation cut back that would impact this year not future year, because we do expect once the economy in back running to be.

Running full steam ahead, as well and then expenses.

I would say, we right now extending arent stent level next year look like last year as expense.

And that and I can't really getting much more detailed panther and I hope not give me a sense, where where where we think aren't senses are trending this year.

Great and that's including for the 22 million dollar reduction that you guys talked about yes.

Got it great already thanks very much.

Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

Your next question comes from Chris Shutler from William Blair. Your line is open.

Hey, guys. Good afternoon, Gary just real quick I wanted to clarify my last comment so up to.

$22 million that you're you're taking out of the expense base.

That's an annualized number is that correct and <unk>.

I want to make sure I have that correct.

No that that would be well Matt is the annual number finished here not now what we're going to be from our plan since basically took out $22 million spend this year and so it is only go and then non as the year money is the annual impact next year, yes.

Okay got it.

Thanks for that and then Charles <unk> <unk> last quarter, you talked about.

Broker dealers as both partners and competitors just given the.

The changing rate environment. The fact that somebody's bdcs have levered up pretty significantly.

The bigger ones do you do you see some of that the firms that are important partners. So that's a mark.

Moving down a path, where they're pushing their home office asset management capabilities, even more as a result of all this just trying to understand.

You know where where are you think the this this challenging macro backdrop for bdcs, how how that.

Could impact assetmark, good or bad.

Yeah, Chris good to talk to.

You know, it's interesting to see I'm going to answer it slightly differently. The way you asked me what are we seeing versus what do we think we'll see you know I think it's just too early to know theres going to be a lot of changes coming from the broker dealer World. You know, we certainly are seeing particularly in the insurance side of the broker dealer world.

Also as you know a lot more willingness to.

To work with Tams are most of the insurance broker dealers a few years ago decided they were going to build out their own proprietary platforms and it's turning out as one would expect to be quite difficult expensive and ongoing extensively. So you have to invest and all the people to support it not just the technique.

Allergy, but the people in the field the training and everything else and the economic difference of that has turned out not to work well and so we're seeing in a world where rates have gone down and that's been an important part of a everybody's economics a shift in the insurance part to to be specific about the bigger broker dealers you're talking about.

We you know maintain both good relationships, where we partner all all of the big ones, we have ongoing dialogue and we're working actually right now on on ways, we could improve the flow of paper and improve the advisor experienced the client experience. So there's a lot of good going.

And in those relationships. However, there are also recognizing and they know that they need to invest in their own proprietary platforms and so they are pushing those proprietary platforms. The one newest issue. That's come out is right beside under Ricky I it'll be very difficult for those broker dealers that are compensating.

Advisers for one platform versus another to continue to do that and we think thats a good thing.

It means that that will have to compete on the merits the quality.

And the economic experience for the end investor as opposed to the paying the advisor. So you know I don't know that I can say that other than on the insurance side, there's a big change yet, but I suspect given the pressure that's on People's economics that we'll see some changes in behavior I would hope that it's mostly towards making a better experience for advisors.

Got it okay. Thanks.

Lastly, just any.

A quick update on the the key initiatives that Youve discussed over the last couple of calls so digitization and I guess the are a channel specifically.

Yeah, Yeah. So we continue to make excellent progress or on our key technology initiatives, particularly around our a in the U.S.J. segment a to allow them to trade more securities on our platform. We're excited about.

That and when we're making very good progress and feel good about that both talking to clients and as well as a technology I think we're making very good progress across those the major projects that we hope to deliver this year and the capital cuts I mentioned earlier, a you know really around you know the building out of space.

And around pushing some of the projects that were really geared towards the later part of the year into 2021, and don't don't expect any real issues with that.

Okay. Thanks, a lot.

Sure Chris.

Your next question comes from Ken Worthington from JP Morgan Your line is open.

Hi, good afternoon, and thanks for taking my questions.

Oh it takes for the opposite side of a Alex's earlier question side and go the any inorganic route so equity markets. It bounced back a interest rates have not so some financial revenue is it's not recovering here and you mentioned the mode of work will be different going forward or maybe different going forward needs and uses of technique.

Allergy. So first is this is sort of environment, where you would look to engage in deal dialogue with potential targets you highlighted the strong balance sheet. So it seems like you're in a position to do it. If you. So choose and then given some targets may not be is well positioned to engage.

With clients digitally.

As well is suffering less rate and asset back revenue.

Is there enough pressure to maybe see improve receptiveness to deal dialogue.

In this type of environment.

It can great questions or so.

You know it hits for say interesting thing the answer to your first question are we willing to and we want to engage in deal dialogue absolutely. We remain focused on both consolidation in capability deals when they make economic sense, a and create real value for our claim.

And for shareholders.

So we continue to have those dialogue those discussions out there. So it's it's been a weird I don't know if you feel this way, but it's been a weird eight weeks here since we all of it at home the number of industry conversations that are going on seems quite high but they you know I suppose you speak to bankers.

He targets.

You know to your second question the pressure to do deals it sure doesn't feel like that yet and I'll tell you why first you know theres. The question of what are you buying right now in terms, if you're if you're buying EBITDA. What is run rate EBITDA right. Now we all know a trailing 12 months is but you have.

No idea what run rate really is because you can make assumptions about today, but it's very difficult to make assumptions about tomorrow. The second thing. It's really hard to know is what is the multiple right. You can look at public company multiples, but private company mobile is very hard to know and so what I think is happening from all the discussions.

I have around the industry is there's a real difference between what buyers I think is value in what sellers think is value and I don't think we've yet seen a not paying or prosperity whichever it turns out to be to push those things together. So my own personal forecast a is yeah.

Yeah, there's a lot of conversations going on we continue to ER to enjoy great industry relationships and we'll continue to have great conversations we like our capital structure in our position Oh, but I don't know yet if there's going to be enough pressure, one way or the other to to give you any sense for if there will be deals or not.

Okay, Great answer thank you and yeah, I feel less surreal and then maybe the second question Schwab announced a swap stock slices for fractional shares how meaningful do you see fractional shares in terms of being an innovation to the wealth management industry and just ask.

Mark expected utilize sort of products or services around fractional shares to deliver to your clients.

So to answer the second part of the question I don't know if we're going to ever look at it or not we we have a very robust product development and technology capability and we evaluate every single move that we see competitors or other companies do we look very carefully invest.

Her behavior and advisor behavior to try to understand and anticipate needs.

Why you've seen us that so many he TFS and fixed income strategies and individual security strategies in a business that primarily was a mutual fund business you know a decade ago, we try to be on top of that and we think that's driven a lot of growth for us and if fractional shares turns out to be one of those that we see broad adoption of advisors.

And investors, we'll certainly take a hard look at it my own personal prediction I'm I've looked at that issue for more than 15 years and over time, they say that somebody will remind me that it's probably been 20 or 25 and and it just has never really taking hold and the reason is is there's lots of good ways to get diversified portfolios.

Without that technique, it's tended to be more adopted by individual investors managing.

Their own portfolios trying to do something in the same we've seen other portfolio construction individual security ideas like motif and others that has now gone that have come and gone because the markets generally are quite small for them.

So my own personal prediction as it does is probably not a lot of demand for that in our world boat, but you know how you never know so we will keep close eye on it.

Great. Thank you very much.

Your next question comes from Alex Blostein Goldman Sachs. Your line is open.

Thanks, Thanks for taking the follow up I'll take myself off mute this time around.

Yeah. So I wanted to go back to you on some of the bigger picture implications there Charles you highlighted and some of your prepared remarks, and I think one other things you mention is changing advisor economics, which so hey, I'm not sure if I heard it right, but it sounds like that's what you said and up until now feels like it by.

And your economics have been actually fairly stable so.

Do you anticipate just the volatility in the portfolio or lower perspective returns or something else to drive some changes and those economics and kind of maybe flush that out for us a little bit.

Yeah. They fix for that question I was wondering if somebody if somebody might ask though so when we look at all the benchmarking studies are on adviser pricing, it's exactly as you say it it hasn't moved at all for Forever.

You know you read about it in investment news in other places, but it just hasn't change when we look at our own a advisors you know because we do building we can see exactly what they're charging it really is quite industry standard.

And hasn't moved around a <unk>. We also don't see people moving a flat fees you know for mass affluent clients either so its not that rather its two major factors. One of course is a anyone based pricing what am is down it puts pressure on advisers and there's no doubt.

Abrams.

Ben down it's come back a little but with the volatility that we're experiencing you know God only again I don't know what with the rest of the years going to look like as we all listen to everybody's a guesses, but you know that when a women's down it puts pressure on advisors I mean, just immediate pressure right out of the bottom line right out of their pockets. So we.

That's a big issue the second big issue that we think impacts are economics is right now the amount a and it might have been yours or Christian mentioned to me.

It was kept a that advisers are spending a lot more time talking to their clients than they normally do and that amount of effort and work is putting tremendous pressure on their key cost structure, which is down you know so the amount of hours that effort that they've got to put in to those meetings preparing for having disk.

Russians doing more analysis follow up is putting pressure on their economics and time.

And lastly technology, you know I again, we believe that that you know a lot of investors who.

You know weren't ever signed up for you delivery and never thought they'd use zoom or whatever you know webex or any of these other technologies are now using them and they're using them when they're grandkids and they like it and it's easy and it's better than driving you know they wanted maybe drive out and go to dinner, but drive into their advisors office not so much and so you know the need to.

Use technology and integrate the experience and the technology, it's not just getting a presumed license from US is integrating the experience of I'm, having a meeting and discussing portfolios and do showing modeling and all the things that are planning all the things that advisors do not experience is hard.

And so when you add all that together, we think that that it's going to impact advisor economics.

And make it tougher and the need to outsource get that expertise free up time, which we've been able to prove outsourcing does is going to be more and more attractive.

Got it alright, thanks for thanks for flush that out Gary just to clean up for you. When you talk about targeting flat expenses in 2020 versus 29 team are you talking about sort of the total expense base or the operating expense base or should we only be thinking about employee comp and as gene and kinda.

Section or are you, including asset based a and spread based expenses, whether or not as well.

Now when we're talking about that we're talking about the operating expenses. So the employee <unk> like you said for employee comp the and DNA.

Excellent fees et cetera.

We view the variable cost is part of that net revenue number that we have we achieved.

What we're earning net on our assets that really yep.

We don't that doesn't change much right right.

All right that's what I thought just wanted to check great. Thanks again for the follow up.

There are no further questions at this time, so ladies and gentlemen. This concludes todays conference call. Thank you for participating you may now disconnect.

Thanks, everybody.

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