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The Pandemic, Record Assets, a Net Loss, and What it All Means for AssetMark

The TAMP’s second quarter earnings revealed how those companies might be performing in an unprecedented environment.

One of the few publicly-traded TAMPs — companies that thousands of wealth managers rely on to invest on behalf of clients — revealed this week how it is performing midway through a year defined by changes and challenges stemming from the Covid-19 pandemic.

AssetMark, a TAMP or turnkey asset management platform that went public last summer, said Tuesday after the markets closed that revenue had fallen and profits disappeared in the second quarter. It reported a net loss of $9.3 million and revenue of $99.1 million in the second quarter, compared to net income of $3.2 million and revenue of $104 million in the second quarter of 2019.

The Concord, Calif.-based TAMP laid off some employees and is saving money because others aren’t traveling. However, costs related to integrating two acquisitions and necessary changes and investments due to the pandemic pushed expenses up slightly in the second quarter to $6.2 million, compared to $5.9 million in the same period last year.

Non-GAAP net income for the quarter also fell to $15.1 million, or $0.21 per share, from $16.6 million or $0.25 per share. Adjusted Ebitda for the quarter was $25.3 million, or 25.6% of total revenue.

Though stocks broadly rallied Wednesday, investors frowned on AssetMark (ticker: AMK), sending shares 8% lower to $25.17 on volume that was more than triple its daily average. The stock has traded as low as $13.94 and as high as $34.02 in the past 52 weeks.

But the company said those results were in line with its expectations and showed the resilience of its business model. AssetMark President and CEO Charles Goldman told investors and analysts on Tuesday that the pandemic has hastened broader changes to the wealth management industry, which are tailwinds for TAMPs, and he pointed out that his company was “growing despite these challenging times.”

AssetMark added 178 new advisors and had net flows of $907 million, helping it end the second quarter with an all-time high of $63.2 billion in assets. It also managed to grow without holding any in-person meetings in April or May and few in June. “This growth, while muted relative to the same period last year, demonstrates the resilience of AssetMark’s model as we navigate a very challenging environment,” Goldman said.

There is “no doubt” the company is not growing as fast as it was before the pandemic because of changes in advisor behavior, Goldman said during Tuesday’s earnings call. Wealth managers have been focused on ensuring they can operate effectively during work-from-home orders, tending to clients, and are figuring out ways to grow without meeting clients and prospects in person. 

As advisors have made adjustments, so has AssetMark to support them. The TAMP rolled out Zoom to its top advisors, which have held 11,600 meetings, and more 200 webinars that have reached over 46,000 investors. Video conferencing has also enabled Goldman and his employees to attend more sales meetings than in the past; AssetMark’s sales team had 78,000 interactions with its advisors in the second quarter, up 30% from the first quarter of 2020.

AssetMark faces some challenges. While the company’s asset-based fees have remained steady in 2020, the AssetMark Trust Company, the TAMP’s custodian to client assets, is earning less revenue on cash in the lower interest rate environment. It collected $64.6 million in asset-based fees in the second quarter, up from $62.6 million in 2019. Meanwhile, spread-based fees fell to $3.1 million from $7.2 million.

Gary Zyla, chief financial officer at AssetMark, said Tuesday the company is “laser focused on our expense management” and views “2020 as a reset year” given the pandemic and market conditions. However, the TAMP is less focused on maintaining its margin and more dedicated to doing what it needs to maintain organic growth going forward. 

AssetMark made it clear after its IPO that other TAMPs could be acquisition targets — and after a lull in the second quarter, deal activity has picked up in the small, little-known corner of finance. But Goldman said he tells sell-side analysts not to include mergers and acquisitions in their models; they’re too unpredictable, he said.

During Tuesday's earnings presentation, Zyla also acknowledged that AssetMark filed a Form S-3 with the Securities and Exchange Commission on Monday. The so-called “shelf” registration is a public statement that Huatai International Investment Holdings Limited, which owns 70.3% of AssetMark’s shares might “from time to time, sell up to an aggregate of 19,501,046 shares of our common stock, as described in this prospectus, in one or more offerings.” Zyla said no date has been set for any sale.  “As you know this filing is standard practice for public companies to facilitate an easy avenue to public markets.”

An analyst asked what impact Charles Schwab’s acquisition of TD Ameritrade (a deal expected to close before 2021) might have on AssetMark. Goldman said it should have little, since the TAMP already works with both RIA custodians, as well as others.

Goldman added that there has been “a lot of speculation in the press” about how successful Schwab will be at keeping the independent RIAs that custody with their competitor. 

“We’ll have to see what happens to the custodians, if RIAs make a pure custody choice. And if it does happen, it will be only if service levels deteriorate meaningfully.” 

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