Ladies and gentlemen, thank you for standing by, and welcome to the SEI Second Quarter 2021 Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded. I'd now like to turn the conference over to our host, Chairman and CEO, Al West. Please go ahead. .

Thank you very much. Good afternoon, everybody. And welcome all of our segment leaders who are on the call with me here as well as Dennis McGonigle, CFO -- SEI's CFO; and Kathy Heilig, SEI's Controller. .

I'll start by recapping second 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 will fill questions at the end of each report..

So now let's turn our attention to the financial results of the second quarter 2021. Second quarter revenues grew 19% from a year ago. Second quarter earnings increased by 32% from a year ago. Second quarter EPS of $0.93 grew 37% from $0.68 reported in the second quarter 2020. .

Second quarter asset balances grew by approximately $7 billion, while LSV's assets under balances grew by $800 million. During the quarter, we repurchased 21 million shares of SEI stock at a price of $61.93 per share. That translates into $129 million of stock repurchases..

Now I'd like to provide you our situation today. One of our businesses is steadily growing its revenues and profits. That's IMS. Another business, the RIA segment, has recently been executing against the new technology-driven strategy. Currently, we are experimenting -- experiencing strong indicators that the business has turned the corner.

And we're very excited about that. .

Another business, Private Banking is diligently working on an implementation backlog, a strong sales pipeline and enhancing client satisfaction. The fourth business is the Institutional Investor segment. While it faces strong headwinds in the legacy OCIO client base, it's addressing growing segments of OCIO and ECIO. .

We're also searching for growth engines beyond our 4 traditional businesses. Here, we are finding opportunity in markets and services adjacent to our 4 main business engines. You have been exposed to a couple of these innovative young businesses..

First, GRC offering global regulatory compliance services; second, SEI IT services, whose leading service is cybersecurity. And third, Private Wealth Management, providing a complete platform to ultra-high net worth families and individuals..

Next, let's turn to revenue production. Net sales events in Private Banks and Investment Managers were $13.2 million, of which $9.8 million are expected to be recurring. In addition, net sales events of $2.8 million incurred in the Asset Management-related units.

These events reflect positive asset flows of Investment Advisors and AMD, offset by losses in our legacy Institutional Investor client base. In a few minutes, unit heads will provide more detail on their specific sales results and their new business opportunities..

Now to grow and prosper in the future, we know that things will never be the same. So we have been busy adapting to new mental models and realities. One such new reality is a remotely distributed workforce. We have been planning how we will work in the future and are currently acting on those plans. .

Fortunately, we have a lot of positive momentum we created during the first half of 2021. We have a strong backlog of sales and implementations and a number of key prospects laid in the sales cycle. We have also made progress in repositioning our Asset Management-related business segments.

So net-net, we look forward to capturing the opportunities inherent in significant change..

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

Dennis?.

Thanks, Al. Good afternoon, everyone. As Al mentioned, I'll cover second quarter results for the investments in new business segment and LSV..

During the second 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 and 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 $9.6 million, which compared to a loss of $10.1 million during the second quarter of 2020. Approximately $7 million of expense during the second quarter 2021 is tied to our One SEI effort..

Regarding LSV, our approximate 38.7% ownership contributed $35.1 million in income to SEI for the second quarter of 2021. This compares to a contribution of $28.3 million in income for the second quarter of 2020. Assets during the quarter grew approximately $800 million.

LSV experienced net negative cash flow during the quarter of approximately $4.2 billion, offsetting market appreciation of approximately $5 billion. Revenue was approximately $116.4 million for the quarter with nominal performance fees..

Corporately, our expenses during the quarter included approximately $1.9 million of severance expense, which was recorded in the impacted business segments and approximately $5.6 million related to subadviser expense tied to revenue growth. .

As we discussed on prior calls, similar to other companies in our industries, we are seeing competition for talent that is driving up personnel costs. We expect this to continue. In addition, our business growth, particularly in our IMS segment, will lead to an increase in overall employees. .

Each quarter, we reassessed the vesting time frame for all previously issued options. This quarter, we made a change to the expense amortization schedule. This included in, due to our judgment that certain option tranches will vest 1 year sooner than previously estimated, additional expense during the quarter of approximately $500,000.

As disclosed in our earnings release, we expect option expense for the remainder of the year to approximate $25.7 million..

Finally, during the quarter, we increased our spending in corporate marketing and branding -- in the branding area, enhancing our digital capabilities and expanding our market reach. We will continue to do so in support of the promotion and sale of SEI services. Our effective tax rate for the quarter was 22.3%.

We have also included in our earnings release additional financial information. And I always remind you, please refer to our soon-to-be-filed 10-Q for additional information. I'm now happy to take any questions. .

[Operator Instructions] And we'll go first to Robert Lee with KWB. .

Can you please go over some of your commentary on kind of expenses and spending? And I apologize because I was I think writing and kind of missed some of this.

Can you maybe just kind of go through that again?.

There's a couple of things I pointed out that in the quarter, as the company, we incurred $1.9 million of severance expense. So it's really not a repeatable expense. And that expense of that hit the different business segments or corporate overhead depending upon where the folks were residents of, if you will. .

And I also just wanted to point out that our expense increases, about $5.6 million was tied to revenue, so tied to asset growth. So it's a cost of revenue growth, because sometimes that doesn't get aggregated or we don't point that out. .

And then I mentioned that every quarter, we go through an evaluation of when we think all the option tranches that we issue as a company will vest. And as you know, we amortized the cost over that vesting period.

And in the quarter, we made a determination that a couple of options will vest sooner, essentially 1 year sooner than we had -- we're amortizing against in the first quarter. That added about $500,000 of additional costs in the second quarter and our option expense for the remainder of the year.

So the third and fourth quarter, we expect it to be about $25.7 million. .

Okay. Great. And so maybe one quick question with the severance.

I mean, obviously, that's a onetime thing, but how should we be thinking just broadly about kind of headcount growth and maybe pressure on compensation, just given competition for talent and whatnot as the year progresses?.

Yes. So I think on the talent side, at least it's clear to us, and I can't imagine other comps since we're competing for talent against other companies and some companies you will cover. Yes, the cost for talent is going up and how is going up.

So to the extent there's inflation, compensation inflation alive and well in the markets, at least that we compete in for talent. That's true. And far be it for me to call that transitory. That's just the nature of the beast right now. .

Secondly, and you'll hear this from Steve as well that in the IMS business, we've had really solid growth, even faster matriculation of some of the sales activity. And I would say we're a little bit behind in the hiring process. So we'll be adding people to support not only future growth, but growth we've already brought on the book.

So our headcount is likely to go up. .

Now other businesses are less so. And Paul, I'm sure he'll mention or at least can speak to, given what's going on in his business, the changing nature of how marketing and selling has changed significantly over the past year, 2 years. Now he's just worked to reset his organization not only for the current environment, but the future of that business.

So I would just say it's adjustments really working off of what our business strategies are and how the market is behaving. .

And next, we go to Chris Donat with Piper Sandler. .

Just wanted to follow up on the -- specifically looking at the consolidated income statement, the sub-advisory fee line. As a percentage of your asset management revenue, that did increase.

Was there anything unique going on there? Anything kind of onetime in nature? Or was it just in sort of an elevated level here?.

Yes. There was a onetime adjustment that occurred in the institutional business on a sub-advisory expense, and Paul will mention that in his comments, yes. But other than that, it's -- some of it is arguably the mix of assets relative to the sub-advisory cost associated with those assets. It could also be at play. .

Okay. I'll wait for Paul's comment. .

Yes. But there was, like I said, onetime catch-up expense. .

We're going now to Ryan Kenny with Morgan Stanley. .

So I heard Al in the opening remarks, mentioned the possibility for more remote work.

So given the pressure on personnel expense, just wondering if there's anything you can do on the real estate footprint side or on the travel expense side to keep margins at current levels? And I'm asking in context of the company margin currently at 29%, still being pretty elevated relative to historical levels. .

Yes.

So I mean just to affirm what Al said, it's more that -- we put a plan together that we're executing against to bring our people back, and we certainly expect that probably a fairly large percentage of our workforce will have the -- be in what we call the hybrid kind of category of in-office sometimes and sometimes working from home or working remotely.

.

So that said, given that we own the real estate in Oaks, Pennsylvania, which is our predominant real estate footprint in terms of square footage. And given that our other larger facilities, London and Ireland and Indianapolis are operational centers, we will be bringing people back to those facilities as well, plus they're under longer-term leases.

So our ability to shrink our real estate footprint is pretty limited, frankly. .

And we do have a question from Ryan Bailey with Goldman Sachs. .

I had a quick question on LSV. I think generally, we've seen or heard of better industry dynamics of value, maybe some rebalancing away from both.

And I was just wondering, as you kind of look out or hearing anything around maybe potential for better flows in that business?.

Yes. I so their flows for the quarter, it's similar to our first quarter and even kind of a little bit close to the fourth quarter also. Their net flows, being negative, were primarily driven by a rebalancing, so lost assets from existing clients. .

They did have some gross sales and signed a couple of fairly large mandates during the quarter. So they're also seeing more sales activity and sales activity pick up. And I think that's a good sign for -- because people are maybe looking at value.

But their strong performance in second half of last year and the beginning of the first part of this year, I think it's probably had some impact on rebalancing as well. .

Their performance for the quarter was on a relative basis, was okay. I mean they were, I guess, neutral or slightly positive in some categories. But I would say the signs are that their ability to sell in the market, being there to sell into is improving. .

Got it. Okay. And maybe just another on repurchase activity, fairly healthy for the quarter.

I was just wondering how we should be thinking about the pace or your timing and maybe why was this quarter the right one to step up the repurchase? Or was it sort of immediately after the last earnings release?.

Yes. So picking up 2.1 million shares this quarter, which is a fairly healthy amount. Comparing to the first quarter is a little bit of, kind of, not really apples-to-apples because in the first quarter, we had a longer blackout period that kept us out of the market.

So I would say the first quarter repurchases were under what we would have normally -- what you would normally expect. .

Second quarter's a little bit healthier and the market made stock available, if you will, to us that we were able to capitalize on. As we look forward, our Board's view hasn't changed that we'll continue to be active in the repurchase space and kind of respond to what the market gives us. .

We have no additional questions in queue. .

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

Please refer to our notices regarding forward-looking statements that appear in today's earnings release and in our filings with the SEC. We do not undertake to update any of our forward-looking statements..

And now I'm happy to turn it over to Steve. .

Thank you, Dennis. Good afternoon, everyone. During the second half quarter, we continued our momentum in the market while also executing on our One SEI strategy. Second quarter 2021 revenues for the banking segment totaled $123.7 million, which was up approximately $16 million or 14.8% in the second quarter of 2020.

Increased revenues were due to asset management revenues and an increase in our processing-related revenues as well as elevated onetime revenues during the quarter. Second quarter 2021 quarterly profit of $6 million for the segment was up $6 million from the second quarter of 2020.

This increase in profit was primarily due to the increase in revenues..

And turning to sales activity. For the quarter, we closed just shy of $3 million of gross recurring sales events, which due to some M&A activity, which I mentioned previously, resulted in a negative $1.1 million of net recurring events for an investment processing business. We did have a positive $1.6 million in asset management events.

This offset from asset management brought our total net recurring events for the quarter to approximately $500,000 for the segment. .

In addition, in the quarter, we closed $1.8 million in onetime revenues. While we would have liked our net events for the quarter to be higher, we are encouraged by our sales activity and feel our results were more impacted by the timing and the length of the contracting process we continue to experience in this market. .

Despite the long contract cycles, we are strongly encouraged by the market activity we are involved in, and we are now seeing many firms in our target markets getting back into normal operations. And with that, sales activity is increasing in the larger end of the market. This bodes well for us going forward..

During the quarter, we signed an agreement with a new client to SEI, Tompkins Financial Advisors. We won this business in a competitive process, and we expect confidence migrate to the SWP platform from a competitor platform in the first half of 2022. We look forward to welcoming them to the SEI family and supporting their future growth initiatives..

Turning to implementation activity for the quarter. Pacific Premier Trust, a division of Pacific Premier Bank converted to SEI Wealth Platform from a competitor platform, and we look forward to working together in supporting their growth and expansion initiatives.

Additionally, during the quarter, we completed the conversion of Truist, the combination of SunTrust and the merged BB&T business on to TRUST 3000. The completion of this conversion allows us to continue providing our current scope of technology and services to the new larger organization..

As an update on our backlog, our total signed but not installed backlog is approximately $72.6 million in net new recurring revenue at the end of the second quarter. From an asset management standpoint, total assets under management ended the period at $26.3 billion, which was up 4.7% from the first quarter of 2021.

Our cash flow for the second quarter of 2021 was a positive $269 million. As we go through the rest of the year, we look forward to continuing our momentum, executing on increased sales and prudently investing in the business to ensure sustainable growth. .

We will also continue to execute on our One SEI strategy, which will allow us to increase our growth opportunities by unlocking all the assets and platforms SEI has to offer across the company. We remain excited and optimistic on our growth opportunity..

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

[Operator Instructions] And we're going now to our first question in the queue, Ryan Kenny with Morgan Stanley. .

So I've heard the message on the higher personnel costs in the IMS segment, which I know we're talking about next, but just wondering if we should expect anything similar going forward in the banking segment? And any color on how that or any other expense pressure might impact the ability to get banking margins higher?.

Yes. So 2 things, Ryan. One, yes, we will add expense in banking, but I think we're trying to do this very judiciously like in other units. But we're also, as I mentioned before, looking at areas that we feel we can be a little bit more efficient in, in the technology operations area. .

We did have increase in our expenses in Q2, primarily in personnel and in operations. But I think we'll look to manage this pretty tight and aligned with new revenue coming in.

And I think as far as margins, us working on that expense plan, which is a longer-term initiative of one I'm hopeful we'll have some benefit from through the year, should help us with margins. .

But also, as I mentioned in Q1, we will have some things this year will cause some choppiness to margin i.e., the M&A activity I mentioned. So I think any movement in margin you see from quarter-to-quarter this year will be more of kind of those onetime things and that choppiness as we go through the year. .

[Operator Instructions] And we will go now to Ryan Bailey from Goldman Sachs. .

I was just wondering regarding some of that elevated onetime revenues that you were referring to, is there any way that we can try to think about sizing that? And what sort of like maybe the more normalized revenue would look like going forward?.

Yes, our onetimes are typically professional services fees. We did have a buyout of a client that was a buyer this year, that was part of it. That was driving most of the elevation from Q1 to Q2.

I expect it to kind of normalize as we go through the year, but there will be other potential M&A candidates that I mentioned that, again, could provide a little choppiness to that. But I think as we've seen before, that recurring -- nonrecurring revenue line is primarily around our implementation fees.

So as we sign more clients, as we bring them on, you'll see more of that as far as professional services implementation and conversion fees in that number. .

Got it. Okay. And maybe just to sort of circle out that conversation just to make sure I'm thinking about it right.

As you're thinking about the M&A activity in the space, the general sentiment could be that there is some more headwinds through the back half of this year?.

Yes. I'd say there's a couple more headwinds. And again, I don't think these are significant or material to business, but more that will provide a little bit of choppiness when you come down to the profit margin. .

Got it. Okay. And maybe if I can sneak one more quick one in. Just regarding the $72.6 million for backlog.

Any change in the time line for implementation there?.

No. I think we are just north of saying about 60% of that would come within the next 18 months, the remainder after that. We're probably still on pace for that.

I do -- there are some clients that are experiencing some delays on their side, as we've all seen as the pandemic has continued in India, some of those development fees that they have, have been a little strained. So we are seeing maybe some minor pushes there, but nothing significant. We're talking a couple of months, et cetera.

So I feel pretty bullish on that implementation schedule still. .

Next, we have Owen Lau from Oppenheimer. .

Just a quick question. Going back to the like outsized onetime revenue in the second quarter.

Did I hear correctly, it was $1.8 million in the second quarter and then there will may be some lumpiness down the road? Is that the right way we think about that?.

No. So there's 2 numbers. Let's not confused them, Owen. So the $1.8 million is what we actually signed. So part of -- they were part of our sales of onetime revenues. The other onetime revenues were actually booked onetime revenues.

And we did have an increase in our booked onetime revenues during the quarter, primarily due to professional and conversion fees but also a buyout of a client who was acquired. .

And when I talk about the potential choppiness of that onetime revenue, there could be an increase in this onetime revenues if we have other buyouts of clients that go through M&A activity. But again, nothing material. It's more an impact on the quarterly margin quarter-over-quarter. .

Got it. And just any change of the time line when you mentioned previously that the margin will continue to expand there, maybe this year and next year.

Any change of time line in terms of your expectation?.

No, we're still working on -- I think we're still looking to get through this year and look for a path we can come out of, again, my goal is to continue our momentum and get us to more of that sustainable and accelerating margin level. but we certainly haven't picked that yet. .

Our last question comes from Robert Lee with KBW. .

Well, first quick question back to the booked onetime revenue.

What was that number for the quarter?.

We tend not to break it out, Rob, given onetime, et cetera. What I'd tell you, I think that's more pertinent is that we did have an uptick over Q1 and most of that uptick. A few million dollars was due to the buyer. .

Okay. So just kind of curious maybe on the competitive environment. You talked about, I guess, what maybe it was Tompkins kind of taking that from a competitor.

And is there any way of general -- I don't know if you can, but generalizing like if you're -- when you feel like maybe you're losing new -- potential new business to a competitor or something gets taken away, is it -- I guess if it's TRUST 3000, maybe it's price, but if it's on something that's more SWP-related. .

Now is there kind of a common characteristic why maybe you feel like you don't win some business and then conversely, when someone is coming to you, are they -- is it more because they're buying a specific component? Or do you -- or is it that coming over to you because they want the whole package? They want the straight -- the whole straight-through processing.

I'm just trying to maybe get some sense that there's any... .

No. I get it, Rob. As you can imagine, that's a big question. It kind of depends on the prospects there are. I would say the lion's share of low win business is our capabilities, our technology and our people.

While we lose business, well, when someone gets acquired and they go on a competitor's platform because that's changing platforms isn't the priority, finishing the acquisition is. .

But there's a good news on that silver lining that client who might be applier becomes part of a bigger organization, they become a new prospect again. .

So I'd say, you mentioned Trust 3000, I think when people leave, it's less to do with price and either more about them changing business model or capability they're looking for. But maybe they want less capability and more streamlined. So I think it's really -- again, it's hard to answer for the market.

But we, again, feel pretty well positioned from our technology and platform. We feel we have probably the best platform in the industry, both here and globally. And unless someone is doing kind of a plug-and-play, looking to maybe just replace 1 or 2 components, we feel well situated against kind of our competitors. .

And maybe one question on client retention. And maybe this is more for the U.K. versus the U.S. where the business is somewhat newer. But do you -- how do you think of like retention rates when an SWP contract comes up for renewal, which I know you've had a bunch in the U.K., and I'm assuming some in the U.S.

Are you -- do you feel like your retention rates or I don't know, pick a number, 90%, 80%.

Is there some kind of metric that you kind of think about?.

Yes, Rob. I actually don't have the specific number in front of me. What I would tell you is it's well into the high 90s. Again, when you look at why we lose business, it's because mostly, if you look in the past, it's been -- we have lost a couple of client service over the past 10 years, but most of it's been because of M&A activity.

There are people that have changed business models. They might go to more just a pure advisory model in their wealth management practice, and they don't need a full-blown platform like us. .

So the good news is -- and listen, we're not perfect. We have things to work on. We're always looking at what we can do to improve. But we have a pretty solid loyal client base. And we look to be client obsessive and to deliver a very new client experience. And I think that helps us as we go to recontract. .

And we also have a question from Chris Donat with Piper Sandler. .

Steve, just wanted to ask on that buyout.

If you can give us a specific number that it was? And if you can't give us a specific number, maybe what sort of range you've seen over time and how frequently you see these kinds of buyouts?.

Yes. So it's literally around $2 million. Like I said, it's a few million dollars. It was not significant in the grand scheme of things. And Chris, this is one of those that -- again, it's not something I look to kind of forecast. If you look, we've talked about this on the last quarter call.

We've had M&A activity since we've been in this business as part of this industry. .

Over the past several years, we've had M&A activity that's benefited us. And we've won the combined entity. So as I'm looking through, I think one of the things we wanted to give a heads up on last quarter was, we do see a couple of clients that are in an M&A process where it's been completed.

And typically, when that happens, as I mentioned previously, the changing of platforms is not the priority. It's getting the acquisition done. And while we might lose them short term, they become a prospect for a longer term and a bigger organization. .

So I think the way we look at it is, it's a part of doing business. It's something that will win some, and it will help us. Some that we might lose for the short term, but the way I look at it is, yes, they become the next prospect on our list. .

There are no additional questions in the queue. .

Great. So with that, I'll turn to the Investment Manager segment. During the second quarter, we continued our momentum and saw strong growth from both new clients and expansion with existing clients.

For the second quarter of 2021, revenues for the segment totaled $142.8 million, which was 19.7% higher as compared to our revenue in the second quarter of 2020. Profit for the second quarter of the segment of $57.8 million was 29.4% higher as compared to the second quarter of 2020. .

Additionally, the second quarter's profit margin was 40.5%, high for the segment.

This is a result of several factors, specifically a substantial increase in revenue due to market growth, a significant portion of our quarterly sales implemented during the quarter as well as a delay in onboarding the operational and infrastructure expense related to this new business during the quarter.

Also a temporary reduction in investment expense this quarter aided the margin increase as well. I expect our margin to normalize over the next 2 quarters..

Third-party asset balances at the end of the first quarter of 2021 were $875.9 billion, approximately $44.1 billion higher than the asset balances at the end of the first quarter of 2021. This increase was due to net client fundings of $5.9 billion as well as market appreciation of $38.2 billion. .

And turning to market activity. During the second quarter of 2021, we had another strong sales quarter with net new business events, totaling $11 million in recurring revenue as well as recontracts of $6.3 million in recurring revenues.

Highlights of these events included in our alternative market unit, we closed a number of strategic new names, while sales to existing clients continued to be robust. SEI has also won the business of a large multi-strat manager in a competitive sales process and is currently converting that client off competitors platform.

Momentum also continues in the private equity and private debt space as we continue to launch funds with both new and existing firms..

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. In particular, we continue to experience strong momentum in both our turnkey collective investment trust and ETF platforms.

For the quarter, we added 3 new client relationships and expanded relationships with more than 30 clients. In Europe, we continue to have solid gross sales. And in our family office services unit, we signed 6 new names single-family office client on the Archway Platform, and assets on that platform exceeded $500 billion for the first time.

Our backlog of sold, but unfunded new business stands at $29.4 million at the end of the second quarter. .

So in summary, this business had another strong quarter. We continue to see strong demand for our solutions and platform and see great opportunities for continued growth as we execute on our strategy..

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

[Operator Instructions] We go now to Owen Lau from Oppenheimer. .

Steve, just one clarification. I think margin, second quarter, 20.5%. But you did mention you expect margin to normalize over the next few quarters.

Could you please elaborate a little bit more? Do we expect to spend more, so the expense line would go up, you expect kind of revenue would be under pressure? And what's the reason for that?.

Yes. So, Owen, the primary reason is, as I said, we had the benefit of this quarter, which I love seeing it. We had quite a good bit of market revenue growth as well as new business. The new business we sold in Q2, 87% of that has funded already.

So that funded well ahead of us bringing in the expense to support it, both the infrastructure expense and the personnel. So I do expect this is a competitive environment for hiring, as Dennis mentioned. I do expect that expense line item to go up.

When I look out over the quarter, there's always a question, will the margin get up to the 40%, which is at. I don't think that's long term sustainable. And I think we'll come back down to the mid or just above mid-30s again over the next 2 quarters. And I wouldn't say it's pressure on expense.

I think it would be adding normalizing the expense to max the revenue we already have in door. .

Got it. That's very helpful.

And then on a kind of related topic, when you look back, do you feel like COVID had any impact on your Investment Managers business? And do you expect all things equal, do you expect any acceleration or deceleration of your business given that the vaccination rate is going up?.

So what I'd say is if you look back during the pandemic that IMS continued to execute. I think we executed it in a different way. If you look at the percentage of sales, we started to grow a lot more with clients than new business.

While there was new business, a lot of the larger initiatives especially over the past year in the market and in the industry we put on hold. .

So I think we executed well. We continue our growth rate. But I think the one impact with us was the new business, especially the larger side, slowed down a little bit. And I expect that to start to pick up. We're starting to see signs of that already. So I'm not sure that will add fuel to the acceleration or just add another lever to accelerate with. .

Got it. That's good.

And then finally, could you please maybe give us an update about any demand of enabling maybe crypto transactions from your clients? Do you think can be kind of incremental to your business from a revenue standpoint?.

Owen, I missed the first part of the question, I apologize. .

So I'm asking about -- sorry, I'm asking about the demand of enabling crypto transactions. Like do you see any increase demand in clients? And do you think it can be incremental to your business from a revenue standpoint of this.

Any requests from the clients and say, hey, can you help us to enable some crypto transactions?.

Yes. So great question. So actually, right now, we actually do support crypto's funds and servicing. We have been in contact with a number of our clients who are adding this to their investment management suite. So we do see some burgeoning demand here. We actually have a group that has looked at expanding our solution.

And when I mentioned our investment spend was a little down quarter which helped profit, we're looking to expand that investment in cryptocurrency. And this just as an investment manager services, we're also looking at that in SWP, and we're actually running experiment right down around SWP and looking at the custody of cryptocurrency in SWP. .

So this is something that we think is -- has got some legs, not just for IMS, but for the company and all of our investment processing businesses. This will also impact Archway as well. And we think it will -- could provide another lever for growth for us. .

Let's go back to Robert Lee from KBW. .

Great. Just a real quick question. The -- I think you mentioned it was $6 million of revenue from, I guess, recontracting existing clients. I just want to make sure I understood that.

Was that like clients recontracted, and upon recontract you actually were able to increase the revenue, $6 million?.

No, no. That's the number of recontracts in there, Rob, might be some slight upticks maybe for additional services, et cetera. But it's basically looking at clients that we contracted and the contract value of their contract that time. So there was a few of them during the quarter, I just called out that recontract on. .

Okay. I just want to clarify that. That was my only question. .

And next, we go back to Ryan Bailey with Goldman Sachs. .

Steve, for, I guess, private equity in general, we're seeing deployment pipelines near or at record levels for the industry, and that's probably pretty good for a private creditor.

I was just wondering if you could give us a reminder on roughly how much of either revenues or assets are tied to deployed capital for the business versus committed capital?.

Yes. So I don't really get into that level of number, Ryan. What I'd tell you, though, from our asset split we're still about 55%, 56% alternative. That would include hedge, private equity and 45% traditional, which would be ETFs, CITs, mutual funds.

Of our alternative assets, of that 55%, more and more of that is going to our private equity, both in private credit, private debt, real estate. But we really don't break that out in that specific. .

At this time, there are no additional questions in queue. .

SP0Great. So with that, I'll now turn it over to Wayne Withrow to cover the adviser segment.

Wayne?. .

Thanks, Steve. During the second quarter, we were immersed in execution of the strategic framework we've been building over the last few years. In this regard, we are seeing benefit from each of the 3 pillars of that framework.

First, our robust technology stack, built on the SWP foundation, is being increasingly adopted across both existing clients and our new adviser prospects. Second, evolution of our sales and marketing process to fit today's digital-first marketplace continues to gain acceptance.

And third, the impact of offering both bundled and unbundled fee investment products has been a catalyst for strong adviser net cash flow..

Second quarter revenues totaled $119 million. This 27% increase from the second quarter of last year reflects the positive of our asset growth as well as the negative of lower fee rates on some of our products. .

Expenses were up compared to the second quarter of last year, primarily due to increased direct cost and costs associated with our purchase and ongoing integration of the Oranj technology platform. The year-over-year comparison also reflected onetime pandemic-related expense reductions included in the Q2 2020 total.

Direct costs and Oranj expenses had a similar impact on the Q2 to Q1 comparison..

Overall, the profit picture for the unit remains intact despite pressure on asset management revenue rate. Total platform assets rose to $95 billion at the end of the second quarter and included $81.6 billion in assets under management. Market appreciation and positive net cash flow drove this increase with market impact being the biggest factor..

Quarterly net cash flow on to app platform was approximately $1.2 billion. Of this total, $874 million represented assets under management and $300 million represented assets under administration. This is our strongest cash flow quarter since completion of the SWP migration over 2 years ago. .

Please note that while AuA growth may be viewed as a factor indicating strengthening market acceptance of our technology stack, our AUM growth would not have occurred without advisers choosing to adopt our technology platform..

Contributing to our growth in platform assets were 65 new engaged advisers during the quarter. Perhaps more significantly, 104 advisers began engagement with SEI in the second quarter, strong improvement from the 67 we recorded in the first quarter. Partial engagement reflects a valuable step in the sales process.

And while some of these advisers move directly into new adviser engaged status within 1 quarter, our goal is to ultimately move all of these firms to new adviser status..

Our competitive advantages are built upon the technology capabilities in which we have invested and continue to invest. To this end, we continue to integrate the Oranj platform, and our goal of a late 2021 rollout remains on track.

We have also begun the Phase 1 rollout of our fully digital account open technology, which will connect in a straight-through manner proposal generation and automated account opening as well as enhanced mutual fund and SMA model management and trading automation..

delivering a compelling front-to-back technology platform; designing and offering investment products responsive to today's investor; and evolving our sales and marketing process to fit today's digital world. .

I now welcome any questions you may have. .

[Operator Instructions] We're going now to Ryan Kenny with Morgan Stanley. .

So I saw the press release come through last week on the reorg in your business with a lot of additions to the management team.

So maybe you could just elaborate on the opportunity and rationale there, and how the new organization can better serve clients?.

Well, I think behind the whole reorganization is the fact much stronger technology focus built upon our ever maturing technology stack and a lot more focus on our digital-first distribution and marketing strategy.

So we had to add some expertise in some of those areas and organize in sort of what I would call a more modern framework as opposed to a more traditional geographic/AUM-based model. .

Makes sense. And then just one more. I know that you mentioned that the lack of travel during the pandemic helped margins a bit.

So I'm just wondering if you can help size how much and when travel resuming might impact margins from here?.

Yes. I mean -- yes, I can do that and -- but I won't. I mean, I think that the -- we look at that, but in my mind, the thing that's the most fun is not how we manage the expenses, which we do every day.

But when you look at our response to the evolution of the physical location dynamics of the workforce, it's going to help us address the question somebody asked earlier, which is the war for talent. So I'm more focused on how we can respond to that. And yes, it will cost us some more money.

I don't think it's something I worry about, but I think it can get us an advantage in the war for talent. .

We go now to Owen Lau with Oppenheimer. .

So Wayne, I think you just launched a direct indexing product in ESG overlay in February this year.

Could you please give us an update on the recent traction you have? And what have you learned from this rollout?.

Yes. I think that the -- we're getting a lot of traction in sort of direct indexing and ESG overlay. And what I would say is don't look at -- take direct index, for example. Direct indexing is a tool. Direct indexing gives you the ability to do something like an ESG overlay in a past the world.

It also gives you the ability to do tax management in a pass of the world. So you need to look at the combination of those 2 together and not each one of those individually. .

ESG overlay is getting a lot of traction in all of our products. It used to be primarily limited to an SMA actively managed product. Now we can offer it in sort of the path of world, which is a big advantage, and we can do the same in a tax management. So hopefully, that answers your question.

Look, the technology capabilities of all those products need to be combined, and that's what's compelling. .

Got it.

And do you have any -- kind of maybe estimate or sizing about the TAM opportunity here in this space, like combining direct indexing plus the ESG, any number you can share?.

Yes. I don't really have a number to share, but I would say those 2 components are among the fastest-growing aspects of our business. .

Our next question comes from Robert Lee with KBW. .

Real quick, I'm just kind of maybe unpack a little bit the cash flows for the quarter.

So on the -- I guess, the AUM side, the $800 million and change, does possible kind of unpack that a little bit more? Should we going to assume, I don't want to -- but what happens when you assume that you're still -- that there's no reason to believe that you haven't seen kind of continued outflows from kind of, I'll call it, the legacy products and whether it's the direct indexing product or the ETF overlay product? I mean that you're still seeing that kind of ongoing mix shift underneath that kind of $800 million.

.

And then if I think of the cash flows overall, which were pretty healthy this quarter, how much of your cash flows are -- do you tend to find that, hey, it's advisers who've signed on in the last 18 months, 2 years who are really driving the gross sales.

And those advisers who have been with us for a while, they are not -- that maybe they are books are more stagnant or an outflow? Any kind of color around kind of the aging of adviser relationships, so to speak?.

Okay. Rob, our marketing group told us we had to be done by 6. So I'll try to answer this question.

I would say that when you look -- in terms of aging of advisers, I think it -- Internally, we age all the advisers from the -- at first, we seek how their cash flow goes because we have metrics and we measure them and we marked in them based upon the maturity of the adviser.

I would say that as a general , the newer the adviser the more active they are, but it reaches a tipping point where you have these large and fast-growing advisers, and they could dominate the cash flow, and they could have been with us a very, very long time.

But as a general rule, the newer the advisers, the faster the cash flow, if that answers your question. But it's not, that's a really rough generalization. .

In terms of newer products and legacy products. What I would say is in a lot of the newer products, they use more of an unbundled fee approach. And I think we're capitalizing on just overall transparency in the world.

I mean, you can see all the press around where kind of the revenue flows among the providers in the value chain and there's much more and more transparency. So we're absolutely seeing better cash flow in the unbundled fee, which is a more transparent fee structure. .

I mean just a curiosity, things like direct indexing... .

Fee structure as a product for us. .

Right. So maybe just with direct indexing to the extent that starts to take off.

Is that going to flow through? I'm assuming as an AUM or is that actually going to be an AuA?.

That's AUM. .

We will go now to Ryan Bailey with Goldman Sachs. .

Just a quick one on the direct indexing.

Is there any sort of rough gauge you can help us think about for the economics that SEI receives for those products? Is it sort of in addition to the fee rates you're already owning? Or is it sort of like a substitute for existing products?.

I would say -- let me see if this is the question you're asking. When you look at the growth in direct indexing products, I would say half of the money is new to SEI and half maybe people who are changing out of a more traditional product into a direct indexing product. That was your question. .

I see. Okay.

And then I guess, like as we think about the revenues, is it accretive to the firm fee rate for where there's the switching from a more traditional product and that's kind of like net of the sub-advisory? Or is it -- would that be kind of like a net down in the fee rates?.

Yes. I think if you look at from our traditional, if you will, kind of a mutual fund product, that is a net down in terms of the revenue rate. .

Okay. All right.

And that is inclusive of the sub-advisory compartment?.

Yes. There isn't really -- yes -- there isn't a separate sub-advisory fee in there, right? We manage all that in-house, Ryan. .

We have no additional questions in queue at this time. .

Okay. Thanks. With that, I will turn it over to Paul. Have a great afternoon. .

Thanks, Wayne. Good afternoon, everyone. I'm going to discuss the financial results for the second quarter of 2021. Second quarter 2021 revenue of $85.7 million increased 12% compared to the second quarter of 2020. Operating profit for the second quarter of 2021 were $43.8 million and increased 11% compared to the second quarter of 2020.

Both revenue and operating profit increases were due to market appreciation, positive currency translation offset slightly by negative client fundings..

Second quarter 2021 expenses were impacted by $1.8 million in nonrecurring expenses that primarily represented a true-up of a sub-adviser incentive fee and onetime severance expenses. Operating margin for the quarter was 51%. .

Quarter-end asset balances of $100.1 billion reflect a $14.5 billion increase versus the second quarter of 2020. This was due to market appreciation. .

Net sales event for the second quarter were a positive $200 million. Gross sales were a strong $2.6 billion, and client losses totaled $2.4 billion. Second quarter new sales were diversified globally and included Canadian OCIO, U.S. not-for-profit OCIO and U.K. Fiduciary Management..

Client losses for the quarter and year-to-date was predominantly due to unsuccessful client rebids, M&A activity and continued DB curtailments and will provide headwinds on revenue and profits in Q3 and Q4 of 2021. In the quarter, we were able to retain a number of OCIO relationships globally that we went through a competitive rebid process. .

The unfunded client backlog of gross sales at quarter-end was $2.6 billion, offset by $3.7 billion of recognized losses that are still part of the 6/30/2021 asset balance. We continue to focus on stabilizing our client base, distinguishing our OCIO solution and selling new OCIO relationships.

We continue to advance our ECIO solution with global large and mega suspects and prospects as well as evaluate enhancements to the overall solution..

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

[Operator Instructions] We go now to Ryan Kenny with Morgan Stanley. .

Just wondering if you could give an update on the percentage of revenues or business coming from corporate DB versus some of the growth industries, like endowments and foundations? And then what is the optimal business distribution you think you could ultimately get so?.

Percentage of assets for corporate DB still hover around the low 30% threshold. We certainly have seen more losses on the DB side. But the DB balances have gone up for a couple of reasons. One, obviously, asset appreciation, but the long-duration nature of the fixed income has actually improved as well.

So that's where we are from a business perspective as far as assets under management. And note that 5 years ago, that number was probably closer to about 52% or 53%. So it's still a sizable piece of the business. It does not mean that all the DB plans are on a path determination. Certainly, we know what's happening in the U.S. and in U.K.

with regard to defined benefit plans, but not all of them are on a kind of final glide path, some subset of those are, and we certainly have seen some impact of that over the last 4 or 5 quarters. .

As far as an optimal mix, there's probably a home for defined benefit plans long term. There are some that are still active in some industries that are still supportive of DB. That's usually the minority and the smaller industries like the utility industry.

So I would say that, that's going to continue to add over time and really is being replaced with the longer-term assets of foundations, endowments, other defined benefit plans that are going to be around long term like governments and unions, hospitals, defined contribution, sovereign wealth fund, et cetera. So I hope that answers your question. .

And next, we'll go to Robert Lee with KBW. .

Two questions. Just want to make sure -- unpack a little bit the unfunded pipeline. I just want to make sure I understood it correctly. So it's $2.6 billion kind of committed, but unfunded. But then there's $3.7 billion of relationships that you know you've lost it, they just haven't flowed out yet.

So I just want to make sure that $2.6 billion is not net of the $3 billion. .

No. No. The $2.6 billion is the gross sales. We've had a little bit of sales that have funded from the second quarter in the second quarter, but we have a couple of sales from the first quarter that still haven't funded.

And then I just wanted to call out given the losses that we have incurred that in the $100.1 billion, as of 6/30, there's $3.7 billion of losses that we've been notified that we have recognized or we'll recognize in revenue when they actually lose that should come out probably sometime in the third quarter. .

Okay. And just maybe a margin question. I mean, if I -- if we adjust for the onetime $1.8 million, margins are still running at pretty healthy levels. And you have said in prior calls that kind of don't expect this, you kind of expect that it will maybe get back towards -- I think you have talked about maybe the high 40s or 50%.

So I mean -- is that still what we should be expecting over time? Or do you feel like you've been pretty consistently running at just the 52%, 53% for almost a year now, kind of even adjusting for this? So is that really what we should be thinking a better indication of where you maybe could be over the coming quarters?.

Yes. I think regarding the headwinds of losses and the fact that even clients that stay with us, we had a healthy rebid process this year. We retained $4.5 billion -- I'm sorry, this quarter, $4.5 billion of competitive tenders that went out that we retain, which is a wonderful statistic for us.

But even when that happens, we do have some reduction in fees based on the competitiveness of that. So when you add all that up together and you look at the realities of the losses hurting us a little bit more than the winds benefiting us, I think high 40s is more realistic as we look at longer term into 2022. .

We manage the business judiciously, but we don't just manage for expenses. We want to invest appropriately when we're looking at that with regard to ECIO and some initiatives we're doing on that front. But there is some benefits we've gotten from travel.

And really because of the clients probably will have a delivery device that will always include some aspect of virtual. So there will probably be long-term travel savings that we have. We want to be in front of our clients.

We love to be in front of our clients, but we may not need as many SEI resources that we've had in the past in front of our clients in the future. .

Great. And then is there any rule of thumb that you're seeing that, hey, when we win on a rebid on average, the concession on fees is 10%, 20%? I mean, I don't know if there's any kind of rule of thumb that you're -- or something that you're experiencing that would be helpful. .

Yes, I could go on for a while on that. And unlike Wayne, I worked to 7, so I can go longer if you want. But kidding aside, it's so idiosyncratic based on each specific deal. But if you look at it in general, it's probably 10% to 12% concessions off of what we've had in the past, but it depends on the competitive framework.

Now again, some of that we might be able to get back over time if they're looking to redeploy more into alternative investments. But I'd say 10% to 12% is probably a good marker to think about. .

And there are no additional questions in queue. .

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

Thanks, Paul. So ladies gentlemen, we're making progress on 2 fronts. On the first front, we were very fortunate to have kept our workforce healthy and productive, delivering a high level of client service throughout the pandemic. On the second front, we are building momentum throughout our businesses. And this is the end of our time this afternoon.

Please be safe and remain healthy. Thanks a lot. .

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect..