SEI Investments Co (SEIC) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the SEI First Quarter 2021 Earnings Call. (Operator Instructions) As a reminder, today's call is being recorded. And I turn the conference to our host, Chairman and CEO, Al West. Please go ahead.

Thank you, and 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 first 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. Now as usual, we will field questions at the end of each report. So let's turn our attention to the financial results of the first quarter 2021.

First quarter revenue grew 10% from a year ago, and first quarter earnings increased by 19% from a year ago. In addition, first quarter EPS of $0.89 grew 24% from the $0.72 reported in first quarter of 2020. Finally, first quarter asset balances grew by $3.4 billion, while LSV's balances grew by $7.9 billion.

During the quarter, we repurchased 1.2 million shares of SEI stock at a price of $58.11 per share. That translates into $66.9 million of stock repurchases. Also this quarter, we continued our investment into growth generating initiatives. The newest effort is One SEI, which is a large part of our growth strategy. As you will recall, One SEI leverages existing and new SEI platforms by making them accessible to all types of clients, all adjacent markets and all other platforms. Turning to revenue production. Net sales events in private banks and investment managers were $17.5 million, of which $13 million are expected to be recurring. On the other hand, net sales events of a negative $12.7 million incurred in the asset management-related units of investment advisers, institutional investors and banking's AMD.

In a few minutes, unit heads will provide more detail on their specific sales results in their new business opportunities. To grow and prosper in the future, we know that things will never be the same. So we have been busy adopting new mental models and realities. One such new reality is a remotely-distributed workforce. We have been planning how we work in the future and are acting on these plans. Fortunately, we have a lot of positive momentum moving into 2021. Currently, we have a strong backlog of sales and conversions in a number of key prospects late in the sales process. We have also made progress in strategically repositioning our asset management related business segments. We are poised and ready to capture the opportunities inherent in significant change.

Now this concludes my formal remarks. So I'll turn it over to Dennis to give you an update on LSV and the investment in new business segment. After that, our segment heads will update the results in their segments. Dennis?

Thanks, Al. Good afternoon, everyone. I'll cover the first quarter results for the investments in new business segment and discuss the results of LSV asset management. During the first quarter of 2021, the investments in new business segment activities consisted of the operation of our Private Wealth Management Group, our IT services business opportunity, the modularization of larger technology platforms to deliver on our One SEI strategy and other investments.

During the quarter, the investments in new business segment incurred a loss of $9.5 million, which compared to a loss of $11.4 million during the fourth quarter of 2020. Approximately $7.5 million is tied to our One SEI effort. Regarding LSV, our approximate 39% ownership contributed $33.4 million in income to SEI for the first quarter. This compares to a contribution of $30.6 million in income for the fourth quarter of 2020. Assets during the quarter grew approximately $7.9 billion. LSV experienced net negative cash flow during the quarter of approximately $4.8 billion, offsetting market appreciation of approximately $12.7 billion. Revenue was approximately $110.8 million for the quarter with nominal performance fees.

Finally, our effective tax rate for the quarter was 22.6%. We have also included in our earnings release, additional financial information and if you have any questions on any statistics, Kathy will be available to answer them.

With that, I'll take any questions.

(Operator Instructions) Our first question is going to come from the line of Owen Lau from Oppenheimer.

So Dennis, with the vaccine, could you please give us an update on your operating model in 2021, how does the vaccine change your view about the T&E spend, health care costs and other G&A spend for the rest of this year?

Sure. So where we sit today, travel is still very, very limited. In fact, it's -- we can count on one hand, not only the number of trips people have made, but the number of trips people are requesting to make. So it's a very limited amount of travel activity. But we certainly anticipate, as we move through the year and, I would say, particularly the second half of the year, after the summer, we might see a slight uptick in travel activity because we are starting to get some requests for folks to travel. Now that being said, it's -- I would say that if it has any impact on expenses, it's really going to be modest overall.

In terms of health care spending, there's really no trend change over 2020 per se, other than we have a slightly higher or larger workforce, which in and of itself, would drive benefit costs up. But I think if you're asking really based on the kind of anomaly we had in the third quarter of last year, I believe it was, that was really, I'd say, case specific with certain health issues with employees.

Got it. That's very helpful. And then you touched on LSV. I got some numbers from the LSV as well. So could you please give us a bit more color on this because I think in the first quarter, the reflation trade was quite strong. The growth-to-value trade was quite strong. Could you please talk about your view about how sustainable that is? And also how would LSV capitalize this trend?

Yes. I mean, their performance, relative performance was strong, both exiting the year and in the first quarter. So the good news is the value trade has certainly helped them. But in addition, their position in the value segment of the market has helped them even further. Now time will tell whether that value trade is -- want to persist for -- in this market this year and beyond. They certainly are going to stick to their knitting as a value firm. And if it does persist, and their outperformance were to continue, that would only bode well for their ability to compete and win assets, but also if clients start to rebalance back towards value within their overall portfolios, that should help them as well.

Our next question, we'll go to the line of Ryan Kenny from Morgan Stanley.

Just a follow-up on LSV. On the $4.8 billion of outflows, just want to get a sense of, was that more of a rebalancing issue or a lost client issue? And how should we think about organic growth in LSV going forward?

Yes. It was about 50-50. So about 50% was rebalancing and 50% was lost clients, mainly in the managed volatility product they have. In terms of the future, I mean, they had positive gross sales during the quarter. But again, back to the answer I gave to Owen, I think that if the value trade persists and their outperformance to that, I think that bodes well for their ability to capture not only assets flowing back to them via rebalancing, but also winning searches when firms who aren't clients look to find value managers to hire.

And then just a question on One SEI. I was wondering if you could give an update on the trajectory for that going forward?

Sure. So as we kind of look at the rest of the year, second quarter is going to look pretty close to the first quarter. And that's kind of how we had it even planned, forecasted out last year. And then we'll start to see -- and we saw a drop-down from fourth to first. Second quarter probably will be in the same range. It could be a little bit higher than first, but not materially so. And then the second half of the year, third quarter, fourth quarter, will see additional step-downs as we finish the work. Some of the One SEI work in terms of modularization is targeted at a client implementation later this year, and we have to finish that work arguably in the second quarter to get that -- those software releases in production so they're well tested and vetted for the client. So we're on track, and I think things are trending the way we had expected them to.

Next, we'll go to the line of Chris Donat from Piper Sandler.

Just quickly wanted to combine the 2 prior questions and thinking about the -- your total expenses on a consolidated basis for the quarter. I mean, given sort of like there should be a positive impact from One SEI decreasing over time, but probably higher expenses further out from some rebound in travel. Is it fair to think about the first quarter expenses as a reasonable run rate for the full year?

I think -- I mean, I think as we talked in the past, we'll see some inflationary growth as the year progresses. So the 1% uptick from fourth to first, I don't -- I think there'll be a little more pressure on expenses than that over the next few quarters. We have, as you'll hear from the unit, from Steve, in particular, we have a pretty big backlog of clients to install. That will have some impact on hiring. I don't know that travel will really move the needle, kind of offset the tick down in One SEI spend. I don't think travel will be that significant.

We did get a little bit of benefit in the first quarter on option expense. We had a couple of people leave and allow us to reverse some option expense. But that being said, I think expenses -- they'll definitely -- I should say definitely, but we expect them to tick up as we progress through the year. But again, our job is to continue to try to execute as best we can, is to keep our spending targeted at the right things, being as productive as possible, but without giving up some of the investments we think are critical to our future. That will continue.

(Operator Instructions) Next, we go to the line of Robert Lee from KBW.

Just question -- just kind of curious at a high level, as you think about notwithstanding some spending, and I think we all hope spending comes back on travel or something similar in the second half of the year, but in a way, but more broadly, as you think about changing the business model in more of a distributed workforce, maybe it's too early, but do you have any kind of initial thoughts on how you think that plays out into -- over long-term expenses? Does that -- there's an opportunity here to diminish our real estate footprint? Or does the cost of kind of having supported this first sales force kind of pretty much offset any potential benefit? Just kind of curious, your initial thoughts on that.

Yes. The pandemic hit at kind of the wrong time relative to our own real estate planning because we were about 75% done, building a brand-new building here. And a new campus, arguably. We call it the North Campus. So we finished that building, and it's ready to be occupied. The reason we built that building was to eliminate a couple of leased facilities that we had in the Oaks area, and we were able to do that. So we got rid of those leased facilities but all those people went home instead of to Oaks. So I guess, it's safe to say that we have plenty of capacity.

So I hope in Dennis McGonigle's future, there is no longer the need to build another parking garage. We do expect the bulk of our workforce, though, over time, to return to our offices around the globe, but let's focus on Oaks at a minimum in roles that are more hybrid. So a few days a week type roles. So we will optimize our capacity as we kind of manage our workforce back to offices, providing them with a lot more -- employees with more flexibility in terms of home-work environment versus just an office-work environment.

So I don't see the cost changing much. Our lease base in our bigger offices, Ireland, U.K., Indianapolis, those leases got some time to run. And to the extent we get the end of those lease terms, and we don't need the amount of space we have, certainly, we would have the option to shrink. Right now, we're under lease, so -- and they're not really -- it's not really facilities that lend themselves to subletting, that's even possible.

And at this time, I have no further questions in queue. Please go ahead.

Great. Thanks. Before I turn it over to Steve, we would like to remind everyone 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 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 Securities and Exchange Commission. We do not undertake to update any of our forward-looking statements.

And with that, I'll turn it over to Steve.

Thanks, Dennis. Good afternoon, everyone. I'm going to talk about banking first and then as usual, I'll turn it over to investment managers. So let's focus on banking. During the first quarter, we continued our momentum in the market while also executing on our One SEI strategy, and we're able to continue to prudently manage expenses, which aided in the profit for the quarter.

First quarter 2021 revenues totaled $117.6 million, which was up approximately 4% from the first quarter of 2020 due to higher recurring revenues. First quarter 2021 quarterly profit of $6.9 million for the segment. It was up approximately $4.3 million or 168% from the first quarter of 2020 and up 49% from the fourth quarter of 2020. This is primarily due to expense management.

And turning to sales activity. For the quarter, we closed $8.7 million of gross recurring sales events, which resulted in $3.6 million of net recurring event for our investment processing business, offset by a negative $2.5 million in asset management events. This offset from asset management brought our total net recurring events for the quarter to approximately $1.1 million for the segment. Also in the quarter, we closed $2.9 million in onetime revenue. While we were encouraged by the $8.7 million in gross sales events for the quarter and the momentum with new business that continues, we had to digest the headwind of an uptick in M&A activity in the industry, which negatively affected our sales total for the quarter.

This is a headwind we'll have to deal with this year as there are several other clients of ours who have been acquired; however, we remain very bullish on the new sales activity we continue to experience. As previously announced on our fourth quarter 2020 call, we closed 3 SWP agreements in the first quarter, 2 of them new clients to SEI and 1 an existing client from TRUST 3000. I outlined the details of these events on the previous call, but to summarize: these new sales included Bangor Savings Bank, a TRUST 3000 client since 2011, who will convert to SWP in 2022; a West Coast large community bank who will migrate to SWP from a competitor platform in the first half of 2022, and who is also a candidate for our One SEI strategy. We believe this firm has an opportunity to leverage additional SEI platforms and solutions and is currently evaluating SEI's asset management distribution products.

And finally, our third signing was with another new client, UMB, United Missouri Bank, who will migrate their private wealth management book of business to the SEI Wealth Platform late this year. We are proud to welcome UMB to the SEI family. Additionally for new sales in the quarter, keeping our One SEI approach in the forefront, we were able to cross-sell our Archway Platform to one of our long-term TRUST clients as well as cross-sell additional services to several other clients, including an upsell of components to a client who is migrating to SWP. During the quarter, we also had 6 client recontracts securing another approximately $9 million in recurring revenue. As an update on our backlog, our total signed, but not installed backlog, is approximately $77.3 million in net new recurring revenue at the end of the first quarter.

From an asset management standpoint, total assets under management ended the period at $25.1 billion, which was down 1.6% from the fourth quarter of 2020. Our cash flow for the first quarter of 2021 was a negative $885 million. The majority of this outflow is due to a single asset management client who have purchased one of our asset management products and decided to sell-out of that product completely. As we continue through 2021, our focus continues to be on maintaining our strong momentum in the market, continue expanding our business with clients and expanding into new markets to increase our opportunities. Key to this will be our One SEI strategy and being able to increase our growth opportunities by unlocking all the assets and platforms SEI has to offer across the company. We will also focus on driving scale in our business as we push towards providing a sustainable and accelerating margin growth in the future. We remain excited and optimistic on our growth opportunity.

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

(Operator Instructions)

Our first question will come from the line of Ryan Kenny from Morgan Stanley.

Couple of questions. First one on the $22 billion drop in AuA for private banks. Just wondering if we could get more color on that, is that all from M&A? And how does that impact the forward look on revenues?

Yes. That was a client who looked like -- it was a fund family who looked more like an asset manager client, so we moved that fund complex to IMS. So it's really just an internal move. And yes, it's a lower fee product, so there wasn't a great deal of revenue associated with it. But from a servicing kind of lining up segment opportunity, it was better to go to IMS.

Got it. And then just as a follow-up, wondering if you could give an update on the competitive environment you're seeing with some of the other wealth management platforms out there. Where are you seeing the most pressure and where are you seeing the most success?

Yes. I would say the competition is -- there's no notable change, except people -- our competition likes competing with SEI, which is nothing new to us. For the wealth managers out there that are looking for a new platform and much more capability, we certainly hit that on all strides. I do see some smaller boutique providers coming in and providing bespoke offerings or going after a piece of the puzzle. But again, I think we've designed our platforms and our solution to really address the whole puzzle for wealth management. And with our One SEI strategy, we'll be able to lean into that now and do it in a more staggered fashion to make it more digestible. But for us, we feel very well positioned both here and overseas with our capabilities and our platform and technology.

Next, we're going to go to the line of Robert Lee from KBW.

A couple of questions. The first thing is on your comments on industry M&A, maybe there's some headwind there. I guess in the past, because it's an industry that's been consolidating for years, I guess. But there's been -- everybody has kind of felt there's as much in the consolidation opportunity as there is risk. But I don't want to read too much into your comments, but it kind of suggests that maybe right now, what you see in front of you, you're kind of expecting there's more likely to lose some of the relationships due to M&A? Or is that just trying to be extra cautious? How should I kind of think about it?

I'd say, Rob, it's a little bit of both. So listen, a number of our clients, and I think we've talked about these in the past, it's been in the press, they've been acquired. One was acquired by competitor from overseas that's kind of lining up to come into the U.S. I don't feel very confident that we're going to keep that business. The other ones, I just think where we see it trending, I think out of a caution, I would say, we're lining up thinking that most likely because of other priorities that the acquiring organization, it most likely will not stay with us.

But yes, when you started off the commentary, M&A, we've dealt with this in the past. It can be a benefit to us or it can be a headwind. Over the past couple of years, we've had some M&A that's been very positive for us. And unfortunately, I think we're going to have a couple that are going to be negative for us this year. That's going to be a headwind, but I view it as a temporary headwind. That does not take away or distract from the momentum we have and I think, quite frankly, my view of it is, even if we do not retain a client because of acquisitions, that gives us another prospect to go after in a larger way.

Okay. Great. And then maybe as a follow-up, and maybe this goes to the pipeline. I mean do you have any sense, I mean, interest rates go up, bank earnings to go up, credit cost seem to be well controlled. So I guess, bank earnings generally seem in better shape versus kind of a year ago potentially. So do you see that translating at all into your pipeline that they're engaging more, they seem more willing to start spending some of the money or at least they feel more willing to kind of engage and think about change and changing technologies?

Yes. It's a great question, Rob. But the way I'd put it is this, we see a number of forces coming to bear that I believe is causing managers, not just banks, but wealth management across the board to relook at their business model, and I think it bodes well for us. I think you've heard us say time and time again before, disruption in this business usually works out for us and presents opportunity. This pandemic has been a big disruption. I think this is causing a lot of people to reconsider outsourcing and strengthens the outsourcing position. You certainly have interest rates and the capital position of banks being in a better position.

But the other piece is, many of these large wealth managers and banks know that they need to make a decision and need to upgrade their technology to drive scale and to execute on their strategic plan. Many of them have pushed that decision. And I think we're getting to an inflection point now where that pushing of the decision cannot be pushed anymore. And I think this is why we leaned in with this One SEI strategy. One of the benefits of that is, we can make our very powerful transformative solution, more digestible and able to do this in steps, and I think that will play well as these forces come together.

Okay. Great. And if I can just probably -- between little numbers, I think I just missed on the asset manager contribution in the quarter and then the onetime revenues, were those both negative and then positive $2.9 million or did I stop writing down?

Well, I think the asset manager of the assets, I said, were down. We were down cash flow wise, $885 million. And what was your other one, Rob?

The onetime revenues were...?

Onetime revenue was $2.9 million. But also, if you're asking for asset management as far as sales, is that what you were asking?

Yes. Yes.

Yes, so the sales were around, I think, it was negative $2.5 million. So it was negative $2.5 million that went against our gross of $8.7 million.

Next, we're going to go to the line of Ryan Bailey from Goldman Sachs.

So I just had a quick question on some of the implementation outlook for the backlog. So it looks pretty healthy, the growth in the backlog quarter-over-quarter. As we look through the costs of the yield, how are you thinking about that getting implemented and how that could contribute to revenues?

So I'm thinking about it doing it on time. Right now, we have people scheduled, and we're in line, things progress. We didn't have any final implementation schedule for Q1, but we do have others scheduled throughout the year. If you look at the backlog now, and I've been giving this kind of 18-month kind of parameter, right now, about 61%. And the last time we talked, that was around 50%, about 61% is probably due in the next 18 months. And the remainder after 18 months, probably more into 24- to 26-month period. And we're looking to keep that on track. Could some of the push? Yes. I don't think materially, we're working with clients that might have more troubles or slowdown on their side, getting implementation -- downstream implementations on their side. But for the most part, I think we're intact and on time.

Got it. Okay. All right. That makes sense. And maybe just a separate one. And to the degree you can talk about a specific client. I'll give it a shot. I was just wondering, one of the drivers you've been talking about for the business is being your asset management and wealth management sort of coming close together and SEI being at a competitive advantage with that. I was just wondering with Wells [Fargo's] (added by company after the call) sale of -- majority sales of their asset management business, how that impacts your relationship with them? And what sort of impact it could have, going forward?

Yes. So I don't think it changed our relationship with them. Obviously, Wells is going through their own rationalization and working on their business. We have a very close relationship and close contact with Wells. We knew about that they were going to be divesting of that business. We service some of that business, but it's not a majority of the business, and we don't think we'll have a material impact on our revenue. But we're still focused and, ironically, we think this is good for us because Wells is normalizing and rightsizing their business for the future. And I think once they do that and get to a -- or getting to a good spot, we'll be able to engage them on how SEI can continue to support them, and increase our support and business with them.

Awesome. Can I sneak one more in?

Sure.

I was just wondering about the -- I think you said that you upsold a client who was converting from Trust 3000 to SWP. I was just wondering if you could give us a little bit more detail there, maybe what components that was, how much of an increase in the revenue?

So are you talking about the cross-sales, Ryan?

Yes, I think so. Yes. Yes.

Yes. So obviously, I'm not going to get into the client. But what I'd say is -- and I think this is an important factor, before you've heard us talk a lot about new business, but we didn't spend much time on cross-sell. As I've told you, part of our strategy, I know we use -- overuse, here it was land-and-expand. But one of the key points of our One SEI strategy was to unbundle parts of our platform, so people could digest and move quicker. And during that process, as we got the client in, if there was opportunity to upsell them or add other functionality.

For example, in this case, to add front-office capabilities because they were just focused either on the back or middle office, that would be an opportunity and that's what happened in this case. And we do think as we lean in more, there'll be more opportunity for us on this -- on clients that are converting as well as new sales that we have. So we view that as a very positive move forward for us. It gives us another lever to pull with as we expand and grow the business.

And at this time, we have no further questions in queue.

Okay. So I'll -- with no questions, I'll turn it over to Investment Managers segment. So turning to the Investment Managers segment. During the first quarter, we continued our momentum in this segment and saw strong growth from both new clients and expansion with existing clients. For the first quarter of 2021, revenues for the segment totaled $136.4 million, which was 17% higher as compared to our revenue in the first quarter of 2020. Profit for the first quarter for the segment of $53.4 million was 26.1% higher as compared to the first quarter of 2020. Third-party asset balances at the end of the first quarter of 2021 were $831.8 billion, approximately $71.4 billion higher than the asset balances at the end of the fourth quarter of 2020. This increase was due to net client fundings of $38.6 billion as well as market appreciation of $32.8 billion.

In turning to market activities during the first quarter of 2021, we had a strong sales quarter with net new business events totaling $9.3 million in recurring revenue as well as recontracts of $8.7 million in recurring revenues. These events this quarter were diverse and spanned our entire business. They were reflective of the current market dynamic, which is highlighted by a larger amount of what we would call singles and doubles versus larger scale mandates.

Highlights of these events included: in our alternatives market unit, we closed a number of strategic new names, while sales to existing clients continue to be robust. SEI was selected to provide fund administration for several new hedge funds. SEI was also selected after an extensive RFP process by a $25 billion fund of fund to utilize the SEI Trade platform. Momentum also continues in the private equity and private debt space, and we continue to launch funds with both new and existing clients. In our traditional market unit, we continue to add new business in all product lines with both new and existing clients, consistent with our land-and-expand strategy.

Two new clients selected us to take advantage of our Middle Office Services platform. A multi-fund complex joined our pioneering Advisors' Inner Circle '40 Act platform, and we also added a new ETF client to our turnkey Advisors Inner Circle Trust Platform. In Europe, we continue to have solid cross sales. And finally, in our family office services unit, we signed multiple new name single-family office clients to the Archway Platform and continue to see strong demand from this industry vertical. Our backlog of sold but unfunded new business stands at $35.6 million at the end of the first quarter. As we progress into 2021, we will continue to focus on our growth strategy and look to continue our strong momentum in the market. We have a strong pipeline across all segments, great momentum and a leading platform combined with exceptionally talented and experienced people. This, combined with our continued execution of our strategy, bodes well for the future.

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

(Operator Instructions) We're going to the line of Ryan Kenny from Morgan Stanley.

Steve, just want to get an update on how you're thinking about margins from here? And how sustainable the 39% is?

Thanks, Ryan. So margins, my view has not changed from before, and I know I sound like a broken record. I feel comfortable with the margins in the mid-30s. As I said last -- I think it was last quarter, I can see that up tip into the 36 range. This quarter, we had a number of things, which I think impacted the margin positively. One, we implemented a lot of new business, and the labor market is a little tighter here. So we implemented a lot of the revenue ahead of us bringing some of the resources for it. So our personnel expense was a little low compared to the revenue. And well, obviously, that will switch as we go through and switch certainly by Q2.

Secondly, we had some kind of onetime expense adjustments that helped us some around compensation, as Dennis mentioned, that won't repeat. So I think if I took those out and look at the margin, we'll probably be more in the 36% range, which is again where I feel comfortable that this business is at, especially as we continue to invest and continue to build out our platform and solutions for sustainable revenue.

Got it. And then just a question on digital assets. We have seen some announcements from a few investment servicers over the last few months, outlining plans to offer servicing, accounting and custody of digital assets. Just want to get a sense of how that could potentially fit into your space and if you're seeing any demand from your customers to offer something similar?

Yes. So we've actually, Ryan, we're already providing services for a handful of crypto funds. And it is something strategically we believe, and we've already had discussion with numerous of our clients, that they have plans to set up funds around this. So it is something that strategically we are on. Obviously, we don't provide custody, but we are obviously linked and integrated into custodians. But it is something we do think that we're going to have a larger servicing footprint on in the future.

And next, we're going to go to the line of Robert Lee from KBW.

Steve, since you already gave us the backlog, I guess I'll just ask one another quick question. Just kind of curious, you've seen -- I mean, there's obviously been plenty of M&A in the asset management industry to more so in the traditional versus alternative space, certainly some there. Just -- is there anything we should be thinking about as that kind of plays out, that there's any kind of impact on the momentum in this business? It seem like it's been -- but I'm just kind of curious to know your thoughts on that.

No. So I think, Rob, and I missed a little bit there, I kind of cut out. But listen, the alternative side has been a driver for us as well as the industry for a number of years. However, what I'd say, and I think we saw this towards the end of last year, our traditional business is resurging again. And I think it's resurging for a number of reasons. The managers in that space are under pressure as active management comes under pressure. And they're rethinking their business model and how to drive scale. Outsourcing and the capabilities we have in the platform resonates very well when they're looking at that. If you look in this quarter sales, a good bit of it was our traditional business. So we're very happy with the progress.

We see a huge need for our Middle Office Services platform. We also see a need across our CITs and our ETF platforms. So that's an area that I expect good growth from this year. And I think as managers kind of rethink their business model, we stand in a good position to service them and give them an offering that will help them with that.

And at this time, we have no further questions in queue. Please go ahead.

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

Thanks, Steve. During the first quarter of 2021, we continued execution of our strategy, including improvements in our sales and marketing process to fit a virtual environment. The offering of bundled fee and our new unbundled fee investment products and continued enhancement and delivery of a completely integrated front to back office technology platform, including custody.

First quarter revenues totaled $113 million. This 11% increase from the first quarter of last year reflects the impact of AUM growth as well as lower fee rates on some of our products. Expenses were up compared to the first quarter of last year, primarily due to an increase in direct costs and, to a lesser extent, expenses associated with our purchase of the Oranj technology platform. Same factors influenced the expense increase from the fourth quarter of last year as well as inclusion in the fourth quarter expenses of some nonrecurring saving.

Overall, the profit picture for the unit remained relatively intact despite pressure on our asset management revenue rates. Assets under management rose to $77.4 billion at the end of the first quarter and total platform assets stand at $90 billion. Market appreciation drove this increase. We did achieve strong cash flow growth in our newer unbundled fee product, but this was mostly offset by net redemptions in our older embedded fee products, primarily in our actively managed mutual fund wrap program. Total net cash flow for the quarter was $306 million. Of this total, $125 million was in assets under management and $181 million was in asset under administration. We recruited 52 new advisers during the quarter.

During the quarter, we purchased the assets of Oranj Technologies. This acquisition was a furtherance of our front-to-back office technology strategy. While the financial size of the transaction was modest, we feel the end investor collaboration platform we acquired is compelling and will unlock new opportunities for tech-forward client engagement. We intend to fully integrate this platform into SWP and begin the rollout to our advisers in the second half of this year. In addition to this platform asset, the acquisition included a team of skilled cloud technology professionals. During the balance of this year, we expect to incur a $5 million expense increase as we integrate and roll out this platform.

While there still remains much to be accomplished, I feel we are making progress in that 3 focus areas: evolving our sales and marketing process to fit today's digital world, designing and offering investment products responsive to today's investor, and delivering a compelling front-to-back office technology platform incorporating custody. It is my opinion that achieving success in these areas favors companies with our skill sets and assets. I'll now welcome any questions you have.

(Operator Instructions) We're going to the line of Ryan Kenny from Morgan Stanley.

Just a question on the Oranj acquisition. I wanted to get a sense of how it fits into your tech strategy in terms of what specifically it enables you to do, that you were unable to do before? And then from here, are there any other gaps in tech or capabilities that you're looking to fill in?

Well, at the highest level, Oranj was an end investor collaboration tool. So we do not have a strong presence in the end investor collaboration tool. So if you look at it in terms of specific functionality, things like account aggregation, a digital document vault, secure messaging and collaboration between investment advisers and advisers and end clients, it functions such as that. It is also a completely cloud-native technology platform and will be in the forefront of us moving all of our end investor technologies into the cloud.

And then are there any other gaps or capabilities that you're looking to fill in from here?

Yes. I mean, I think, when you look at it, we're always going to -- we'll always enhance our end-customer reporting, and we expect it to be able to do that. If you look at the collaboration on the financial planning side, how you can sort of review and modify financial plans in real-time is something we have on our roadmap. It's items such as that without telling the world what our tech strategy is.

And next, we're going to go to the line of Ryan Bailey from Goldman Sachs.

Wayne, I'm sorry, I missed the number. Did you say for the AUM side you had inflows?

Right. Total new assets on the platform were $306 million in net cash flow. Of that total, $125 million was assets under management and $181 million was assets under administration.

Got it. Okay. I guess, just sort of a question as you think about the bundled versus unbundled approach. It seems like you're having -- you've had several quarters now of really good momentum on the unbundled or AuA approach. I was just wondering if you can help us think about why it might be that advisers are choosing the AuA approach of AUM for you guys? Is it just sort of an investment selection decision? Is there a pricing component to it at all or maybe something else that I'm not thinking about?

Yes. I think you hit all the high points. It's -- as you get down into the weeds, a little more complex with that. I mean some of the products, at least we have one that's more expensive than existing products. I would say -- if you haven't generalized, I would say the unbundled products are a little bit more expensive -- excuse me, a little bit cheaper when you add all the components together. But some people prefer having the bundled price, even if it is a little more expensive because it just seems cheaper. It is not a whole different set of line items. But the major difference, I think, of the unbundled and bundled is it allows you to sort of deconstruct the whole investment management process.

So that if you want to charge separately, for example, for tax management, take that as an example, you can do that in an unbundled structure, where if it's everything is bundled, you have to offer all the components of asset management together, whether an investor values it or not. So take -- tax management would be the easy example. If you have qualified money in tax management in the pricing of the bundled product, you pay for it, even though you really don't need it. So this allows us to customize the pricing and the delivery of the products to what the investor really needs. And I think that's what's resonating.

Got it. That makes sense. And then I know I asked this question last quarter, but if I can ask the question again. If you could do sort of rough justice on the split, of the AuA floors between sort of like new advisers, those existing advisers sort of converting existing books of business from AUM to AuA?

Yes. I think right now, the major growth is -- the majority of the growth is in the new advisers at this point.

And at this time, I have no further questions in queue.

All right. Great. With that, I will turn it over to Paul to talk about Institutional Investors.

Thanks, Wayne. Good afternoon, everyone. I'm going to discuss the financial results for the first quarter of 2021. First quarter 2021 revenue of $84.5 million, increased 7% compared to the first quarter of 2020. Operating profits for the first quarter 2021 were $45.3 million and increased 11% compared to the first quarter of 2020. Both revenue and operating profit increases were due to market appreciation, positive currency translation, offset slightly by negative client fundings.

Operating margin for the quarter was 54%. Quarter end asset balances of $99.4 billion reflect a $19.8 billion increase versus first quarter 2020. This was due to market appreciation. Net sales event for the first quarter were a negative $2.7 billion. Gross sales were $1.2 billion and client losses totaled $3.9 billion. First quarter new sales were diversified across U.S. endowment and foundations, governmental and health care. The client losses for the quarter were predominantly due to unsuccessful client rebids and DB curtailments. The OCIO market is highly intermediated and numerous OCIO search consultants are active in getting asset owners to evaluate their incumbent OCIO firm.

We were impacted by this in the first quarter and it is likely this trend continues given our tenure -- tenured client base, particularly in the corporate-defined benefit market. The unfunded client backlog of gross sales at quarter end was $865 million. We continue to focus on stabilizing our client base, distinguishing our OCIO solution, selling new OCIO relationships and advancing our ECIO proposition.

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

We're going to go to our first question from Robert Lee from KBW.

Just kind of curious, I mean, so I mean, given the commentary around the heavily intermediated channel, I mean, I guess, assuming that's always been the case, but what's kind of changed more -- maybe more recently, that it seems like maybe there's some acceleration in the pace of activity? Is it just coming out of the first half of last year, there was like maybe pent-up demand. I mean, how should we think of that?

Yes, good question. The OCIO search consultants have kind of exploded over the last 3 or 4 years. And certainly, the velocity has increased even more in the last 12 months. What we witnessed last year in the first couple of quarters, in the second and third quarter of last year as most of our clients were just kind of entrenched in focusing on their own business and focusing on the risk management with respect to their asset pool, rightly so. What also with Zoom and video and efficiencies unveiled, was more time they had to maybe think about their incumbent provider and perhaps test the market. At the same time, many of these search consultants were prodding into clients, our clients and other tenured clients suggesting the proper due diligence and proper governance after some intervals, say, it's 5 years, 7 years, whatever, that they should go out and test the market.

So it's been a little bit of a confluence of events in the sense that the clients have more time on their hand and maybe more efficiencies in their quarterly meetings and the search consultants have gotten more aggressive in their target. Now we're not anti-search consultants. We have a whole team focused in both the U.S. and the U.K. around the search consultants, but we also believe that you have to give an OCIO firm an ample amount of time to prove value and prove worth. And just to go through due diligence for the sake of due diligence may save a couple of dollars from a cost perspective but might not bring the right value proposition.

So we are in flight, reminding all of our clients of that. The Zoom impact, we've lost a little bit of the human element. So while we haven't traveled as much, we do see that some of our clients are requesting travel, and we're excited to be back in person because some of the human part of the client relationship we think is important in addition to just the substance and the quantitative components that we deliver.

That makes sense. And maybe a follow-up to that. So if -- I mean if there's a way to characterize when you -- even with the search -- the search intermediaries having their own agenda, more or less, is there a way of characterizing when you do lose a mandate? Is it price, performance, some mix of the 2? I mean is there any way to kind of -- for us to kind of get a sense of if you do lose something, what tends to be the kind of tipping point?

Yes. When we see rebids, price is always a factor. So whatever we made in the past, we kind of know intuitively we probably won't make the same in the future. So we addressed that in our rebid for the client base. So we adjust price when we're actively trying to retain the client. That said, and I think I've mentioned this in the past, there are some OCIOs that are very predatory with respect to price, where they're even bidding very low single-digit basis points. And we spent a lot of time making sure the search consultant and the asset owner understands all costs, not just the OCIO fee, but all the cost of the implementation, which the bigger component is what the cost of the managers are.

And just having a simpler model or model, low-cost model, doesn't mean it's a better model. So cost is a factor, back to your original question. Sometimes it might be this shiny new car. You go through a rebid, and they have 8 or 9 firms that are presenting, and they maybe click with the new team or there's a different relationship, are there's other dynamics. One of the beauties of the business is being able to get assets over quickly. One of the negatives of the business is the business does not have long-term contracts. So our contracts are 30 days and most OCIOs are 30-days notice.

So clients could move easily if they want to, not that it's not painless to move, but it's not like you're migrating technology or doing a whole large-scale migration and moving from one OCIO firm to another OCIO firm. So all those factors are there. Now with all that said, which is clearly a headwind from an existing client perspective, that's also a tailwind from a new business standpoint, and our new business trends have increased. Our pipelines are increasing and our ability of attracting larger investors are increasing. So while we don't want to lose any client, we do think there's going to be trends continue on that front, but we also feel the velocity of selling new clients is still going to be there as well.

Okay. Great. And if I could just ask one more question, and I apologize for taking up so much time. But one of, I guess, your long time competitors, I guess, it's Russell, I guess, is working with a neighbor of yours, Hamilton Lane, to be their kind of, I guess, one of their sole providers for kind of private investing, private assets. I mean, I guess they made the -- decided to outsource that. I mean, do you feel comfortable? Do you think that that's something -- if you look at the universe and your own capabilities that is something you guys have thought about or think about that maybe that part of your offering -- this -- someone else, you could team up with or do you feel comfortable that you've got what you need in-house?

Yes. We have a very robust alternative offering, and we've been a pioneer for a number of years. And now that we have endowments and foundations at a larger clip, they're consuming alternatives. So we're very comfortable with our alternative capabilities. We would always like to add more resources and more people that have expertise, and we're looking at that, and Kevin Barr has taken that responsibility within the investment management unit. Quite simply, what Russell did is, they're an outsourcer that just outsourced their major asset class to another firm.

So that befuddles me a little bit that if you're picking a firm that can't do a core component of the asset classes that are maybe the most important component then why are you picking that firm to be the outsourcer. So looking through the realities of some other things that are occurring with their business, and I won't comment on that, it may be because they don't want to invest in the people and they rather just have a relationship or a partnership.

Next, we'll go to the line of Chris Donat from Piper Sandler.

One quick question on the revenue yield, as we calculated on average assets. It looked like it's ticked down about 2 basis points over the last year. I don't know if I'm looking at -- it's not a dramatic move, but I'm just wondering if you got any commentary on either your mix shifting or pricing pressure or a lower mix of ALPS after the volatility? Or any dynamic going on that's affecting your revenue yield per average asset?

Yes, Chris, not necessarily a lower reduction in alternatives. I mean, like anything, there's a rebalancing that will occur -- that incurs any kind of quarter to take it back in line with the investment policy statement, so there might be a little bit of that. But the participation in ALPS continues to be consistent. And in fact, it's probably actually increasing as we bring on more endowments and foundations. I would say the biggest thing on the revenue yield is the reality of either lost clients or rebid clients. So clients that we rebid that we keep, that we don't keep at the same rate that we had before.

And our next question is going to come from the line of Ryan Bailey from Goldman Sachs.

I wanted to come back to some of the lost clients, the loss rebids dynamic. And you kind of brought up that like shining new-car analogy. Do you find that you recall it 12 or 24 months after a client leaves, are you able to sort of like reengage with them and sort of win them back? Is that sort of like a blueprint that you could think about?

I wouldn't say 12 or 24 months, that would be awesome if it was that quick. But that would probably be unlikely that they would pick somebody else and then move again in 12 or 24 months unless they made a really bad decision. That said, your question is a great question. We keep an incubation program alive with our lost clients. In fact, there's 2 or 3 prospects right now that were clients that were lost more than 5 or 7 years ago that their program maybe is not working out as great as they had hoped that we're reengaging with. So I would say most asset owners that would take an OCIO firm unless something really went bad. It would be a very odd less than 3 years.

It would be more normal somewhere between 5 and 7 years. And yes, we do reengage and try to keep connected with those clients. Of course, as you know, some of our lost clients are things that are actually -- they're just lost entities in the sense that the DB plan is going away. So they're not -- the assets go, the plan or the organization still exist, but there's not a DB plan any longer. So those can't be reengaged, of course.

Got it. That makes sense. On the ECIO opportunity, do you have a rough time line for when you think you'll be out in the market and starting to generate some revenues?

Yes. We're in the market. We're active. We have a number of prospects. We're optimistic that we can get some closes this year, hopefully sooner in the quarter than the later quarters. But we're also realistic to understand that any new initiatives, while we have passion and energy about getting things over the goal line, the institutional asset owners don't move as swiftly as we would like and that's just common. I started in the -- what was called the Manager of Manager Group back in 1995. And I remember the early years, it took a while. It took us 18 months to get our first one over the goal line when we were selling Manager of Managers. Now clearly, the environment is different now than it was then.

But that said, even new initiatives take some time. There are some things that we're trying to offer as sweeteners with respect to pricing and trying to get a longer-term contract that I can talk about when we do get one over the goal line. And there's also some things that we're going to continue to invest in, which we've already budgeted for in our P&L around front-end technology to make the user experience customizable and as efficient for these asset owners as possible.

Next, we go to the line Robert Lee with KBW.

Just taking my follow-up. So I guess, Paul, I just had kind of the -- I guess, the quarterly margin question. So margins continue to maintain at a pretty healthy level. I mean, kind of, maybe not at historic highs. I guess that was last quarter, but kind of certainly up there. So given some of the -- whether it's the pricing challenges and new business challenges; clearly, there's been some asset tailwinds, which have helped. But how should we be thinking of kind of margin progression from here? Just given some of the headwinds you face and if we just implicitly assume markets kind of -- I don't know, I'll use the word normalized, whatever that -- how you want to define that? How should we think of kind of progression from here? Is this kind of 53-plus sustainable? Or should we think it kind of drifts back to like a 51 kind of handle?

Yes. So Rob, I think I've messaged in the past. Without question, we've been aided by tremendous capital markets. I don't think 53%, 54%, 55% for the business and the headwinds is sustainable. It's probably more realistic that it's closer to 50% and maybe toggles between, say, 49%, 50%, 51%, some in that area. We don't necessarily -- and we don't -- as a business practice, we don't manage to a specific margin. The realities of the client rebids and the lost clients and what goes out the door is far larger than what comes in the door. That said, more and more of the new clients are consuming alternatives, which is a better clip. So I think a more longer-term run rate profit margin, that's profit margin percentage that's closer to 50% and might spike down a little bit from there is more realistic.

The other component, Dennis commented on that I think you'll see our group return quicker is travel. We want to be in front of these clients. We want the human element. And there are some of our clients because they have these formal quarterly meetings. That require us or defer asking us to come travel soon rather than later. Now that doesn't mean that we have to send multiple people in, but we want to be in front of them because we want to remind them of the value of the relationship. So you might see my group pick up the travel a little bit quicker than perhaps some of the other groups.

And at this time, I have no further questions.

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

Well, 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, despite short-term headwinds, momentum is building throughout our business. Please be safe and remain healthy. Have a great day. Thank you for attending our call.

Thank you. And ladies and gentlemen, that will conclude our conference for today. Thanks for your participation for using, AT&T Event Services. You may now disconnect.