Q4 2022 AssetMark Financial Holdings Inc Earnings Call
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Good afternoon, everyone and welcome to asset marks <unk> fourth quarter 2022 earnings Conference call. Currently all participants are in listen mode. Only later, we will conduct a question and answer session and instructions will be given at that time today's call is being recorded now I'd like to turn the call over to Taylor handled.
And have Investor Relations. Please go ahead Mr. Hamilton.
Thank you good afternoon, everyone and welcome to <unk> fourth quarter 2022 earnings Conference call. Joining me are asset marks Chief Executive Officer, Natalie Wilson, and Chief Financial Officer, Gary Zyla today, They will discuss the results for the fourth quarter and provide an update to <unk> business outlook for 2023.
Introductory remarks, we'll open up the call for questions. We also have an earnings presentation that Natalie and Gary will reference during their prepared remarks. It can be accessed on our IR website at IR about asset Mark Dot com.
Before we get started I would like to note that certain statements made during this conference call are forward looking statements. These forward looking statements represent our outlook only as the date of this call and actual results could differ materially. Additionally, during today's conference call will be addressed discussing net revenue adjusted EBITDA adjusted EBITDA margin and adjusted net income.
All of which are non-GAAP financial metrics. Please refer to our earnings press release and SEC filings for more information on forward looking statements risk factors associated with our business and required disclosures related to non-GAAP financial information with that I'll turn the call over to my colleagues not only taken away. Thank you Taylor and good afternoon, and welcome to our fourth quarter.
Earnings call I hope everyone is doing well today before we begin I'd like to formally welcome adhesion wells to the asset Mark family aftermarket adhesion have a shared mission and we couldnt be more excited to have them join our team I.
I would also like to thank our over 9200 advisers clients and nearly 1000 teammates.
2022 was a record year for asset Mark and it would not have impossible without the loyalty of our clients and the dedication.
<unk> of our team.
As we start 2023, we are the top independent camp as measured by platform assets as well as the top camp as measured by advisors, having just one wealth advisers top overall Tampa Award in January .
Not be prouder of the year, we had in 2022 and how we have started off in 2023.
My prepared remarks today will focus on our evolution in growth in 2022, I will then provide a detailed analysis of each of our five growth pillars, highlighting the progress we are making on each.
Finally, our previewed preview our strategic focus in 2023.
Gary will then discuss our financial and operating results for the fourth quarter and introduce our 2023 outlook.
Starting on slide three in 2022, we continued our evolution from a tamp to a holistic full service wealth management platform.
On December 16, 2022, we closed the acquisition of adhesion well to complement our end to end outsourcing offering.
In addition, we continue to optimize our digital ecosystem to provide advisers with a differentiated experience that champions client engagement and drive advisor efficiency.
To further enable our advisors to serve diverse clients across the wealth spectrum, we expanded our investment platform to include improved income planning capabilities.
Life's investment solutions and enhanced cash tax loss harvesting services.
As advisors increasingly focus on serving their clients, we expanded our turnkey business program and invested meaningfully in our personalized consulting services, both of which foster advisor growth and efficiency.
We put we executed on our strategy, which allowed us to achieve record results in 2022.
Now, let's turn to slide four to highlight these results while doing so I'd also like to take a step back and provide some perspective on how we've grown since our IPO in 2019.
In 2022, we served more advisers and investors than ever before supporting over 9200 advisors, who use our platform to help more than 241000 investor household.
Since our IPO in July of 2019, we have added more than 85000 households, approximately 1400 total advisers and 750 engaged advisers.
Additionally, we achieved record financial and operating results and matched our all time high net promoter score.
Full year net revenue for 2022, with a record $456 million and is up more than 20% year over year and almost 60% from our IPO.
<unk> adjusted EBITDA was up 27% to nearly $200 million and adjusted net income was up more than 26% to $130 million.
We also continue to scale, our business as evidenced by our ability to expand adjusted EBITDA margin 270 basis points in 2022.
Since our IPO in just three years, we have doubled the earnings of the company and expanded adjusted EBITDA margins, a robust 600 basis points well above our historical guidance of five <unk>.
50 to 100 basis points a year.
Now, let me turn your attention to our growth strategy as I do every quarter I want to give you an update on how we are moving the ball forward in each key pillar.
Starting with the first component on slide five we're meeting advisors, where they are.
In December we closed on the acquisition of adhesion was welcoming more than 516 advisors and close to 16000 households.
<unk> the industry's second largest motto marketplace with over 400 asset managers provides its clients with outsourced overlay portfolio management services.
Engagement technologies, and Taylor's managed account solutions for Champs and <unk> enterprises.
At the heart of both of adhesion and asset marks is aftermarket.
<unk> concept that outsourcing needs advisors to a better quality of life ability to grow in scale and better investor outcome.
<unk> will greatly amplify our ability to serve the rapidly expanding our end market, allowing us to serve different advisor profiles and to significantly increase our total addressable market.
<unk> will no longer have to choose between fully leveraging our curated investment solutions for fully relying on infusion model marketplace. They can now choose to do either or both at Aramark.
We believe both full outsourcers and those that are leveraging the marketplace will benefit from our consulting services community like community of Likeminded advisors and the open architecture nature of our offering.
Okay.
<unk> has a strong plan for growth this year and we will look forward to sharing their progress during future earnings calls.
Now turning to slide six the second component of our growth strategy is to deliver a holistic differentiated experience to advisors and their clients.
We're pleased with the growth of <unk> in 2022, especially during the second half of the year.
Excluding foreign exchange pressures revenue from <unk> was up approximately 13% year over year, driven by an uptick in both enterprise and advisor consumer licenses.
Enterprise advisor licenses are up more than 50% year on year, driven by a new deal with the retail arm of TD Bank I'm, sorry, TD Bank in Canada, which added more than 5000 licenses for the quarter.
Well and continues to gain traction in existing geographies, including the U K and Canada and they are also progressing well in high potential expansion geographies.
For example, they have experienced excellent momentum in Australia with strong year over year license growth.
We're excited about <unk> prospects and the diversification of revenue it brings to us and work.
Third component of our growth strategy is to enable advisors to serve more investors across the wealth spectrum varying life stages and generation.
Let's turn to slide seven to discuss this more.
There's no denying that 2022 was a difficult macro environment for advisors and their clients.
Inflation search to 40 year highest causing the fed to increase rates seven times throughout the year.
Led to historic losses, and bond markets in highly volatile global equity market.
Advisors needed timely education, and actionable solutions to lead their clients through these difficult times.
In response to this environment, we launched our market volatility toolkit, which helps advisors get informed feel confident and stay in front of their clients questions and concerns.
Since launch the toolkit has had over 5600 I'm sorry has had over 9600 page views from over 800 unique users.
Our events also continue to be highly valuable for our advisors in 2022, we held over 70 in person events with over 2300 advisers in attendance.
Our 2022 events net promoter score was the highest it's been since 2018 at 72.
Additionally, just next week, we will be hosting over 600 of our top advisors at our annual Gold Forum. This is our largest ever topping last year's event attendance by nearly 40%.
We also leveraged webinars in 2022 to provide timely information given the ever changing market last year, we hosted 49 webinars with over 8100 advisers attending.
Not only did we do an excellent job of being there for our advisers. We also added new investment solutions to our platform.
Spanning our eligible client wallet and.
In April we launched four new ESG strategies as part of our value driven investment program.
Launch we've had over 'twenty 100 proposal submitted totaling $194 million.
In July we reopened sovereign fixed income ladder strategies, our proprietary strategy of asset marks.
This strategy aims to smooth out fluctuations in equity market inflation and interest rates using a disciplined buying approach.
Reopening we have already had over 2900 proposals submitted totaling over 80 880 $834 million.
In October we launched three new market volatility strategies for advisors to leverage during these uncertain times. It's been just a few months since launch, but we've already had over 900 proposals submitted totaling $82 million.
We will continue to educate our advisers and provide them with the best solution possible to enable them to serve investors.
Now, let's turn our attention to slide eight in the fourth component of our growth strategy.
While 2022 was challenging for investors it was equally challenging for our advisers and their businesses.
Over the last year, we have invested heavily into business programs to help advisors grow and scale.
This is largely driven by our business consulting team, which provides our advisors individualized guidance by helping them to identify actionable opportunities to increase our efficiencies and to grow in scale over time.
As I've mentioned in previous earnings calls I firmly believe that our business consultants in the program to support our competitive advantage for aftermarket and are one of the key reasons Wi Fi users continue to win.
Over the last year, we grew our business consulting team over 40%, while also launching programs to help with some of our advisers most pressing needs.
For example in January 2022, we launched wealth builder prospecting.
Since launch the tourist and used by over 600 advisors with strong lead generation and conversion metrics.
Last February we launched asset Mark marketing advantage.
Celebrating its one year anniversary. This month marketing advantage has been used by hundreds of advisors. During this first year.
Finally, we expanded our advisor acceleration Academy, which I discussed last quarter, we hosted a total of three classes with over 280 advisors for the year.
We just finished our last class in December and the results from all participants were off the charts.
Finally, we kicked off 2023 with our investment consulting program.
A pilot program right now this investment consulting provides selected <unk> direct access to advisors investment consulting team. So that they can benefit from guidance and creating customized model portfolios that leverage the strategies available on our platform.
We take great pride in our ability to help advisors grow and scale. It's why they win and then we win.
Turning to slide nine which is the final component of our growth strategy, we pursue strategic transactions by adding capabilities and assets that improve advisers ability to serve investors and expand their businesses.
Even after purchasing adhesion for $46 million, we still have about $450 million of purchasing power for future M&A opportunities.
We're also doing a great job of increasing our purchasing power each quarter because of our strong cash generation.
As always we are proactively looking at all opportunities that we feel will benefit our advisors and their clients.
Now, let's turn to slide 10.
While 2022 was a record year there were challenges and we are not taking our foot off the gas invest.
Investors need more guidance support and advice than ever before a recent <unk> study found that 44% of investors agreed if they need more advice, who may have received in the past.
In 2023 in response to this and other trends will continue to focus on executing our growth strategy.
In short, we will expand our offering with adhesion. We will continue our re platforming effort, we will expand our fixed income and SMA offerings, and we will focus on helping advisors grow and scale their business through enhancements to our advisor benefits program and our service capabilities. In addition to our investment consulting.
Program, which I discussed a little earlier.
Our strategy is working we are well positioned to help advisors grow which in turn will help asset market growth I cannot be more excited about the opportunity ahead.
I'll now turn the call over to Gary who will take us through a deeper dive into our fourth quarter 2022 results and discuss our 2023 outlook.
Thank you.
And good afternoon to all loans on the call I want to Echo <unk> welcome to the adhesion wealth team.
I don't have them join the <unk>.
Our family.
And now we mentioned 2022 was another record year for asset work. During my remarks today I will highlight our fourth quarter results and share with you our 2023 outlook.
Joining them slide alone fourth quarters platform assets decreased two 2% year over year to 91 5 billion.
Quarter over quarter platform assets were up 15%.
<unk> six $9 billion from the acquisition of adhesion will a market impact net of fees of $4 3 billion.
Our quarterly net flows of $908 million.
Net flows for the full year of 2022 were $5 6 billion.
In 2022 2022 net flows.
Beginning period assets was 6%.
Net flows continued to be pressured by lower production relative to last year as money continues to sit on the sidelines due to market volatility and those assets are coming onto our platform are coming on a depreciated levels.
That said redemption rates were still lower than expected a strong sign of our advisor satisfaction.
All in all we are quite pleased with our net flows for the year given the current market environment.
Let's now discuss our advisor metrics.
Added 143, new producing advisers, our NPA in the quarter, we are focused on continuing to stay close to our existing advisors.
I believe down on our increased marketing events and digital adviser acquisition strategy.
We believe focusing on these areas positions us well to win new advisors and share of wallet from existing advisers, both of which will positively impact.
Future flows.
On slide 12, we show our engaged adviser count.
<unk> engaged advisors at the end of the fourth quarter 2882.
During the quarter. We added 281 engaged advisers. This increase is driven by our acquisition market appreciation and core adviser growth.
Specifically the 280 of the 281 185 were from our acquisition of adhesion.
Two where advisers that moved back above the $5 million platform asset threshold as a result of market appreciation and <unk>.
44, where core by which would qualify for engaged status for the first time due to their organic growth on the asset market platform.
Our engaged advisers account for 30% of all advisers, using our platform and make up 92% of our platform assets and growing the number of engaged advisers is a key focus for management and it is and it is crucial to drive further growth of our business and its financial.
In addition to the asset level and adviser count the third way, we measure our growth, which is not accurate base as the number of households on our platform.
Our households are up almost 50% year over year to 241.
As <unk> mentioned.
Acquisition of adhesion and nearly 15000 households to our platform.
Now, let's turn to slide 13 to discuss this quarter's revenue, which was a record $164 million.
You know we focus on our revenue net of related variable expenses for the fourth quarter of 2022, our net revenue was a record $24 million up 20% year over year.
This is Kevin primarily by spread based revenue, which was up $26 million 15 times from a year ago.
This more than offset the decline in asset based revenue, which was impacted in the market depreciation.
Slide 14 details our year over year net revenue walk.
Waterfall shows net revenue was up year over year, driven mainly by interest rate income, which we just discussed.
Year over year yield on spread improved over 300 basis points and 327 basis points.
Also contributing to the increase in net revenue and a $1 $2 million reduction.
As a reminder is the ongoing savings and was primarily driven by restructuring agreements.
Right.
Asset based revenue was down $8 $3 million year over year.
Im really driven by the $6 2 billion decline in billable asset.
Yes.
Year over year fee compression with 95 basis points of which half was driven by a team.
It's great to revenue from <unk> was flat year over year, primarily driven by foreign exchange pressure, excluding the impact of FX subscription revenue was up approximately 13% year over year with now we mentioned we are encouraged by blades growth prospects, both in their existing geographies and at highest potential expansion here.
Okay.
Lastly, other income increased about $2 $2 million year over year, driven largely by higher interest income earned on our corporate cash.
Before discussing our expenses I want to emphasize the stability of our revenue during the past two years in a very different market conditions.
2021, we had the best year for U S equities since 1990.
This strong growth helped us and over $9 billion in platform assets and market impact.
We experienced and then record revenue numbers with asset based net revenue accounting for 96% of our total net revenue.
In 2020, Q with quite a different story market impact caused a $14 billion loss, it's not from assets in the year.
Asset based net revenue as a percentage of total net revenue fell to 83% yet 2022 with another record revenue year for aftermarket driven by over $55 million of spread based net revenue.
Can you restate the last two years have been two completely different market demand and in each year, we have been able to grow revenue to record numbers.
We're excited about the resiliency of our revenue model.
<unk> revenue continues to grow it will provide further revenue diversification that it is not correlated to equity markets or interest rates.
Now, let's discuss expenses turning to slide 15, total adjusted expenses increased six 2% year over year to $118 million.
Quarterly operating expenses were up 7% year over year to $69 $2 million driven by a $4 $5 million increase in SG&A.
The increase in SG&A was primarily driven by increased travel and event core.
Compensation expense was flat year over year.
We increased our head count by 12% year over year, but that cost was offset by lower variable compensation.
As always I will quickly run through our adjustments for the quarter. We added back a total of $9 $3 million pre tax which is comprised of four items.
$3 $8 million of noncash share based compensation, we anticipate this to increase to just under $5 million.
Per quarter in the second half of 2023 at which point, we will likely be at the ongoing run rate non share base noncash share based compensation.
Second adjustments of expenses was $2 1 million of expenses related to acquisitions, primarily for adhesion will this include one time costs, such as legal and professional fees.
There are an adjustment of $1 $6 million related primarily to reorganization and integration costs.
Lastly, $1 8 million.
Acquisition related amortization in 2023, we expect the quarterly run rate of about $2 2 million.
Now, let's turn to slide 16 to discuss our earnings for the quarter.
Fourth quarter 2022, adjusted EBITDA was a record $52 $9 million.
Up 38% year over year, we are extremely pleased with our adjusted EBITDA This quarter, which is an attachment to our growing revenue diversification and the flexibility and disciplined management of our expenses.
EBITDA margin was up a robust 550 basis points year over year at 32, 2%. The full year. We grew adjusted EBITDA margins 270 basis points to 32, 3% well above our target annual target of 50 to 100 basis points.
Net income for the quarter.
$25 6 million, but full year with $183 million more than four times reported net income for the full year 2021.
Adjusted net income for the fourth quarter with $34 3 million.
46 per share, which is based in the fourth quarter diluted share count of $73 9 million.
Our adjusted effective tax rate for the full year is now at 24% up from 23, 5% due to the growth in pretax income outpacing the growth of our tax credits and deductions.
Further please see the adjusted net income walk on slide 21.
Now, let's look at the reported fourth quarter balance sheet I would highlight two items first we continue to do a great job of generating cash we ended the fourth quarter of $136 million in cash.
Ascertained $46 million in cash for adhesion.
This week, we still have a $375 million.
In our credit facility that is available to the company.
Our cash balance from strong ability to generate cash and our credit facility gives us a lot of dry powder for future M&A deal, which remains an important focus.
Key components of our growth strategy.
Second capital expenditures, which primarily reflect our long term investment focus on creating new capabilities, increasing scale and improving service.
In the fourth quarter, our capital spend was $11 3 million or six 9% of total revenue in 2022 capital expenditures were six 2% total revenue well within our previous guidance of 6% to 7% total revenue.
Capital projects, primarily tax related IP reflects the constant focus we have in improving our business within the confines of our capital spend parameters.
The largest capital investments in 2020 to focus on our continued re platforming efforts and productivity initiatives.
'twenty three we will continue our re platforming efforts productivity initiatives and built other new solutions for our advisors.
All this while maintaining our run rate between six and 7% of total revenue.
Turning to slide 17, I would like to provide some commentary on a meaningful impact that spread continues to make in our financial results and how we look to maintain.
<unk> to earn spreads as a direct result of us of our owning our own custodian AST Trust company or ATC.
Spread based revenue is a function of the amount of cash held by investing the ATC and interest rates.
First lets discuss cash balances in the fourth quarter total cash for the percentage of assets to ATC remain elevated over time, we expect it to revert to more normalized levels of about three 5%.
Turning our attention to interest rates the fed increased rates two times during the fourth quarter and one in January .
These rate increases are highly beneficial to the growth of our spread income rates will not stay high forever. As a result, we have started to deploy a portion of our insured cash deposits to fixed term agreements in the fourth quarter, we added $750 million of new fixed rate term contracts and as it gets.
31, 21% of cash ATC is in fixed rate term and then added maturity of 178 years and a growth rate of 439%.
As a reminder, we have the optionality of placement up to 40% of cash at ATC into fixed rate term, we will continue to update the street on the deployment of cash into fixed rate term on future earnings calls.
Finally, let's turn to slide 18 to discuss our 2023 outlook, our financial model starts with asset growth and the continued adoption of growth of our trust company and the growth of SaaS based revenue from point.
We have already discussed spread in subscription based revenue. So let me focus on active patients.
As discussed in my earlier prepared remarks core net flows continue to be pressured by lower production, our expectation of flat platform asset growth in 2023 is 10 plus percent which includes.
Organic growth in the high single digits.
And a modest market with a three 5%.
Driven by the growth and spread revenue subscription revenue and a full year of adhesion revenue, we expect our net revenue growth to be in high teens to low twenties.
This assumes the asset growth and slightly offset by about one basis point of fee compression, which is a regular expectation.
We expect our operating expenses, which consist of SG&A the compensation SG&A to increase in the high teens for clarity about order of the year over year increase is due to the full impact from adhesion.
Third of the increase is due to volume and the remainder is driven by our strategic investments in talent acquisition advisor growth and technology initiatives, especially as our advisor benefits program and billing system replacement.
As a reminder, our expense growth is disciplined and closely managed and we will not limit our expenses outpaced our revenue growth.
As always we are focused on realizing improved margin on our revenue and growing earnings.
We expect our adjusted EBIT to be up 20%.
Plus year over year, and we expect margin expansion between 50, and 100 basis points for the year.
And with that I will hand, it back over to Natalie for her concluding remarks. Thank.
Thank you Gary and thank you to everyone on the call today I will look forward to seeing you in person at upcoming Investor conferences. This concludes our prepared remarks I'll now turn the call back to the operator to begin our question and answers.
If you'd like to ask a question. Please press star followed by one telephone keypad. If for any reason you would like to move that question. Please press star followed by two <unk>.
To ask a question it is star one.
Our first question is from Gerald O'hara with Jefferies. Your line is now open.
Good afternoon or I suppose.
Yeah, good afternoon folks.
He meant to some.
Maybe.
Maybe wanted to just.
Can you talk about the solution set.
It's kind of be curious specifically what.
What youre hearing from advisers and clients with respect to kind of alternatives on the.
<unk>, four and where that kind of solution set might be evolving within your ecosystem or or maybe how you're kind of thinking about it.
Just sort of a solution in the broader picture of things.
Thanks, So much for the question Gerry alternatives are clearly a.
Very important need for high net worth and ultra high net worth investors and as well as if you broadly define the term alternative investments volatility managed solutions for all investors and so at aftermarket implemented alternatives on our platforms in two different ways, because we view these knee.
<unk> is being very different.
For the smaller investor the mass affluent and below we implement alternative sleeves within our market based portfolio, so that advisers and their clients could talk about how much volatility they're comfortable with and then implement the portfolio, that's where the sleeve of alternatives is sized appropriately appropriately to that risk.
Neat.
Expanded that offering last year as I mentioned in my remarks, and added three solutions towards the second half of last year. In addition to that for larger <unk> and then also for larger investors who are served by those.
They have needs for true qualified purchaser alternatives and we have a partnership where we deliver access to those alternative investments fully diligence.
To our advisors.
Who serve investors should have that leap.
And that solution is to learn for all right.
Okay, great. Thanks, and then maybe just a follow up Gary I appreciate you're.
Your color on cash and credit facilities.
Overall capital management.
I don't know if this is maybe more towards not only but.
Can you kind of remind us a little bit.
Yes.
With respect to the M&A possibilities what capabilities you might find most attractive.
As we sort of look past it.
The adhesion deal and congratulations on closing out at the checkout.
Thanks, So much Gary and I, both mentioned, we couldnt be more excited about welcoming the adhesion family to aftermarket.
As it relates to capabilities.
You know we have two types of acquisitions, we're really excited about capabilities acquisition and scale acquisition.
You didn't ask about scale acquisition, but I just wanted to mention it because it remains an important part of our strategy because we know what the advisers become part of our ecosystem, we can help them grow and succeed.
And part of how we do that if we have the right capabilities on our platform that are geared towards helping advisors scaled our business and enhance our service levels to their clients and so the capabilities. We're looking at.
Fall into two categories. The first is where are they spending their time and effort in a way that doesn't add value to their client relationships. That's how we can really help advisors scale, where they can turn that percentage of their time to working with clients and helping our clients achieve their goals and there are lots of different aspects of that.
The marketing and lead generation.
Compliance exercises key technical two key parts of their technology that takes them a lot of time and effort like performance recording in performance calculations. These are all areas that because they take advisors, so much time and effort and.
We would love to do more of and then as it relates to the second part what we try and do is we try to enhance the advisors dialogue with and interaction with our clients.
So that that interaction that that advisor apart and that's one of the reasons. It was so important for us to purchase buoyant because of financial planning and the goal is at the heart of the advisors conversations with their clients.
And so there are other aspects of the advisors dialogue with our clients, which take a lot of time and are difficult and will require specialty skills in those areas would be areas that aftermarket is interested in so just some example tax management would be an example of that direct indexing would be an example of that.
Investment selection would be an example of that.
All of those areas could be interested into aframax amongst others that I didn't mentioned, so hopefully that clarifies.
Yes, absolutely.
Thank you for taking the question, maybe just a real quick one for Gary.
This will be the last I promise, but.
You mentioned sort of fixed rate term and that sort of average if I heard it correctly. One seven years any reason why you wouldn't maybe try that stretched out a little bit longer or maybe can you kind of just help us sort of understand what the suites on them is there for the for the cash cash management in terms of growth.
Fixed rate.
Contract.
Yes, sure Jerry Hey, you can ask me any questions in Q1 will be here all day.
The way the way we engineer to Miss.
Process, we created sort of layers.
Aladdin approach and we entered into some content one year from in Q3 right now.
Due to me.
Mid <unk>.
A slight predictability to our cash balances right that cash balance goes up and down with.
The assets on our platform and also on the market environment and so we are being.
Let me take cautious as we are entering the program.
In terms of the tenure.
These.
Contract initially to make sure that we can.
Review of the process and make sure we kind of learn from what we're doing.
So for now in the mid short medium term, we're probably going to stick to this sort of one two and three year Atlanta.
See where that takes us.
And then we will evaluate in a year or so.
Okay. It makes that makes sense. Thanks for taking my questions. This afternoon.
Sure.
Our next question comes from Jeff Schmidt with William Blair.
Your line is now open.
Alright, thank you.
The TD bank partnership with point, it looks like a great win for the company.
Im just curious how you differentiate in the marketplace relative to get better just as you kind of roll that out more what's your what's the pitch there.
Absolutely. So a couple of things the first thing.
I just want to clarify about why it is that <unk> is a leading financial planning provider outside the U S and so they have really great market share in the UK and Canada, starting in Australia, and then beginning to gather market share in the U S and there's a few ways that <unk> has.
English itself outside the U S. The first is the flexibility and depth of its technology.
And the degree to which that technology can be customized by enterprise clients.
The example, you used the <unk> example, they can use <unk> technology to create a financial planning system that suits the needs of their advisors and holiday.
Mike.
Wallboard to have financial planning conversations with their clients.
Flexibility include language tax regime.
Sure.
Workflow for the advisor and the type of financial planning that is delivered as well as the degree to which that particulars in that particular institution can connect their own financial products to the plant.
So outside the U S. In the enterprise market, it's really the flexibility and richness of the technology.
The small business market outside the U S.
The way that they differentiate themselves is the richness of the tax.
Integrations.
The financial planning system, the degree to which the small business can leverage the technology off the shelf, meaning the simplicity of it.
And then lastly, the training that we.
Provide to the financial of the small financial.
Market, a small advisor and small advisory market.
Inside the U S. They differentiate based on all of those things.
In addition to that the fact that they can create a great conversation between the advisor and their clients, which talks about the <unk>.
Consequences of cash flow decision clients are making every day to their ability to achieve our long term goal.
And that single user interface is so incredibly powerful for the advisor and the client the advisor because they can help the client understand.
Their ability to retire based on their spending habits. They have today and for the client because they can be comfortable that they are spending the right amount and still reach their long term goals. So it's really an incredible technology and we're very very excited to have it as part of the asset Mark offerings.
Okay.
Okay great.
And then building on the question about <unk>.
Fixed rate balances.
I understand your concern about sort of where that percentage.
Client cash is going to shake out.
But even if you sort of move that up to a 40% mix fixed rate I mean, it seems pretty conservative. So I guess my question is are you seeing the demand out there and move it up to that and I guess can we expect you to be.
Pretty aggressive in doing that just given the unique rise in interest rates here. Thanks.
I'll start this one and then hand off to Gary if he has anything to add.
Our scheme interest and our fixed term deposits in the marketplace, which is which is great.
And as Gary mentioned are our most important value and our cash program is making sure that clients have the liquidity they need at the insurance levels that we promised and so we're going to focus on that first because that's the primary reason for the program and then secondly on the yield that the program delivers to the Investor and then the spread.
That it delivers to aftermarket and so where we're definitely seeing demand for the balances that we can provide and we will continue to manage that closely.
Keeping in mind, our first principle, which is obviously the client outcomes.
Okay.
Okay, great. Thank you for the answers.
Thank you thanks, Jeff.
Our next question comes from Alex <unk> with Goldman Sachs. Your line is now open.
Hey, guys. This is Michael on for Alex.
So I guess first question comes Shannon on organic growth here.
September the annualized growth rate that you guys put out in the monthly has been 5% below 5% before that the average for 2022 was closer to eight.
Last year, it was closer to a double digit or above so I guess, what factors maybe have contributed to that slowing growth rate others.
The market impact and lower production is there a specific channel that you guys might have seen a.
Slower organic growth coming from.
And any other color you have there would be helpful.
Okay.
So.
I'll start Michael Scary.
No to your last question the Nonspecific channel, let me we attribute this team overall and overall in the industry, we've seen it in our competitors and et cetera.
There is a slowdown in the movement of money and when we think about our net flows net flows for us are purely in the money in what we call production and the money out the redemptions.
We maintain our redemption rates and money going out has been very favorable consistent with our very high NPS scores that we have with our clients. We believe once our sponsors have money on our platform, they're getting the service and the technology.
Appealing to them and helping them grow their business, but we are seeing a slowdown of production coming in.
And so that enough to exactly what you said, our net flows right down from the high single digits to the mid five or so that we've seen in the second half of 2022.
We have seen.
Save Green shoots that give us encouragement from the outlook that we gave you which was we believe that our net flow growth rate will be in the.
High single digits.
In 2023 Bonanza.
But that is a process that's a process in the market kind of opening back up.
And then alright that's helpful.
Yeah.
Alright, I just wanted to add go ahead, not only start Duane.
No no worries to what Gary said.
When there is uncertainty in the market and that can be all sorts of contributions to uncertainty recently, we had the pandemic we had the credit crisis.
Times nearing around election.
Advisers and their clients pods.
To take stock of the situation, they're in and to make sure that they're comfortable with their portfolios and comfortable with the risk that they're taking.
Natural human response.
And in my view the best company in the best Advisors take that time to serve their clients.
And in 2022, where you had record high inflation and completely unexpected and historic losses in the bond market.
Our advisors because of their great advisors, we're taking that time to serve their clients.
As things become more certain and as investors and advisors have taken stock then you start to see that.
Momentum return and you never know exactly when that's going to happen.
But based on my experience if you spend that time, serving your clients is what aftermarket in 2022 and what our advisors did you always benefit from the resurgence in interest and so that's why one of the green shoots that Gary mentioned earlier and why we're excited about 2023.
The last thing I'll, just say is 2022 is a little bit of a map.
Problem as well because you are beginning period assets were inflated and the flows throughout the year.
We're impacted by the market decline.
And so about up about four percentage points or so of that.
La is was contributed to by just the math of that.
But.
The higher beginning balances relative to the flu.
That's helpful. Thanks, guys.
I guess for the second question.
Getting back to the kind of spread based revenues so.
Obviously bank demand for deposits and Verizon and I guess, maybe an update on what the spread on the floating portion of the cash might be and if you have any update on where cash balances stand today halfway through 2023.
Yes.
Sure so.
Our.
Our.
Net.
Im just trying to make sure I.
And you're right number Michael so on a net basis for the quarter.
We earned three just under three and a half.
Point screen of 5%.
On our <unk>.
ICD program, which is the majority of the cash that we disclose every month or so and so the cash balance at the end of the.
The quarter was about three.
$5 billion.
And we earn like I said about three 5% on the ICD and so Thats six term number I gave you which is the gross number of $4 39.
In excess right now.
We disclose them here in the past that we will earn about 4% on our on our cash everything a bump that will go certainly to the end investor and so we are approaching that cat book Carnival cautious in moving to some fixed rate term is to ensure that we can.
Maximize.
Turning to ourselves and of course, our end clients win rates return probably to more normal levels.
In either end of this year and next year.
Thanks, guys.
Thank you. Our next question is from Madeline building with Jpmorgan. Your line is now open.
Hi, Good afternoon. This is Matt <unk> on for Michael Cho.
I wanted to dig a little bit deeper on the organic investment priorities you mentioned as part of your 2023 growth strategy on slide 10.
<unk> 22 was a choppy year, yet you're still expanding margins quite substantially. So since 23 is still experiencing a bit of that market choppiness market Choppiness I'm curious, how you're thinking about the priority areas for these investments and if you're delaying or EBIT accelerating any particular areas within the current market conditions.
Thanks, Madeline and nice to meet you over the phone.
So as it relates to our priority investments will.
We're very disciplined about ensuring that our expense growth doesn't outstrip revenue growth.
And as a result, we have.
Multiple list of potential investments, we can make depending on how the year unfolds around that.
If we have a great year as it returns tour.
It relates to revenue growth will expand our investments to make sure that we're investing.
According in accordance with the revenue growth and if the year unravel the last positive we make sure that we invest in what we think are the highest priority areas for our future growth.
And that's part of the investment discipline and we have it off the mark.
It doesn't mean that at any stage, we're not investing for growth we're investing for growth growth all along it's just it just really depends how much we want to put our foot on the gas.
So in 2023, we really feel like the most important areas for us to grow in the most important drivers of growth and therefore, the most important areas of investment are adhesion and making sure that we create shared client experience between asset bucket adhesion and the reason we believe that is because in doing this.
So we expand our total addressable market by nearly 60%.
We also believe that the intersection of.
Open architecture model marketplace with more curated and diligence solution gives advisers.
One place one experience for the whole of their business versus having to manage two partnerships.
That's the first area.
Area is where we know that in times, where markets are choppy taxes are extremely important and we are going to extend the tax management services, we deliver to our advisers to deliver to their clients.
And we believe that this will be highly impactful because it'll give advisers.
Source of return and their conversations with their clients.
And in addition to that it will expand the eligibility of nonqualified assets on our platform.
Now the third area that we're investing a lot in is making sure that we have the investments on our platform that advisors and their clients need across market cycles, and so we're going to expand our fixed income offering because right now now that the fixed income market is healing and theres a yield in the marketplace again.
Demand for a robust suite of fixed income solutions is expanding and expanding really materially.
We're also continuing to invest in our productivity we.
We want to make sure that our solutions are a straight through an automated as possible to stay and advisors time to make sure that the services, we deliver to them are accurate and that our service organization can focus on the high impact areas out there advisors business.
And then lastly, we're very very much focused on making sure that the initial experience of an adviser with aftermarket is.
Extremely good and that's blocking and tackling for us.
But in 2023, and we're very much focused on that onboarding experience and making sure it's a smooth as possible.
And then one last thing I'll, just mention because I think it's important and it's not so important for 2023, specifically and very important across time aftermarket is going to continue to re platform and we're going to invest in that.
Last year, we changed our trust accounting system, which created a lot of efficiency and scale and our custodian.
This year, we're very much focused on a new billing system, which will provide advisers with a lot more flexibility in how they build our clients, we're working on expanding and extending the capabilities. We provide through our adviser portal E wealth manager, which will be delivering at the end of this year and through the following year and then we will also focus.
On trading, which sounds like a lot, but we're gonna do all of this within the 7% of revenue guidelines that we have talked to you about in previous earnings calls and also this one.
Great. Thank you for the detail.
And then just moving to the top line of things.
<unk> households, growing pretty steadily in a consistent direction past few quarters.
Can you provide any incremental color on what's driving that underlying organic growth excluding adhesion.
Any metrics that you can share too that we better appreciate the potential revenue opportunity here.
So I'll start my online Thats, a nice meeting you.
So households is a great metric to look at because again, it's not <unk> and so during this market volatility, including me off market in 2021 in the Downmarket in 2022, it can skew like.
The actual progress, we're making and so.
The number of households is purely a function of.
New advisers coming onto our platform opening up new accounts per household as well as our existing advisors their organic growth and they're increasing their share of wallet on our platform.
That backs that BD is growing about 15% a year.
But the underlying growth of the business.
<unk> markets come back, we'll go down the assets will catch up or lagged behind that.
<unk> growth, but it is part and parcel to our overall growth strategy of bolt NPA of new advisers as well as growing share of wallet with our existing partners.
And then adding to that.
Capabilities that out from our cash that makes us attractive.
To new households that our advisors are attracting the first thing I would just call out is we are have a proven ability to help advisors serve higher and higher net worth individuals. We have a lot of training a lot of resources investment solutions partnerships that help advisors move up market and so.
A good percentage of our household growth is due to that capability.
You also have a proven ability to help advisers move from commission to fee.
So we're they're managing money in a commission orientation to where they are outsourcing it and a fee based orientation.
And we have ample tools training material.
Resources, where advisers to to use to do that and so that also contributes a lot to household growth. We also help advisors, who are small businesses one of the reasons. It's so important that we have a retirement offering.
We start with the plan part of the business and then you grow to the to the personal part of the investors.
Advisors clients business.
And so that contributes to household growth.
And then last but not least we also have solutions that help advisors with the next generation of their clients.
A smaller solutions are getting started physicians and so that also contributes to household growth.
Great. Thanks for that clarification, thanks for taking my question.
Yeah.
Hmm.
There are no further questions. So I'll pass the call back over to the management team for closing remarks.
Alright, well. Thank you everyone for joining our second quarter earnings call. We really appreciate you spending time with you and look forward to talking sorry, fourth quarters, and I think by Q.
Fourth quarter earnings call and we really look forward to seeing you next quarter.
Goodbye.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.