SEI Investments Co (SEIC) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Third Quarter 2021 Earnings Call. (Operator Instructions) And as a reminder, this call is being recorded. I would now like to turn the conference over to our host, Chairman and CEO, Al West. Please go ahead, sir.

Thank you. Welcome, everyone. All of our segment leaders are on the call as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller.

I'll start by recapping third quarter 2021. I'll then turn it over to Dennis to cover LSV and the investment in new business segment. After that, each business segment leader will comment on the results of their segments. And as usual, we will field questions at the end of each report.

So let's now turn our attention to the financial report, the financial results of the third quarter 2021. Third quarter revenues grew 14% from a year ago. Third quarter earnings increased by 24% from a year ago. And third quarter EPS of $0.97 grew 29% from the $0.75 reported in third quarter 2020. Third quarter asset balances decreased by approximately $3.7 billion, while LSV's balance decreased by $4.8 billion.

During the quarter, we repurchased 20 -- excuse me, 2.0 million shares of SEI stock at a price of $60.58 per share. That translates into $120 million worth of stock repurchases.

Now I'd like to provide you with our situation today. One of our businesses steadily grows its revenues and profits, that's IMS.

Another business, the Advisor segment, has recently been executing against a new technology-driven strategy. We are experiencing strong indicators that the business has turned the corner, and we're very excited about that.

Another business, Private Banking, is diligently working on an implementation backlog, a strong sales pipeline, and enhancing client satisfaction.

Now the fourth business is the Institutional Investors segment. While it faces strong headwinds in the legacy defined benefit OCIO client base, it's currently addressing other growing segments.

We're also focused on building growth engines beyond our 4 traditional businesses. Here, we are finding opportunity in markets and services adjacent to our 4 main engines. In the past, we have shared a couple of these innovative young businesses.

First, GRC, providing global regulatory compliance services to financial service organizations throughout the world. Second, what has been renamed from SEI IT services to SEI Sphere. Sphere's leading-edge service is network and data security. Third, the Private Wealth Management business is providing an enterprise platform to ultra-high net worth families. In addition, we have made 2 acquisitions in October that will add additional capabilities for both our IMS and Institutional business lines. Dennis, Steve and Paul will provide more information.

Next, let's turn to revenue production during the third quarter. Net sales events in Private Banking and Investment Managers were $19.4 million, of which $15.1 million are as expected to be recurring. In addition, net sales events of $6.9 million incurred in the Asset Management-related units. These events reflect positive asset flows of advisers and institutions.

In a few minutes, unit heads will provide more detail on their specific sales results in their new businesses. And their opportunities in the new business.

To grow and prosper in the future, we know that things will never be the same. So we've been busy adopting new mental models and realities. One such new reality is the remotely distributed workforce. We have been planning how the workforce will work in the future. And today, we're beginning to act on our plans. Fortunately, we have sustained the positive momentum created during the first half of 2021. We have a strong backlog of sales and implementations in a number of key prospects late in the sales cycle. In addition, we have been successful in repositioning our Asset Management-related business segments.

In conclusion, we look forward to capturing the opportunities inherent and significant change. And with that, I will turn it over to Dennis to give you an update of LSV and the investment in our new business segment. Dennis?

Thank you, Al. Good afternoon, everyone. I'll cover the third quarter results for the investments in new business segment and discuss the results of LSV Asset Management.

During the third quarter, the investments in new business segment activities consisted of the operation of our Private Wealth Management group, our IT Services business opportunity, which Al told you now -- we now call SEI Sphere, the modularization of assets and data integration of different platforms to deliver on our One SEI strategy and other investments.

During the quarter, the investments in new business segment incurred a loss of $8.5 million, which compared to a loss of $9.6 million during the third quarter of 2020. Approximately $6.5 million of expense during the third quarter 2021 is tied to our One SEI effort.

Regarding LSV, our approximate 38.7% ownership contributed $35 million in income to SEI for the third quarter 2021. This compares to a contribution of $28.3 million in income for the third quarter of 2020. Assets during the quarter contracted approximately $4.8 billion. LSV experienced net negative cash flow during the quarter of approximately $3.1 billion, with market depreciation of approximately $1.7 billion. Revenue at LSV was approximately $115.7 million for the quarter with $1.9 million of performance fees.

As we discussed on the last quarter call and over time, our people are the key to making SEI go. Our business growth adds to our need to recruit, develop and retain our talent in all areas, including our operational teams. During the quarter and again recently, we have taken steps to invest in our operational talent with adjustments to their compensation. We recognize their contribution to our success and the role they play in our competitiveness as a company.

Regularly, we monitor the labor markets within which we compete, and we'll make appropriate investments to keep SEI as an employer of choice. While this has an impact on overall expenses, we believe it is the right thing to do.

As Al mentioned, we have recently closed on 2 acquisitions. The first is in the United States. We have purchased the technology assets of a company called Finomial. These assets enhance our Investment Manager Services offering in the areas of investor services and regulatory compliance. In addition, the talent that is now part of SEI enhances our technical team and grows our cloud computing expertise.

In the U.K., pending regulatory approval, we are expanding our institutional capabilities in the Master Trust solution space with the acquisition of the Atlas Master Trust. This trust will combine with the SEI Master Trust, giving us greater scale and capabilities to compete and grow. Neither of these acquisitions are financially material, although we believe they carry high strategic value. Steve and Paul will provide additional commentary when they speak to their respective segments.

For the quarter, our effective tax rate was 22.3%. We have also included in our earnings release additional financial information. Please refer to our soon-to-be-filed 10-Q for more information.

I will now take any questions.

(Operator Instructions) We will go to the line of Owen Lau with Oppenheimer.

Dennis, could you please give us an update of your latest status about people working in the office versus working remotely for the rest of 2021 and also the planning going into 2022?

Sure. So since the end of the second quarter, we have gradually welcomed employees back to our offices, both here in Oaks and in London and somewhat in Ireland and Indianapolis. Starting just Monday of this week, and we have what I kind of call an open door for anyone who voluntarily would like to come and work in our offices, whether it be 1 or 2 or 3 or 5 days a week. We have, we think, proven protocols on how to keep people safe and protected. We certainly look forward to seeing more people on our campuses.

But as Al mentioned, we have adjusted well, too, and we'll continue to take advantage of the opportunities and the pros, if you will, from how we've worked over the past 20-plus months. And we've learned that we certainly can run effectively with people distributed in different geographic areas. We can run effectively with people not coming into the office every day.

We do recognize and our workforce recognizes the benefits of being in the office when they can be relative to things like team engagement, group meetings and conversations, certainly the benefits of spontaneity and running into people and covering specific business issues when they do. But that being said, we're taking a kind of gradual build back process, if you will, versus a big bang. And so I could see that certainly -- that's our process really for the rest of this year. And as we work through fourth quarter, we'll make some decisions around how we go into 2022.

The next question is Robert Lee with KBW.

Another earnings season.

They come up fast.

They do. And I just want to go back to 2 things. Well, maybe your commentary around, I guess, was kind of employee compensation expense. And I apologize because I think I may have missed a little bit of it. But -- I mean were there like specific metrics or what not that you had -- you may have mentioned that, for whatever reason, I kind of missed.

No, I didn't mention any metrics. But remember, back on the second quarter call, we talked about that we were seeing the inflation impact hitting our compensation structure, particularly in certain areas. And we wanted to make sure everybody knew that third quarter, we were going to see some impact of that because July 1, for many of our employees, is their anniversary date for compensation. And so we would have a full quarter's effect of any adjustments we made then.

But as we work through the quarter and as we look at our kind of workforce strategy and long-term planning, particularly in the area of operations and operational talent, we made a recent decision to do something in addition to what we did for our workforce back in the beginning of July. So it was more to kind of set the expectation that, again, you'll see some growth in compensation costs in the fourth quarter and then ongoing as a result of those decisions.

Okay. Great. And maybe...

I would just say that after the -- well, it's funny about the conversation back in the second quarter is that within a couple of weeks after the call ended, what we had said on our call became much more the norm than the outlier because every company is talking about it. I mean it's a labor force issue, to sort of add to that one.

Very much so. And maybe keeping with that theme, and this maybe goes back to the prior question a little bit of back to office. But as knock on wood, we hopefully start exiting the COVID and whatnot and -- anything we should be thinking about maybe on other expenses like maybe marketing, T&E starting to pick up as you get into the quarter or expectations for next year or anything or -- that we should maybe just thinking about as you look -- think ahead of the next few quarters into the first part of next year?

Yes, I think you pinpointed out. During the third quarter, we saw a little bit of elevation of that, and we did have more people on the road. It's all relative, though, to kind of where we were in the first half of the year. And we're seeing -- we've seen more client engagement. Things as simple as dinners or meals with clients to outdoor activities with golf being the most positive or prominent one on that.

Now with the winter coming, maybe that will die down. But I think sales folks and client relationship folks that are comfortable, and we do have a process of approval for what we allow and won't allow, we'll see that continue to inch up. I don't think you're going to see a big bang event where we're going to drop the flag and it's going to look like a NASCAR race.

Well, maybe we wouldn't want that.

And I also think there's probably a few people at Eagles games and Giants games and some of that going forward as well. So...

Okay. And lastly, and I appreciate your patience. The One SEI and the investments in new business, I guess, have been thinking about that kind of starting to trail off as we got deeper into this second part of this year or so. Should we still expect that, that's going to start kind of trailing off somewhat in that $6.5 million of expense? Or is that kind of a reasonable place to be in the next couple of quarters?

I would say it'll trail down a little bit, second and third. It'll trail down a little bit more third and fourth. And then it'll step down, I think, more as we go into the next year. So I wouldn't necessarily carry where we are today into next year because it will be...

And the next is Chris Donat with Piper Sandler.

Just a small one on the facilities, supplies and other costs, just looked a little light. Anything to call out there or is that sort of at a new run rate for some reason if -- I don't know, I'm just trying to understand what's moving there.

In that line item on the income statement, we were the beneficiaries of a state tax program for R&D investments. And we -- after, frankly, a very exhaustive process by our tax team, our IT folks and other folks in accounting, we applied for a rebate, if you will, on R&D investments we made in our data center. And so we did pick up a nice check. We -- they did actually accept our application and request, and we got that benefit in the third quarter.

So I would say that number is probably more -- it's a little bit understated. So from an expense standpoint, we did get that benefit. On the other side, there were some, say, more onetime expenses that went the other way. So in total costs for the company, total expenses, it was fairly neutral in terms of things that went one way or the other.

Okay. But as we think about the individual line items like facilities probably comes up, but some others come down. Okay. Okay. That's it from me for now.

And we have one more question in the queue, Ryan Kenny with Morgan Stanley.

One more question on expenses. So we've talked about comp and the return to work. But given that revenue growth at the company level has been up 14% year-to-date, how should we think about how much of that you plan to reinvest into the business beyond the comp and beyond One SEI? Is there any other type of investment initiatives that you might lean more heavily into?

Well, I don't know how you define heavily, but there -- we are clearly investing in some new initiatives that Al outlined in his talk, the SEI Sphere business activities, the GRC business activities. As I mentioned, we did 2 smaller acquisitions in October, which Steve and Paul will speak a little more to, those have probably short-term expense elements to them.

So we are investing. We always speak in terms of the percentage of our revenue in terms of total R&D. And I think we are still operating in that kind of 10% type range in total. There's nothing that I think would surprise anyone that we're doing or that we don't already have in play. Things like Private Wealth Management, that's a self-funding business now because it's a revenue-generating business.

And we do not have any more questions in queue, sir.

Now before I turn it over to Steve, we would like to remind you that during today's presentation and in our responses to your questions, we have and will make certain forward-looking statements that are subject to risks and uncertainties that may cause the actual results to differ materially.

Please refer to our notices regarding forward-looking statements that appear in today's earnings release and in our filings with the SEC. We do not undertake to update any of our forward-looking statements. Kathy Heilig is so happy that I get to say that.

With that, I'd like to now turn it over to Steve.

Thank you, Dennis. Good afternoon, everyone. As usual, I'll start with the Private Banking segment. Third quarter 2021 revenues totaled $123 million, which was up $8 million or 7% as compared to the revenues of the third quarter of 2020. This increase was driven primarily from recurring revenues. Third quarter 2021 quarterly profit of $6.3 million for the segment was up $4.6 million from the third quarter of 2020. This increase in profit was primarily due to the increase in recurring revenues.

And turning to sales activity, during the quarter, we signed an agreement with a new client to SEI, CNB Bank based in Clearfield, Pennsylvania. We won this business in a competitive process, and we expect CNB Bank to migrate to SWP from a competitor platform in the first half of 2022. We look forward to welcoming them to the SEI family and supporting their future growth initiatives.

For the third quarter of 2021, our total gross sales events signed for the investment processing business was approximately $1 million of annualized revenue. Total net sales for the investment processing business was essentially flat. The primary driver of this was our new sales event offset by a reduction in several trust recontracts, reflecting some reductions in the size of the specific lines of business or a reduction in services utilized. Also in the quarter, we closed $2.6 million of onetime revenues.

While we would have liked to see stronger sales events signed in the quarter, this net result was more a function of timing than effort. It is safe to say we have a good start to the fourth quarter, having moved some transactions along. I will wait to give an update on those activities when we report our fourth quarter results.

Turning to implementation activity for the quarter. Last year, we announced that we are expanding our relationship with our long-term client First Horizon Bank. First Horizon has been an SEI client since 2003. In July 2020, First Horizon merged with IberiaBank, which had previously been running on a competitor platform. We are pleased to announce that during the quarter, we successfully completed the migration of that book of business to SEI.

We are excited to continue providing our current scope of technology and services to the new larger organization. As an update on our backlog, our total signed but not installed backlog is approximately $72 million in net new recurring revenue at the end of the third quarter.

From an asset management standpoint, total assets under management ended the period at $25.6 billion, which was down 2.5% from the second quarter of 2021. Our cash flow for the third quarter of 2021 was a negative $80 million. This resulted in a negative $200,000 sales event for the asset management side of the business for the quarter.

As we go through the rest of the year, we will remain focused on continuing our momentum, executing on sales and prudently investing in the business to ensure sustainable growth. We will also continue to execute on our One SEI strategy, which will allow us to increase our growth opportunities by unlocking all the assets and platforms SEI has to offer across the company. We remain excited and optimistic on our growth opportunity.

That concludes my prepared remarks, and I'll now turn it over to any questions you may have.

(Operator Instructions) We will go to Ryan Kenny with Morgan Stanley.

So you've outlined some growth opportunities in private banks. I'm just wondering how much of the growth is expected to come from expanding existing relationships versus new clients, if you could help us size that skew?

Yes. I think, Ryan, it's hard to size, and I probably wouldn't give you the exact size. But I'd say when we look at the pipeline right now, we probably have about 60%, a little bit more on new opportunities and 40% from what we're looking at of maybe expansion of existing relationships.

When you look at the platforms we have, including Archway, some of the other technology platforms we have, we see good opportunity. And we've actually been successful with some of those during the past 18 months. So I'd say we're equally bullish on both, and yes, trying to move down the path.

Got it. Just as a follow-up, how do you think about transition risk? And I'm asking because one investor concern that we've been hearing is that there's been some chatter of a large wealth adviser looking to change their provider. And we don't know if that's even someone on your platform or who it is. But it does bring up the question of how do you think about protecting yourself around that potential risk. What flexibility you have in your model? And if you could remind us what your concentration in revenues is on maybe your top 3 or top 5 clients.

Yes. So I'll start in reverse order. We don't have any material, to the business, single clients or a group of top 5 or so clients. So we don't typically go into specifics, but if we had a material client, we'll certainly talk about that.

As far as transition risk, that -- we're in a servicing and outsourcing business. That risk is out there for everybody in this business. I think our client retention rates being in the very high 90s points to the fact that we've managed that risk very well over the years. I think it all comes down to execution on what you have in front of you of the services and the power of your technology and people. And I think we feel pretty secure in those.

Typically, I think we've covered this in Q2. The risk we run in the Private Banking segment, when I look back to history, with the majority, you see transition. While we have had some client service or client movement outside of M&A, most of it comes from M&A. When a bank is bought by another bank or a wealth manager is bought by another wealth manager and if that large organization is not a client of ours, typically, that's when we will lose a client. But as I've also said, the silver lining in that is for us, they become an immediate prospect for us again.

And the next question comes from Owen Lau with Oppenheimer.

So the expense is slightly better than expected, and I think it declined sequentially. Is there anything you want to call out for that expense discipline? I think you mentioned that you'll continue to make investment, but it's a sign that it will start to tail off?

Besides expert management, no, kidding, I don't -- we did -- as we mentioned in Q2, we took a good look at what our expenses are and tried to manage them pretty judiciously, and we'll continue to do that through the year. That does not mean that -- certainly, as Dennis mentioned, we will have some pickup in expense due to compensation that we do have operations folks in private bank. So -- but again, we'll manage that and certainly manage as best we can. But I was happy with the results, and the team is working very hard on that as expected...

We will now go to Robert Lee with KBW.

A couple of quick ones. First one is just kind of on bank M&A and its impact. I mean I know sometimes you win as with First Horizon, sometimes it doesn't go your way. But more broadly, as bank M&A feels like it's been pretty heated and maybe likely to stay that way, does that at all impact kind of the conversations you have with prospects in terms of their willingness to kind of go forward or go down too far down the path if there's just so much kind of activity going on around them? Or is that not really a factor just in the kind of the day-to-day prospecting and trying to move the pipeline along?

Yes. Rob, I'd say I don't think it's too much of an impact day-to-day unless the prospect we're talking to is down the path already. And that becomes pretty evident when we start negotiation or discussions or if we reach out to them and they're resistant to start a conversation. They are typically the ones you'll see that are in process.

Other ones, I think they view it just like us. It's a part of the business right now, and they're making their strategic decisions that they have to go forward to grow their business. So we really don't see it being a big fear or hurdle in the sales or prospecting process.

Okay. Great. And then maybe as a follow-up on the backlog. Could you just remind us kind of how you currently expect that backlog to kind of fund over the next 2 years? And is Wells Fargo still in the backlog as part of that or have they dropped out and went way?

No, I appreciate that, Rob. So yes, the Wells Fargo, the net up would be in that backlog. And the way we're looking at it right now of that approximate $72 million backlog, about 61% of it, we expect to come in, in the next 18 months, the remainder probably in the following 18 months.

With that said, we have seen certain prospects where we expect a delay, but it will be a short-term delay, probably more of a 3- to 4-month delay. As you know, the pandemic has hit development centers pretty hard over the past 18 months. So I think getting some development done in certain of our clients and prospects has taken a little longer. So I don't think it will dramatically change those time frames as laid out, but there could be a couple that move here or there.

And next we go to Ryan Bailey with Goldman Sachs.

So just a quick follow-up to Rob's question. If you can't comment, I completely understand. But it will be in sort of that first 18 months of the backlog or the second 18 months?

It would be in the second. The reason is, Ryan, is we just don't have a date on that one.

Got it. Okay. And then, Steve, I think you had said in some of your recent commentary that feel like for the segment, you'll be heading towards a more sustainable and accelerating margin as we sort of exit this year. Now that we're kind of nearly 10 months through the year, does that still feel like the right case? And how much of that is based on the matriculation of the $72 million, call it, like over the next 6 months or so?

Yes, Ryan. So that's one of the goals. We're not there yet. I feel we're getting closer to a point where, again, I can say we're on more of a sustainable and accelerating margin level. We still have some things to navigate through that, and I mentioned, through the year. Us getting to that sustainable margin, really, the 2 main pieces are us matriculating that $72 million as well as us managing and looking to rightsize certain expenses.

And then the third piece of that or the third leg of the stool will be us continuing to fill the backlog with new sales as we matriculate the sales that are in there.

Got it. Okay. And if I can sneak one more quick one in. Just on the RIA or the larger scale RIA opportunity, any sort of advancements there, anything that's developing or [percolating]?

No. I think the team is working very hard building the pipeline there. We continue to go down the path. We see that as a big opportunity for us, but nothing to report yet.

And we do not have any more questions in the queue. You may continue.

Thank you. So I'll turn now to the Investment Manager segment. During the third quarter, our momentum continued in the segment with continued strong growth from both new and existing clients. For the third quarter of 2021, revenues for the segment totaled $147.4 million, 19% higher as compared to our revenue in the third quarter of 2020.

Profit for the third quarter for the segment of $57.8 million was 31.4% higher as compared to the third quarter of 2020. Third-party asset balances at the end of the third quarter of 2021 were $861.6 billion, approximately $14.3 billion lower than the asset balances at the end of the second quarter of 2021.

This decrease was due to net client fundings of a negative $25.6 billion, offset by market appreciation of $11.3 billion. The net client funding decrease was driven by 1 client in-sourcing their lower fee liquidity product, resulting in a large drop in assets and a much smaller drop in revenue.

And turning to market activity. During the third quarter of 2021, we had another strong sales quarter with net new business events totaling $15.2 million in recurring revenue as well as recontracts of $15.8 million in recurring revenues.

Highlights of these events included: in our alternative market unit, we closed a number of strategic new names, while our land-and-expand strategy continues to resonate as sales to existing clients continue to be robust. SEI won the business of a large private equity fund in a very competitive sales process and is currently converting that client off competitor's platform.

A highlight of the quarter was our selection as a service provider to an $80 billion private equity manager outsourcing a fund for the first time, thus adding to our land-and-expand roster.

In our traditional market unit, we continue to add new business in all product lines with both new and existing clients. In particular, our business expansion in our collective trust and ETF solutions is robust. During the quarter, we added 3 new client relationships and expanded relationships with more than 25 clients. We had a multi-fund complex join our pioneering advisers and our Circle 40 Act platform.

In Europe, we continue to have solid cross-sales with growth mainly in our credit lines. And in the family office services unit, we continue to see steady demand for the Archway Platform from the single-family office market segment and strengthening demand for our outsourcing services in the multifamily office market segment. Our backlog of sold but unfunded new business stands at $30.1 million at the end of the third quarter.

Turning to the strategic side of the business. I am pleased to announce, on October 18, we acquired the assets of Finomial, an investor life cycle and compliance, cloud-native fintech firm that complements our platforms and solutions in our Global Regulatory Compliance services offering. While not financially material, this transaction adds complementary resources and expertise in cloud development and technology to our employee base. We are pleased to welcome Meredith Moss and the Finomial team to the SEI family.

Finally, during the quarter, we also received final approval on our Luxembourg servicing license, which allows us to start operating fully in Luxembourg. We've established an office and hired our initial staff and look forward to adding our servicing capability to this important jurisdiction.

That concludes my prepared remarks, and I'll now turn it over for any questions you may have.

(Operator Instructions) We will go to Owen Lau with Oppenheimer.

Steve, could you please remind us your criteria of doing M&A? And what area you think it's better to buy versus build?

Sure. So I mean I think our criteria has switched where if we feel we can get into an adjacent market, add capabilities and it's better served because the markets move so fast, doing it through an acquisition or a strategic partnership versus build, I think we're open for business then. And I think in Finomial's case, we came across a company with just a terrific group of assets from their technology to, most importantly, their people and their expertise.

And quite frankly, there's a kind of very tough labor market out there. And we looked at this and thought it would just be a great addition to a lot of the products we have in flight to adding some kind of firepower to the solutions products we have and really as we look to build things out for the future. So we just thought it was a very good match and it made sense for us.

I think as we look and go down the path further, and I think this is probably across the company, if we see that an opportunity comes to us that will help us get into a new market, whether that be an adjacent market or a completely new market or help us build out substantially our solution and platforms, I think we'd be very interested in that. We will not be interested in things just to gain market share or just to buy assets to gain market share. That's not strategic to us.

We're very focused on the benefits of an acquisition or strategic partnership, what comes after the actual acquisition. To us, that's the most important fit.

Got it. That's very helpful. And then in terms of the margin, how should we think about the margin going into next quarter and maybe even 2022? Because I think your margin came down a little bit, but you also mentioned that you're going to make some investments. So how should we think about margin?

I was hoping you were going to ask that. I think I've said this. At this point, I feel like the boy who cried wolf. I've said for the past 2 quarters, I do not feel where the margin is right now is sustainable, being up close to 40%. It did come down a little bit to 39-and-some-change this quarter.

I do believe, again, at the risk of sounding like the boy who cried wolf, we will see that come down and more in line with the mid-30s, maybe a little higher. And the reason for that is, we are obviously growing the business and expanding our sales. We're actually implementing those sales more rapidly than we have in the past. The market is very active. And we're actually bringing revenue before the expense of supporting that.

That, combined with the salary increases that Dennis mentioned, we believe will have an impact in Q4 and going forward. So that will normalize the margins back to where they were historically, we believe.

And we will go to Robert Lee with KBW.

You got my margin question already, but I do have a question kind of on -- I guess, nowadays, almost have to feel like on all these calls almost have to ask about crypto and crypto assets and capabilities. So I'm just kind of curious, and this will be a question for Wayne later, so be prepared. But the -- could you talk a little bit about, in your business, are you seeing a need or demand from your clients to start building out or providing more some of those capabilities, whether it's safekeeping, transaction, however you want to define it for crypto assets?

Yes, Rob. So I think we did cover this a little before. We not only see the need, we're already there. So we are supporting some crypto funds we have. We do see a demand from our client base. And we actually have quite a few inquiries from a number of our clients and prospects on our capabilities. So we do think there is a burgeoning demand for it.

What I'd say, though, is even with the ones we have, those funds are typically smaller. While we do see some adoption, it's not wide-scale adoption. So I think we're in the early innings of this still. I think there's still a concern about regulations around these, how they will take off in wide scale. But there is definitely a question we get asked, and we're getting asked a lot in prospecting meetings on capabilities around crypto.

So we actually have a cross-functional team across banking, adviser, IMS, looking at how this would impact platforms, operations, additional services we might have to offer. But right now, as far as IMS, we can at least offer the administration and outsourcing services around crypto funds.

And the question is from Chris Donat with Piper Sandler.

Just want to ask -- yes. Just with Finomial, it -- I thought I heard you say that it was cloud-native. And I'm wondering how you're thinking about the world and how your clients want you to think about the world in terms of single tenant or multitenant cloud? Or are your clients expressing a strong opinion? Or do they prefer data centers or on-prem, just where are your clients' heads right now in terms of architecture?

I think our clients are very similar to us. I think people realize we have to be on the cloud. I think there's obviously people who still have concerns, especially when you get into some more of the wealth managers and banking side. However, if you look across many of the large institutions, most of them have cloud initiatives or in the middle of them.

So we think they're kind of in line with us. We believe this is inevitable. We believe it's a key part of our future. And we believe that expertise in taking all of our platforms to be able to be cloud-native, multi-tenant is very important. So I think strategically, we're very well aligned with our markets.

And I apologize if I didn't get the name, but it is Rajiv Bhatia with Morningstar.

Can you remind us what your revenue mix is between traditional versus alternative? And how did the traditional versus alternative revenue growth rates compare?

So our split is about 55% alternative, the remainder traditional. Obviously, the alternative side of the business over the past several years has been higher, what I would say specifically for this quarter and what we saw the trend starting in Q2. Our traditional business had a strong showing as well.

So I would say it was close to split down the middle, maybe 55%, 58% alternatives, remainder traditional. But we are very excited to see kind of a strong push from our traditional clients as well as they expand out their passive management capabilities as well as look for some of our other services around our platforms and middle office.

And we do not have any more questions in queue. You may continue.

Thank you. So I'll now turn it over to Wayne Withrow to cover the adviser segment. Wayne?

Thanks, Steve. The third quarter reflected continued progress in the execution of our strategic framework. Third quarter revenues totaled $125 million. This 21% increase from the third quarter of last year reflects positive net cash flow as well as lower fee rates on some of our products.

Expenses increased compared to the third quarter of last year, primarily due to sub-adviser and personnel costs tied to our growth and, to a lesser extent, increased investments in our technology platform. Overall, the profit picture for the unit remained intact, slight pressure on asset management revenue rates.

Total platform assets rose to $96 billion at the end of the third quarter and included $82 billion in assets under management. Cash flow onto our platform during the quarter was approximately $1.4 billion. Of this total, $1.1 billion represented assets under management and $300 million represented platform-only assets. Like was the case in the second quarter, this quarterly AUM and total platform asset cash flow is the strongest we have realized in over 2 years.

I believe this is a clear indication that our strategy is working. Contributing to our growth in platform assets were 82 new engaged advisers during the quarter. Our competitive advantages are built upon the technology capabilities in which we have invested and continue to invest. To this end, we continue to integrate the Oranj platform, and our goal of a launch this year remains on track.

We are also continuing rollout of our fully digital account-open and proposal technology as well as enhanced mutual fund and SMA model management and trading automation. While there still remains much to be accomplished, we continue to make progress in execution of our strategy.

I welcome any questions you have.

(Operator Instructions) And we have Ryan Kenny with Morgan Stanley.

So heard the comments on your competitive advantages with the Oranj acquisition and some of the automation work that you're doing. So wondering if we could just get a broader picture update on the competitive environment. Specifically, there have been a lot of new entrants in the TAMP space. So I'm wondering if you're mostly competing today with the big players like Envestnet and AssetMark? Or are you seeing more competition from some of the newer entrants?

Yes. I think, to be honest, it will be a mistake just to focus on other firms that compete in this space. I think you also need to look at the broker-dealers that are -- most of our advisers are affiliated with. And they're building sort of complementary platforms where people could take the business in-house. So that's also a competitor, and you might not see that as much.

So we really compete against those proprietary platforms as well as an AssetMark or an Envestnet or one of these other people. But I think for us, our advantage is we continue to gain additional traction in the market acceptance of our platform, in the TAMP space, I think that our strong technology, which really give us an advantage in that market.

And our next question is from Robert Lee with KBW.

Can you just kind of refresh our memory on your new cash flows, say, the $1.1 billion? Just how should we think of that from like an aging perspective? And what I mean by that is, I guess, my impression has always been that new advisers or recently added advisers tend to obviously be kind of the -- tend to be bigger drivers maybe of net flows, whereas advisers who have been on the platform for a while, have been around, maybe their books of business have less organic growth baked into them.

So is that kind of still the case? Or are you seeing any kind of changes in kind of how the book of business is flowing overall? Or is it still skewed towards the newer advisers?

Yes. I think -- I mean you're right. That has always been the case, and we still look at it that way. But the shift we're seeing, and maybe this is -- a lot of this is still in our new technology platform. We're seeing kind of reengagement and a lot more growth coming from our existing book to the point where if you look at the last quarter, most of the growth came from the existing book and not the newer book. And that's been one of our key to successes. They often stay, the best new customers and existing customers. So I think there's been a little bit of shift in that traditional view.

Great. And then maybe I'll ask the same question I just asked. Steve with -- on crypto. So -- but -- are hearing from some of the brokers and others who report their -- more of their advisers are getting asked about adding crypto to portfolios or having the capabilities. So can you maybe just talk a little bit -- Steve obviously talked about it some. But are you seeing that same from your kind of adviser base and that you have to kind of build that -- spend more time or money or whatnot building that out? Or just kind of curious what you're seeing there.

Yes. I mean I think you need to sort of divide it into 2 separate items. The first Steve addressed, and that is how does crypto fit into your whole processing capabilities and your platform capabilities. And also I'd refer to Steve's comments with which I agree. And we need to continue to build out that capability. And a lot of that supports kind of a more of a custody/trading capability.

Now the second question is how does it fit into an investment portfolio and have you modified your investment strategies to incorporate crypto into asset allocation into the portfolios that you or making available or that you advocate for your clients. I think we're still studying that right now. I don't know that we have an answer for you on that right now. The processing capability is one and how it fits into the investment strategy are different conversations. We're further along on the processing side.

And then the next question is Ryan Bailey with Goldman Sachs.

So I was just wondering the -- your order was very strong this quarter, accelerating over the last quarter. I think generally, we're seeing accelerating order trends from some of your peers as well. And clearly, there are some term-specific tailwinds which are helping SEI. I was just wondering if you're hearing anything from the new advisers who are joining as to why they're more willing to outsource to these TAMPs now relative to, call it, 6 or 12 months ago, if anything has changed or is that pent-up demand or is there something like that?

Yes. I don't know if I call it really pent-up demand. I think that -- what I'm seeing is as we have further enhanced our technology platform and now when we look at some of the capabilities sort of I mentioned earlier in which we are investing, I think our technology platform -- and this is not just -- we call it sort of Techstodian, the entire business platform, including custody, as that becomes more and more compelling, people are more and more willing to make a change. So for me, I would say that's the dynamic that's going on out there.

Got it. Okay. And also just passing along appreciation for breaking out the platform-only assets in the disclosure. Thank you for doing that.

We do not have any more questions in queue. You may continue.

Okay. Thank you. With that, I will pass it on to Paul.

Thanks, Wayne. Good afternoon, everyone. I'm going to discuss the financial results for the third quarter of 2021.

Third quarter 2021 revenue of $85.8 million increased 8% compared to the third quarter of 2020. Operating profits for the third quarter of 2021 were $44.1 million and increased 6% compared to the third quarter of 2020. Both revenue and operating profit increases were due to market appreciation, positive currency translation, offset slightly by fee compression across the client base.

Operating margin for the quarter was 51%. Quarter end asset balances of $96.7 billion reflect a $7.1 billion increase versus the third quarter of 2020. This was due to market appreciation. Net sales events for the third quarter were a positive $310 million. Gross sales were $370 million. And client losses totaled $60 million. Third quarter new sales included U.S. not-for-profit, U.S. health care and U.K. Fiduciary Management. The unfunded client backlog of gross sales at quarter end was $2.5 billion.

As Al and Dennis mentioned, we completed the acquisition of Atlas, Capita's Defined Contribution Master Trust in the U.K. Subject to regulatory approval, the acquisition positions the SEI Master Trust to continue to deliver best-of-breed service with greater scale and more capabilities. The combined assets under management as of 9/30/2021 of the 2 trusts are approximately GBP 1.9 billion or USD 2.6 billion.

Presently, the U.K. DC Master Trust marketplace is GBP 80 billion pounds, according to Go Pensions Ltd and is growing rapidly. While not financially material, this transaction significantly increases our competitive presence in the U.K. DC market and demonstrates our commitment to the Master Trust clients and members. This transaction gives the SEI Master Trust additional scale, and the SEI Master Trust has a long-term track record of investment results dating back to 2007. These are important criteria when DC schemes evaluate candidates to serve their members.

In addition to the news regarding our U.K. Master Trust, we continue to focus on stabilizing our client base, distinguishing our OCIO platform and selling new OCIO relationships. We are advancing our ECIO platform with global large and mega prospects while making enhancements to the overall platform.

Thank you very much, and I'm happy to answer any questions that you may have.

(Operator Instructions) And we will go to Robert Lee with KBW.

Just curious. Maybe I have my notes were wrong, but I guess I recall that there was like a large -- I think it was like $3 billion or so of business that you thought you were going to lose in the quarter. Is that still out there? Or did I kind of misunderstand something last quarter?

No. Last quarter, we reported gross sales of $2.6 billion and losses of $2.4 billion. And the majority of that $2.4 billion that we reported is out as of 9/30, which is why the asset balance is down relative to the 6/30 asset balance.

Okay. I guess I misunderstood. I thought there was a -- something else out there, thought you may be losing, but I had the wrong number, I guess. Then maybe going back to the margin, I guess, it's as it's been, holding up really well, although, I mean, obviously, down from where it was a bit the end of last year and last quarter but -- or the first quarter. But I know you've talked about it getting back towards kind of out of the 50s range, but it's been -- it's pretty sticky.

So any reason that it should start to trend down a bit or you feel pretty comfortable that this is where it's going to be for the round year, give or take, for the foreseeable future?

Yes. I feel a little bit like Steve in the boy that cried wolf about the margin. But I do expect that there's going to be pressure on the margin percentage, given fee compressions on rebids, which we've messaged. Travel is increasing, which is good. So certainly not at the levels that we saw pre-pandemic. But we are out seeing clients and prospects, which we think is helpful in both retention as well as being able to distinguish ourselves in new business settings. We're hopeful that sales comp increases with greater production around OCIO.

And so just generally, given some of those macro things, we think there would probably be some margin pressure over time. We've been holding nicely in the low 50% and then investing back in the business, including the acquisition of Capita, which would be accretive to earnings we see relative to just profit, not profit percentage, but making an investment in that business and investment in salespeople as well as being able to get in the marketplace and compete in that very large market of GBP 80 billion.

So for those reasons, we're probably going to see ultimately some margin percentage erosion. But we hope by retaining -- returning to growth on the top line that the profit itself in absolute terms will increase over time.

Great. And then one last question. Kind of the client mix, if we think of kind of your pipeline on gross sales, any update on how maybe that's shifting more towards endowments, foundations, hospital systems, less DB? Just kind of curious how your -- how that's evolving.

Yes. We certainly have seen a switch over the years to endowments and foundations and hospitals and some of the non-corporate DB, whether that's governmental or multiemployer plan or DB plans that aren't being terminated. I mean that's the other thing that we look at when we are thinking about DB, defined benefit, for new business, not all plans are on a path to termination. And if they have a life cycle that's longer, that's still attractive because that's going to be around for a longer period of time.

So clearly, the mix is diversified more to what I would call evergreen or longer-term asset pools. So we're confident where we are in building the pipeline. One of the things that we really like with the larger end of the market segment is we have this continuum of OCIO to ECIO. So we have the ability of walking into a $1 billion foundation and, honestly, letting them self-select whether a delegation model makes sense for them or whether a model where we would help them be more efficient with an investment team makes sense.

We never had that before. So that actually may pivot some to go outsourcing because they may decide that, that's more palatable for them and also may pivot some to go to ECIO. But having that continuum, we're not forcing them into one of those categories, which has really been nice on the larger end of the market segment.

We have a question from Owen Lau with Oppenheimer.

Paul, just one quick one from me. ECIO you just mentioned, could you please talk about the progress there? Started generating any revenue or it's still in the investment and expend stage?

Yes. Owen, we've been at it for about a year. We announced it this time about a year ago. So we haven't gotten any over the goal on it yet. There's active suspects and prospects, and there's also an evaluation that we continue to do in enhancing the platform, specifically around the front-end capabilities and analytics. So a lot of nice work has been done. Suspects are turning to prospects, and we're hopeful prospects will turn to clients.

We've seen this reality before, getting the early ones or the harder ones, getting them over the goal line. But we're bullish and we're confident about the capabilities we have there. And again, I'll just harken back to the comments I just said and having that continuum to be able to go in the marketplace really gives the buyer a decision to choose as opposed to us pushing them one way or the other. So we're excited about that.

And we do not have any other questions in queue. You may continue.

Great. I'd like to now turn the call back over to Al West.

Thanks, Paul. So ladies and gentlemen, we are making progress on 2 fronts. On the first front, we are very fortunate to have kept our workforce healthy and productive, delivering a high level of client service throughout the pandemic. On the second front, we are building momentum throughout our businesses. Please be safe and remain healthy. Have a great day. Thanks for attending our call.

That does conclude our conference for today. Thank you for your participation and for using AT&T Event Services. You may now disconnect.