Ladies and gentlemen, thank you for standing by and welcome to the SEI First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder today’s conference is being recorded.

I'd like to turn the conference over 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. As usual, we'll 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 2020. Finally, first quarter asset balances grew by $3.4 billion, while LSV's balances grew by $7.9 billion. During the quarter we repurchase 1.2 million shares of SEI stock at a price of $58.11 per share. That translates into $66.9 million of stock repurchase.

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 advisors, institutional investors, and bankings AMD.

A few minutes, unit heads will provide more detail on their specific sales results and 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 in 2021. Currently, we have a strong backlog of sales and conversions and 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 and 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 segments heads will update 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 occurred 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..

Thank you. [Operator Instructions] Our first question is going to come from line of Owen Lau, Oppenheimer. Please go ahead..

Thank you. Thank you for taking my questions. 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, healthcare costs, and G&A spend for the rest of this year? Thank you..

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, I would say, particularly the second half of the year, after the summer, we might see a slight uptick in the travel activity, because we are starting to get some requests for folks to travel.

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 healthcare spending, really, no -- no trend change over 2020 per se, other than now we have a slightly higher or larger workforce, which is in of itself with a 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 that was that was really, I'd say case specific with certain health issues with employees..

Got it. That's very helpful. And then you touch 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 patient 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 the strength? Thank you..

Yes, I mean, their outperformance -- 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 on the -- in the value segment of the market has helped them even further.

Now, time will tell whether that value trade is going 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 weight assets.

But also, if clients started to rebalance back towards value within their overall portfolios, that should help them as well..

Thank you. That's it for me..

Thanks Owen..

And our next question, we're going to go to the line of Ryan Kenny from Morgan Stanley. Please go ahead..

Hey, Dennis, how are you?.

Great Ryan. How about yourself..

Good. Just a follow-up on LSV.

The on the $4.8 billion of outflows when I 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 a managed volatility product they have. In terms of the future, I mean, they had positive growth sales for the quarter. But again back to the answer I gave to Owen, I think that if the value trade persists and their outperformance adds to that.

I think that bodes well for their ability to capture not only assets flowing back to them via rebalancing, but also when in searches, when firms who are clients look to find value managers for hire..

Thanks.

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 the first quarter.

And that's you kind of how we hadn't even planned and forecasted out last year, then we'll start to see, and we saw a drop down and from fourth, the first, second quarters probably will be in the same range could be a little bit higher than that first, but not materially, so.

And then the second half of the year, third quarter, fourth quarter, we'll see additional step downs as we finished the work. Some of the One SEI work in terms of modernization is targeted at a client implementation later this year and we have to finish that work, arguably, in the second quarter, to get that -- the 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..

Thank you..

You're welcome..

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

Good afternoon, Dennis. Thanks for taking my question..

Hey Chris..

Just quickly wanted to combine the two prior questions and thinking about your total expenses on a consolidated basis for the quarter. I mean, given sort of like the -- there should be a positive impact from one SEI decreased over time, but probably higher expenses further out from some rebound and travel.

Is it is it fair to think about the first quarter expenses is a reasonable run rate for the full year?.

I think as we talked in the past, we'll see some inflationary growth as a year progresses. So, the 1% uptake from fourth the first, I don't -- I think there'll be a little more pressure on expenses than that over the next few quarters.

We are -- we have as you'll hear from the unit, from Steve, in particular, we have a pretty big backlog of clients install, that'll 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.

Now, we did get a little bit of benefit in the first quarter on option expense, we had a couple people leave and allow us to reverse some option expense. But that being said, I think expensive, though, definitely -- I should say definitely that, we expect them to tick up as we progress through the year.

But again, our job is 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'll continue..

Okay. Thanks very much..

[Operator Instructions] Next we'll go to the line of Robert Lee from KBW. One moment. Next, we're going to go the line of Robert Lee from KBW. Please go ahead..

Great, thanks. Good afternoon, Dennis.

How you doing?.

Great Rob.

How are you yourself?.

Pretty good. Thanks. This question -- is kind of curious and at a high level, as you think about notwithstanding some spending, 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, we did more of a distributed workforce.

Now, maybe it's too early, but if you have any kind of initial thoughts, and how you think that plays out and into over long-term expenses, is that, there's an opportunity here to diminish our real estate footprint, or the cost of kind of having supported this first salesforce kind of pretty much offset any potential benefit, kind of curious, your initial thoughts?.

Yes, the pandemic hit -- it's kind of the wrong time relative to our own real estate planning, because we were about 75% gone building, a brand new building here and a new campus, arguably, we called 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 couple leased facilities that we had in the in the Oaks area and we were able to do that. So, we got rid of those leased facilities. Now, but all those people went home instead of two 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, 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, obviously, the cost change in much our lease space in our bigger offices, Ireland, U.K., Indianapolis.

We are leasing that to some clients and to the extend we get the end of leased terms and we don't need the amount of space we have certainly we would have the option to shrink. But right now we're under or under lease. So, it's not really -- facilities that lend themselves to subletting. That's even awesome..

Great, that was my question. Thanks so much..

All right. Thanks Rob..

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

Thanks. Before I turn over to Steve, we would like to remind everyone that during today's presentation and 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, in our filings with the U.S. Securities and Exchange Commission. We could not undertake to update any of our forward-looking statements. 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 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 events 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 one-time revenue.

While we are encouraged by the $8.7 million in gross sales events for the quarter and the momentum with new business that continues, we had to divest 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 will 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 three SWP agreements in the first quarter, two of them new clients to SEI and one 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, TRUST 3000 clients since 2011, who will convert to SWP in 2022. A West Coast large community bank 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 six client contracts 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 of $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 had 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 toward 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..

Thank you. [Operator Instructions] Our first question will come from the line of Ryan Kenny from Morgan Stanley. Please go ahead..

Hey, Steve.

How are you?.

Good.

How are you, Ryan?.

Good. 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 all from M&A, and how did 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 clients. So, we moved that fund complex to IMS. So, it's really just an internal move and it's with a lower fee product so there wasn't a great deal of revenue associated with it.

From a servicing kind of lining up segment opportunity, it was better to go to IMS..

Got it. Thanks. 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 is no notable change except people in our competition like competing, we see, which is nothing new to us. For the wealth manager out there, they 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're -- 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..

Got it, thanks..

Sure..

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

Great. Thanks.

Good afternoon Steve, how are you doing?.

I'm great, Rob.

How are you doing?.

Good. Thank you. Couple of questions. The first thing is on your comments on industry M&A, there is some headwind there, I guess in the past, because the industry has been consolidating for years, I guess, but there has been -- I've always kind of felt that as much consolidation opportunity is there as risk.

But I don't want to read too much into your comments, but you kind of suggest that maybe right now what you see in front of you, you're kind of expecting there is -- more likely to lose some of the relationships due to M&A, or is that just trying to be extra cautious now? I am thinking about it..

I'd say rather a little bit of both. So, listen, a number of our clients, and I think we've talked about this in the past; it's been in the press that they've been acquired. One was acquired by a 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 caution, I would say we're lining up thinking that most likely because of other priorities that the acquiring organization is most likely will not stay with us.

But yeah, 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 of 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 from the acquisitions that gives us another prospect to go after in a larger way..

Okay, great. And then maybe it's because of the pipeline, I mean, do you have any sense -- I mean, interest rates go up, bank earnings should go up, private costing can go up roads, so yes, 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 like bank that they are 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 change in technologies?.

Yes, it's a great question, Rob and I'll put it like this. We see a number of forces coming to bear that I believe is causing managers, not just banks, but wealth managers across the board to relook at their business model and I think it goes 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. The pandemic has been a big disruption. I think this is causing a lot of people to reconsider outsourcing and strengthened the outsourcing position.

You certainly have interest rates and the capital banks being in a better position. But the other pieces, many of these who are large wealth managers and banks know that they need to make a decision and need to upgrade their technology to drive scale and 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 up 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 solutions more digestible and enable to do this in steps and I think that will play well as these forces come together..

Thank you.

And if I can just probably two little numbers, I think I just missed on the asset manager contribution in the quarter and then the one-time revenues, were those both negative and positive $2.9 million and are now breaking down?.

Well, I think the asset management, as it was said, were down to cash flow $885 million and what was your other one, Rob?.

Of the one-time revenues were--.

One-time revenue, it was $2.9 million, but also if you're asking for asset management, as far as sales, is that what you're asking?.

Yes..

So, the sales were around negative $2.5 million. So, it was negative $2.5 million that went against our growth of $8.7 million..

Okay, great. Thank you so much..

Sure..

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

Hi, Steve.

How's it going?.

Good.

How are you, Ryan?.

Not so bad. Thank you. So, I just had a quick question on some of the implementation and work for the backlog. So, it looks pretty healthy, the growth in the backlog, quarter-over-quarter.

As we look through the course of the year, how are you thinking about that getting implemented and how that can contribute to revenues?.

So, I am thinking about doing it on time. Right now we have people scheduled and we're in line. Things progressed, we didn't have any final implementation scheduled for Q1, but we do have other 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, it was around 50%, up 61% is probably due in the next 18 months and the remainder after 18 months, probably more in the 24 to 26-month period. And we're looking to keep that on track.

Could some of it push? Yes, I don't think materially we're working with clients that might have more troubles or slow down on their side getting implementation, downstream implementations, on their side, but for the most part, I think we're in -- in fact we're 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 have been talking about the business has been, 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 and sale of -- majority sale of their asset management business, how that impacts your relationship with them? And what sort of an act we 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 they were going to be divesting of that business.

We serviced some of that business, but it's not a majority of the business and we don't think it will 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 -- and if they are 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 is converting from TRUST 3000 to SWP.

I was just wondering if you can give us a little bit more detail there and maybe what components that was, how much of an increase in the revenue?.

Are you talking about the cross-sells, Ryan?.

Yes, I think so. 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-sells. As I told you, part of our strategy, and we overuse it here with 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 to sign in, if there was opportunity to up-sell 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 will be an opportunity, and that's what happened in this case. And we do think as we lead 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..

Great. Thanks Steve..

Sure..

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 manager 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 -- 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.

And turning to market activity, 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 re-contracts 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 alternative 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 fund. SEI was also selected after an extensive RFP process by a $25 billion fund of funds 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 client selected us to take advantage of our middle office services platform, a multi-fund complex joined our pioneering advisors in our circle, [Indiscernible] platform and we also added a new ETF client to our turnkey advisors in our circle TRUST platform. In Europe, we continue to have solid cross-sales.

And finally, in our family office services unit, we signed multiple new names, single family office clients to the Archway platforms 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..

Thank you. [Operator Instructions] We're going to the line of Ryan Kenny from Morgan Stanley. Please go ahead..

Hey 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 -- 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 offsetting to 36 range. This quarter, we had a number of things, as 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 bringing in some of the resources for it. So, our personnel expense was a little low compared to the revenue and well obviously -- that will, that will switch as we go through and switch certainly by Q2.

Secondly, we had some, kind of one-time expense adjustments that helps 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'd probably more -- and be more in the 36% range, which is again where, I feel comfortable with 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've seen some announcements from a few investment servicers, over the last few months outlining plans to offer, servicing, accounting, and custody of digital assets.

I 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 got you 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..

Great. Thanks..

Sure..

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

Great. Thanks. Hi again, Steve. Since you already gave us the backlog, I guess, I'll just pass one another quick question. Just kind of curious to me, you see, 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? And there's any kind of impact on the momentum in this business? Same, I considered even just kind of curious to know your thoughts in there..

No, so I think Rob, and I missed a little bit there, it kind of cut out, but the other thing, the alternative side has been a driver for us as well as the industry for a number of years. However, would I say, 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 at space are under pressure as asset 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 resonated very well when they're looking at that.

If you look in this quarter sales of goods better that 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 CIT 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..

Okay, great. Thanks for taking my questions..

Sure..

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 Advisor 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 a bundle 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.

Its 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 that purchase of the Oranj technology platform.

Same factors influence the expense increase in the fourth quarter of last year, as well as inclusion in the fourth quarter expenses of some non-recurring saving. Overall, the profit picture for the unit remained relatively intact, light pressure on our asset management revenue rate.

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 products, but this is mostly offset by net redemption in our older embedded fee products, primarily in actively managed mutual fund wrap program. Total net cash flow for the quarter was $306 million.

Of this total, $125 million was an assets under management and $181 million was an assets under administration. We recruited 52 new advisors during the quarter. During the quarter, we purchased the assets of Oranj technology. This acquisition was in 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 to roll out to our advisors 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 three 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 added skill sets and assets. I'll now welcome any questions you have..

Thank you. [Operator Instructions] We’ll go to the line of Ryan Kenny from Morgan Stanley. Please go ahead..

Hey, Wayne, how are you?.

I'm great, Ryan.

How about you?.

Good.

Just a question on the Oranj acquisition, 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 weren't able 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. But we did not have a strong presence in the end investor collaboration tool.

So -- if you look that in terms of specific functionality, things like, account aggregation, a digital document vault, secure messaging and collaboration between us and advisors, and advisors and clients. Its 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.

Its items such as that without telling the world what our tech strategy is..

Got it. Okay. Thanks..

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

Hi, Wayne.

How's it going?.

Hi, Ryan..

Wayne, I'm sorry, I missed the number.

Did you say for the AUM side you had inflows?.

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

Got it. Okay. I guess just sort of a question as you think about the bundled versus unbundled approach, like you -- it seems like you're having -- we've had several quarters now of really good momentum on the unbundled or AUA approach.

I’m just wondering if you can help us think about why it might be that advisors are choosing the AUA approach or the AUM to you guys, is it just sort of an investment selection decision? Is there a pricing component to it at all? Or it may be something else that I'm not thinking about?.

Yes. I think you hit all the high points. As you get down into the weeds, a little more complex with that, I mean, some of the products, we see one is 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 when -- 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, because it's not a whole set of line items.

But the major difference I think of the unbundled and bundled is that allows you to sort of deconstruct the whole investment management process.

So that if you want to try it separately, for example, for tax management take that as an example, you can do that in an unbundled structure, where if it's everything 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 an easy example.

If you have qualified money in tax management's in the pricing of the bundle 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 product 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 it again.

If you could do sort of rough justice on the split of the AUA flows between sort of like new advisors versus existing advisors 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 advisors at this point..

Okay. Perfect. All right. Thanks, Wayne..

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

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, all set 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 for $1.2 billion and client losses totaled $3.9 billion. First quarter new sales were diversified across US endowments and foundations, governmental and health care. And client losses for the quarter were predominantly due to unsuccessful client rebids and DB curtailments.

The OCIO market is highly intermediated and numerous of OCIO service 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 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..

Thank you. We're going to go to our first question from Robert Lee from KBW. Please go ahead..

Hi. Good afternoon, Paul..

Hi, Robert..

I'm curious. I mean, so give me a commentary around the heavily intermediated channel. I mean, I guess to some degree that's always been the case.

But what's kind of change more -- maybe more recently that feels like maybe there's some acceleration in the pace of activity, is 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 three or four years, and certainly the velocity has increased even more in the last 12 months.

What we witnessed last year in the first couple quarters in the second and third quarter of last year, as most of our clients were just kind of entrenched in focusing in their own business and focusing on the risk management with respect to their asset pool rightly.

Well, 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 the search consultants were prodding into clients, our clients and other tenure clients suggesting that proper due diligence and proper governance after some intervals, say it's five years, seven 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 service 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 go through due diligence for the sake of due diligence may save a couple hours 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, we haven't travelled 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 intermediaries having their own agenda, more or less, is there a way of characterizing when you do lose a mandate, is it price, performance or mix of the two? I mean, because it's in any way to kind of -- for us to kind of get a sense of if you do lose something within 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 address that in our rebid for the client phase, 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 simple 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 the shiny new car, you go through a rebid and they have eight or nine firms that are presenting, and they maybe click with a new team, or there's a different relationship, or 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, right now with all that said, which is clearly a headwind from a new -- from 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 in our client, but we also feel the velocity of selling new clients is still going to be there as well..

Great. And if I could just ask one more question. And I apologize--.

Sure..

…to get so much time, but one is I guess your long time competitors I guess is Russell. I guess this is working with a neighbor of yours Hamilton Lane to be they're kind of in I guess one of their sole providers are kind of private investing, private assets. I mean, I guess they decided to outsource that. I mean, do you feel comfortable.

Do you think that that's something, if you look at the university, your own capabilities that is something you guys have thought about or think about that maybe that part of your offering, there is someone else you can team up with and 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 there an outsourcer -- they just outsourced a major asset class to another firm.

So that follows 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 from the busy 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 partnership..

Okay, great. Appreciate it. Thanks, Paul..

Thank you, Rob. Appreciate it..

Next, then we'll go -- next we will go to the line of Chris Donat from Piper Sandler. Please go ahead..

Hey, Paul, how are you doing?.

Good.

Chris, how are you?.

I'm fine. One quick question on the revenue yield, as we calculated on average assets, it looked like it ticked down about two basis points over the last year. I don't know, if I'm looking at this. It's definitely not a dramatic move.

But I'm just wonder if you got any commentary on either your mix shifting or pricing pressure or lower mix of all it's after the volatility.

Are there any dynamic going on that's affecting your revenue yield per average asset?.

Yes, Chris, not necessarily lower reduction and enough alternatives. I mean, like anything, there's rebalancing that we occur. If that incurs that -- kind of quarter to take it back in line with the investment policy statements. So there might be a little bit of that. But the participation in ops 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 loss clients or rebid clients. So clients that we rebid that we keep that, we don't keep it the same rate that we have before..

Got it. Okay. Thanks, Paul..

Thanks, Chris..

Then our next question is going to come from line of Ryan Bailey with Goldman Sachs. Please go ahead..

Hi, Paul. I wanted to come back to some of the loss clients. So the loss rebids dynamic. And you kind of brought up that like, shiny new car analogy.

Do you find that your call it 12 or 24 months after a client leaves? Are you able to sort of like re-engage 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 that would be awesome. If it was that quick, that would probably be unlikely that they would pick somebody out and then move again until they're 24 months, whilst they made a really bad decision. That said, your questions, a great question, we keep incubation program alive with our loss clients.

In fact, there's two or three prospects right now that were clients that were lost more than five or seven years ago, that their program maybe is not working out as great as they had hoped that we’re engaging with us. So, I would say, most asset owners that would take an OCIO firm, unless something really went bad.

It would be very odd, less than three years, it would be more normal, somewhere between five and seven years. And yes, we do really engage and try to keep connected with a loss clients. Of course, as you know, some of our loss 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 plan or the organization still exists, but there's not a DB plan any longer. So those can't be re-engaged of course,.

Got it. That makes sense.

On the ECIR opportunity, do you have a rough timeline 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 quarters than the later quarters, but we're also realistic to understand that any new initiative, 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 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 managers now clearly environments 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, in 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..

That makes sense. Thank you..

Thank you..

And next we're going to go to the line of Robert Lee with KBW. Please go ahead..

Hi, again. Thanks for taking my follow-up. So I guess, Paul, just had kind of the -- I guess, the quarterly margin question. So, margins continue to remain at a pretty healthy level. Kind of, maybe not at historic highs, I guess that was last quarter, but kind of, certainly up there.

So, be given some of the -- was the pricing challenges and the business challenges.

And clearly there's been, some as a tailwind, 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 there'll be just implicitly assume, markets, and -- I use the word normalize, however you want to define that.

Now actually think of, you know, progression from here is kind of 53-plus sustainable, which we think it can introspect, like a 51 kind of handle..

Yes. So Rob, I think I've mentioned 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 real estate that is closer to 50% and maybe toggles between, say, 49%, 50%, 51% someone 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 rebuilds, and the walls clients, what goes out the door is far larger than what comes in the door. That said, more and more than 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 real estate. The other component that 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 sooner 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 the relationship. So you might see my group pick up the travel a little bit quicker than perhaps some of the other groups..

Okay, great. Thanks for the refresher. Appreciate it..

Thank you..

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

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

Well, so ladies and gentlemen, we are making progress on two 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. Thank you participation for using AT&T event services. You may now disconnect..