Greetings, and welcome to the Envestnet First Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. .

It is now my pleasure to introduce your host, Josh Warren, Chief Financial Officer. Thank you. Sir, you may begin. .

Good afternoon, everyone. I'm Josh Warren, Chief Financial Officer of Envestnet. Thank you for joining us on today's first quarter 2024 earnings call. .

Before we begin, I'd like to point out that our earnings press release, supplemental presentation and associated Form 10-Q can be found under the Investor Relations section of our website at envestnet.com. .

This call is being webcast live, and a replay will be available for 1 month under the Investor Relations section of our website as well. .

During the call, we will be discussing certain forward-looking information. This information is based on our current expectations and is not a guarantee of future performance.

I encourage you to review the cautionary statement on Slides 2 and 3 of the supplemental presentation for the potential risks, uncertainties and other factors that could cause actual results to differ those expressed by the forward-looking statements. Further information can be found in our regular SEC filings. .

During this call, we will be referring to certain as-adjusted financial measures. Please refer to the appendix in our supplemental presentation for a reconciliation of these as-adjusted financial measures to the most directly comparable GAAP measures. .

Joining me on today's call are Jim Fox, our Board Chair and Interim CEO; and Tom Sipp, Executive Vice President for Business Lines. .

On our call this afternoon, we will provide a company update as well as an overview of the company's results during the first quarter. After our prepared remarks, we will open the call to questions. [Operator Instructions].

I'll now turn it over to Jim Fox. .

Thank you, Josh. Good afternoon, and thank you for joining our Q1 2024 earnings call. We appreciate your time and look forward to highlighting for you the strengths and opportunities Envestnet provides for our clients and shareholders. Let me start with our Q1 results, which represent our focus on disciplined execution. .

Q1 revenue was $325 million, representing a 9% growth over Q1 2023 and near the high end of the guidance range. .

Adjusted EBITDA was $70 million, slightly above our guidance range and representing a 22% adjusted EBITDA margin and approximately 350 basis points of margin expansion when compared with Q1 2023. .

Adjusted EPS for Q1 was $0.60, also above our guidance range, up 30% from the $0.46 we reported in Q1 2023. .

AUM net flows were $12.5 billion, an annualized organic asset growth rate of 12%. .

Free cash flow in Q1, as always, is impacted by seasonality but improved more than $40 million year-over-year. .

Josh will discuss our results in more detail later in this call. .

As we look forward, Envestnet is in a tremendous strategic position for growth. We are uniquely able to deliver for clients through our connected ecosystem and extensive capabilities. Envestnet continues to be in this leading position because we are executing on what our clients need. .

We have unmatched scale that the leading wealth management firms, RIAs and broker dealers rely on to power their businesses. We are the industry leader by assets, advisers and accounts. We have invested in our technology and data capabilities connected to the broadest set of solutions. .

One, we are providing meaningful data insights 20 million each day that enables advisers and home offices to make better decisions and put more assets on our platform. .

Two, our technology is industry-leading and connects all parts of the adviser workflow. You see this in client engagement and an industry recognition like the annual P3 survey where Envestnet finished in the top 3 in 13 separate categories. .

Third, our investment platform is the largest in the industry with the broadest set of solutions, investments, alternatives, insurance, credit and supported by the leading product producers in the industry. We have a talented, experienced and aligned leadership team that is driving the next phase of Envestnet and delivering results. .

All of this is why we are deeply and broadly embedded in our clients and partners, driving the growth and productivity of advisers by providing the leading wealth management platform to the industry.

We have connected the pieces of Envestnet to create scale and competitive advantage which leads to revenue growth, operating leverage and improving free cash flow conversion. .

We're focused on execution, delivering greater value for our clients and that, in turn, creates value for our shareholders. .

I'd now like to turn it over to Tom Sipp, who leads our Envestnet business lines for an overview of the drivers of the business.

Tom?.

Thank you, Jim. I would like to stay with a very important KPI that underscores our progress. In Q1, we delivered $12.5 billion of AUM net flows into our asset manager and marketplace. This compares to $30 billion for all of 2023. Now let me highlight the key drivers of this progress and exciting momentum. .

Envestnet Wealth Management platform continues to be unparalleled in both capabilities and scale. We provide access to the solutions advisers need to provide holistic advice.

We are essential partners for our clients, asset managers and product manufacturers, and we continue to enhance the breadth and depth of our technology capabilities to solidify our leadership position, drive sales and deliver financial results. .

Let me provide some context for the marketplace we serve by highlighting some of what we confirmed via our adviser survey. We conduct a survey each year to help inform our road map and ensure that our strategy is aligned with what our clients are looking for. I'd encourage you to review the survey deeply when it comes out over the next few weeks.

But today, I want to call out a few key highlights. .

The average broker-dealer affiliated adviser expects to increase their fee-based mix by 10 percentage points in the next 5 years. That's a tailwind to utilization of managed accounts and thus, a tailwind to utilization of Envestnet. .

Most advisers do not want to be a CTO. They don't want to assemble, integrate and maintain a plethora of point solutions. In fact, roughly half of the advisers that are assembling their own tech stacks today say they would prefer an all-in-one solution. .

Third, advisers want more seamless workflows. A more unified experience is the primary reason an adviser changes technology providers. .

This adviser feedback informs our strategy of offering a best-in-class one-stop technology and fiduciary platform. Investments we've made in the last few years in our proposal engine and managed account solutions position us to attract flows to our platform and accelerate revenue growth in the years to come. These trends align with our focus. .

Specifically, we have enhanced the planning to proposal process to help the adviser go from a financial plan to implementation of the full set of investments and solutions an adviser needs to particularly service their clients. In fact, in Q1, we experienced the highest usage of our proposal generation capability.

This enabled the $12.5 billion of net flows into an AUM marketplace in Q1 as compared again to $30 billion for all of 2023. .

Finally, within in our PMC solutions, our high net worth solutions, direct indexing and tax overlay capabilities have each seen year-over-year growth of more than 38% in assets, accounts and advisers. .

Our turnkey asset management program is industry leading. We have over $450 billion of AUM and continue to take managed account share. .

Operating from an industry-leading position allows us to deliver more functionality, better technology and deeper integration than anyone in the industry. This is a significant competitive advantage and one that we will continue to press. .

We work with over 700 asset management partners to deliver for our adviser clients. We are seeing more interest from asset managers to partner with us to provide an even more customized, integrated and seamless experience. This will positively impact the client experience as well as our economics.

This is how we are driving our results, and I want to underscore what those results are. .

Envestnet during Q1 had revenue growth of 9%. We are serving over 109,000 advisers with over 19.6 million accounts totaling over $6 trillion in platform assets. We have improved margins, and prudent expense management will remain a focus.

Positive AUM annualized organic growth of 12% handily outpacing growth rates of other large TAMs and wealth managers. AUMA accounts grew 11% and AUMA accounts per adviser grew 10%. Our client service scores continue to show improvement year-over-year. .

So what's next? We continue to enhance the features that drive further adoption and usage of the platform because that is what drives our top line.

We will continue to make it easier for advisers to seamlessly move from planning to implementation as we see the impact of facilitating more client and adviser actions in our flows and cross-sell initiatives. We will be rolling out enhanced outsourced trading and model management capabilities to enable greater efficiency for advisers and Envestnet.

We will enhance our unified managed account and unified managed household capabilities, which allow the adviser even more ability to personalize portfolios for their clients, but at scale. .

Jim mentioned earlier the number of insights we deliver to advisers every day. We are incorporating those insights into the tools that advisers use to make them actionable, powering our advisers to be more effective with their clients. .

Additionally, we will continue to focus on integrated experiences for advisers and clients. We recognize that an integrated wealth management plus custody experience is a key component of a truly connected technology platform.

So we are working to deliver the account opening, funding and servicing workflows between our wealth management platform and custody back-office functions in one single experience. .

We have and always will support a multiple of choices for every channel in the industry to meet the needs of our clients, which will be different depending on their persona. What we're doing is impacting our clients and driving our results.

The continuous delivery of enhancements of our technology, tools and solutions drive discrete revenue opportunities and create a competitively advantaged leading platform. We've connected the components to meet client needs and drive holistic client relationships. .

Now let me turn the call back over to Josh. .

how the strength of our business translates into our attractive growth algorithm, the operating leverage in our business and our balance sheet. .

Our client foundation supports our growth algorithm. The result is growing and durable free cash flow as we expand our offerings and extend through the value chain. Our strategy is consistent, to focus on expanding our footprint among our existing adviser base by delivering mission-critical technology, including both software and solutions.

As I've mentioned previously, we do not depend on adviser count growth to drive our growth algorithm or continue to expand our margins. .

As the adviser landscape continues to evolve, we are implementing differentiated pricing strategies to better focus on growing with our clients and delivering an integrated platform across products.

As a reminder, our Wealth Solutions segment generates both asset-based and subscription-based revenues, while our Data & Analytics segment generates subscription-based revenues only. .

Envestnet has traditionally defined asset-based revenues as primarily consisting of variable fees for providing our platforms. In our Wealth Solutions segment, across diverse client channels, these pricing constructs provide the breadth of solutions to fit the industry and enable Envestnet to grow. .

Envestnet has delivered strong and structural organic asset growth measured by our consistent net inflows. We believe that structural growth from consistent inflows represents one of the most enduring features of our franchise despite variability from cyclical or seasonal factors.

We view the inflows into Wealth Solutions asset-based revenue accounts during Q1 of nearly $33 billion as a confirmation of our strategy to expand our relationships with existing clients. .

Q1 flows demonstrate both Envestnet's positioning as a market leader as well as specific actions we are taking to grow wallet to our clients. Although mix will vary from quarter-to-quarter, we have significant opportunities to continue to go deeper and grow with our long-standing clients with our connected ecosystem of comprehensive capabilities. .

A couple of call-outs regarding our net flows. Approximately $17 billion of Q1 inflows were related to a long-standing enterprise clients, a top 10 regional banking firm, extending their use of our platform to replace an in-house reporting tool late in the quarter.

These low-fee assets appear as AUA flows and create a mix headwind to our overall effective fee rate, which is reflected in our outlook. .

Our March core end numbers also reflect 1 approximately $10 billion hybrid RIA. In other words, the firm operating as both an RIA and a broker-dealer that has been in the process of leaving our platform for several months. This firm used Envestnet for reporting only and was not a significant contributor to our revenue.

We had anticipated this deconversion away from our platform during Q1. Given the longer-than-anticipated timing, we carry the assets as part of our March results. The net outflow from this idiosyncratic event should be reflected during Q2. .

During Q1 2024, total asset-based revenues generated by Wealth Solutions was over $202 million, a 15% increase from Q1 2023, supported by improving market conditions. Year-to-date, equity markets have continued to be strong, while the yield curve has showed signs of normalization despite remaining inverted as it has been since 2022. .

Investors often keep cash in their portfolios for liquidity needs and defensive reasons. However, cash balances have remained at all-time high levels given attractive short-term rates where investors are being paid to wait.

Investors with large cash on the sidelines run the risk of missing a longer opportunity as research suggests time in the market leads to better results than it tends to time to market. .

Client propensities to hold more assets in cash has created a headwind to our results, albeit one we view as temporary. We believe money invested in the debt and equity markets will help investors accomplish their objectives and be more accretive to Envestnet's financial results. .

During Q1, our Wealth Solutions subscription-based revenue of $84 million represented a 5% growth over Q1 2023. Q1 wealth subscription-based revenue included approximately $3 million of FDx revenue.

FDx, a leading marketplace for annuities, was formed in 2018 to enable financial advisers to provide insurance and income protection products to their clients. FDx is integrated into the Envestnet platform. In accordance with GAAP, Envestnet has historically consolidated FDx' operations on our financial statements. .

In connection with the recent funding round with FDx with new capital led by insurance company partners and investment clients, during Q2, we anticipate deconsolidating FDx in accordance with accounting rules, reflecting updated governance of that entity.

While Envestnet did not participate in this funding round, we remain the largest shareholder in FDx, owning approximately 38% of the company. During 2023, FDx contributed approximately $9 million of consolidated revenue, with approximately 90% of this contribution in subscription revenue. .

On an overall basis, Wealth Solutions revenue grew to over $289 million during Q1, representing 11% growth over Q1 2023. .

Turning to our Data & Analytics business, which generates subscription-based revenues across open banking and alternative data offerings. During Q1, our D&A revenue was $35.1 million, representing an 8% decline from Q1 2023.

As mentioned on previous calls, the March 2023 regional banking turmoil created a headwind for that business and the comparison is relative to a primarily pre-turmoil base. .

improving the quality of API exchanges, improving uptime, reduced incident response time and securing several contract renewals. We will keep all stakeholders updated as this transformation progresses. .

For D&A, sequentially Q1 represents a modest decline from Q4. The primary source of that decline was in professional services revenue, which has been higher than historical trends during the last few quarters. Relative to Q4, D&A had a less than 1% sequential decline in subscription revenue, consistent with our stabilization efforts.

We believe the actions taken will stabilize and orient that business for future growth. .

Now moving on to expenses. As a reminder, the platform infrastructure investments we have made over the last few years enable us to achieve operating leverage by growing revenues ahead of costs to expand our profitability and grow our free cash flow.

As previously detailed, Envestnet's costs consist of a combination of noncontrollable and manageable expenses. Our noncontrollable expenses include asset-based payments to third-parties, which move in tandem with revenue growth and are common for the wealth industry.

During Q1, our direct expenses were nearly $127 million, including $118 million of these asset-based costs. .

compensation related, whether delivered in the form of cash or stock; non-compensation expenses; and capital expenditures. Because of our scale, we expect an overall year-over-year decrease of these manageable expenses in the mid- to high single digits for 2024. Let me walk through the components. .

As a reminder, during 2023, Envestnet reduced its head count by 10%, consistent with the conclusion of a period of elevated platform infrastructure investments.

For 2024, while we expect our stock-based compensation to be approximately flat year-over-year, we expect total 2024 compensation-related costs, regardless of a treatment regarding software development, to be down in the mid- to high single digit year-over-year. This includes all salary, benefits, severance and stock-based compensation. .

The second major area of total cost is non-compensation expenses, which encompasses all operating expenses, including, first, any direct expenses unrelated to our previously described noncontrollable asset-based costs; second, G&A; third, non-compensation related software development costs that were capitalizable based on the stage of development or deployment; fourth, consistent with our emphasis on free cash flow, we consider manageable expenses comprehensively and includes several nondiscretionary items, including income taxes, our net cash interest expense and any other economic or cash costs.

We expect a reasonably similar level for these nondiscretionary expenses in 2024 as in 2023. .

Overall, given our scale, we anticipate our 2024 non-compensation costs will be modestly lower versus 2023 despite inflationary headwinds, and we will continue to focus our expense efforts on this area going forward.

The remainder of our total expenses, our CapEx, which for Q1 was approximately $2 million, reflecting the timing of spend rather than any variance from our 2024 expectation of approximately $10 million. .

When we aggregate the 3 components of our manageable costs, compensation related, all non-compensation costs and capital expenditures, we expect our 2024 total manageable costs to decrease overall in the mid- to high single digits.

As a reminder, this includes both all cash costs, whether capitalized or treated as operating expenses, as well as stock-based compensation. .

In addition to adjusted EBITDA, which is a useful metric to track our performance, we are committed to providing greater transparency regarding our free cash flow. Free cash flow for Q1 2024 was negative $20 million, reflecting seasonality and an improvement over the negative $62 million from Q1 2023.

My and our focus will continue to be on improving this number in 2024. .

Turning to our balance sheet. Consistent with the seasonality observed in previous years, Envestnet's cash position declined during Q1 to $61 million. .

As of the end of Q1, our leverage ratio, defined as total debt less cash over trailing adjusted EBITDA, was approximately 3.1x. This ratio represents other modest decline quarter-over-quarter and approximately a full turn of reduction from this point during the prior year. .

A tranche of convertible debt, which we pay 75 basis points of interest on, is due in Q3 2025. Given our low cost of carry, we intend to continue to be patient and prudent regarding our capital structure.

Our fully undrawn $500 million revolver provides optionality as we patiently evaluate market conditions and look for further opportunities to enhance our capital structure. .

In total, we believe our strongly position and continued deleveraging give us flexibility as we pursue our strategy. We are modestly ahead of schedule with respect to our deleveraging as we continue to look forward from our period of necessary and elevated platform infrastructure investments. We expect to further reduce our leverage ratio during 2024.

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As mentioned previously, beginning in Q2, we expect to account for FDx as an equity method investment. In connection with our expected deconsolidation of FDx, we have moved those assets and liabilities into separate line items on our Q1 balance sheet. .

Looking ahead, for the second quarter of 2024 and consistent with how we've provided information previously, we expect revenues to be between $337 million and $345 million, representing 9% growth over Q2 2023, assuming the midpoint of the range; adjusted EBITDA to be between $71 million and $75 million, the midpoint of our guided range would represent approximately 350 basis points of margin improvement versus Q2 2023; and adjusted EPS to be between $0.60 and $0.65.

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Envestnet continues to be in its leading position because we are executing on what our clients need and delivering shareholder value. We have unmatched scale that the leading wealth management firms across channels rely on to power their businesses. .

Our first quarter results are a testament to our differentiated products, deepening client relationships and inherent operating leverage in our business. We see tremendous runway for future continued growth and margin expansion from here and look forward to updating you in future quarters. .

Before we take your questions, I would be remiss if I didn't say thank you to our shareholders, analysts and the entire Envestnet team. These calls are important milestones for us to share our progress and articulate our vision. Thank you for your support, and we look forward to your questions. .

[Operator Instructions] Our first question comes from the line of Devin Ryan with Citizens JMP. .

So I guess I just want to start on the flows, and you gave a lot of good background there around the strength in the quarter. And I appreciate there's going to be some nuance quarter-to-quarter around different things, and you hit the enterprise win and the RIA outflow that will impact 2Q.

But it sounds like, more broadly, you guys are feeling really good about how the strategy is coming together around flows. And even if we adjust for the enterprise win, it would still be a good quarter there. .

So I just want to dig in a little bit more and just get a sense of like, is something changing in the environment where you're just seeing maybe more momentum or deals are accelerating in the pipeline because counterparties are feeling more comfortable? Or is it really just the strategy is winning out? I just would love to get more of your perspective on that and then just the sustainability, forgetting that there's going to be some lumpiness quarter-to-quarter with different idiosyncratic events.

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Sure. Devin, thanks for the question. Really appreciate it. And first off, you're right, I mean let me first point out how proud we are of our flows during Q1. We did $32.7 billion of net flows, purely at a headline level. You've been covering Envestnet for a long time, that's our biggest flow quarter since 2015.

It's a reflection, as you say, of the focus and commitment that we have to our clients. .

Maybe a couple of things to call out to your question. The first is I just want to make sure that one thing that we are focused on not losing sight of, even with a substantial number of $33 billion, is each and every dollar of flow is an adviser who's using the Envestnet platform to drive their business, help someone achieve an objective.

But like I mentioned in my prepared remarks, structural inflows are one of the most enduring features of our wealth franchise. The composition, to get into it a bit, that gives us confidence that our clients are doing more with us. And that momentum, in our view, creates a nice set up for future growth. .

So in the first quarter, to break it down, $12.5 billion of those flows were AUM. That tends to be a higher fee. And then there's an additional $20-plus billion of flows which were AUA. These are lower fee, but they're incrementally profitable business for us.

There are, as you say, always ins and outs, but being a structural grower means having that track record of net inflows. .

And look, regarding the AUA, many times, AUA activity gives us a foot in the door that could cause other higher revenue margin products down the road. This situation in Q1, the one I described, maybe a little different from that pattern. The $17 billion was a current client outsourcing more to Envestnet, retiring an in-house tool.

So think of it as a client using our scale, very natural for a platform business, one with long-standing clients who are just looking to do more with us. So I'd say, in aggregate, Devin, we view that case study, the other case studies that underlie our flows, as evidence of our strategy working. .

I would just add, this is Tom. I talked about the $12.5 billion of AUM flows. That compares to $30 billion for all of last year. That's a combination of our asset manager marketplace. And we have very solid growth and partnering with the biggest asset managers in the marketplace.

They're leaning in more and more with our platform and deploying their sales force and driving flows onto our platform. And then our proprietary products, we're starting to hit scale. And we've talked about high net worth solutions, direct indexing, tax overlay products.

And those cross-sells and delivering those solutions in an integrated way throughout our technology is working. .

Okay. Terrific color. And then a follow-up just on Data & Analytics trends. We haven't heard too much quantitative on the outlook there the last couple of quarters. We appreciate there's been some pressed lines around maybe strategic things you're thinking about there.

But if possible, it would be great to just get a little bit of an update around some of the business drivers and things you've been doing to kind of better position that business and just more broadly, how you're thinking about the outlook there as well. .

Sure. So I tried to cover a couple of them in my remarks. We have several initiatives that we're excited about, really with all sort of focus of helping to drive growth going forward. So first step is stabilization. And then secondly, we're reorienting that business for future growth. .

I'd say we have a variety of opportunities in front of us and just we're certainly going to keep you updated as these initiatives continue to play out.

But some of the ones I mentioned, improved uptime, improved API exchanges, just generally a higher-quality business, a higher quality franchise, we're excited about the transformation journey that we're on.

And we view this quarter's results, particularly on subscription revenue, which has been generally flat over the last couple of quarters as an early return that we are stabilizing that franchise and will return it to future growth. .

Yes, this is Tom. I would just add, we are focused on stabilizing the business, stabilizing the data sources from our client base and innovating and creating new products. The underlying client activity throughout 2023 was down, consistent with overall market activity.

That, we've seen some slight recovery, if you look at some of the usage or underlying usage data. But it's really stabilized the business that we have, stabilize the data set. And then we've reduced the cost base to improve the operating margins and then gradually grow it from here. .

Our next question comes from the line of Michael Cho with JPMorgan. .

Josh, I just wanted to touch on one of the topics you highlighted. I think you called out kind of Envestnet's approach towards differentiated pricing as you grow with your client base. I think there's been some news during the quarter about maybe some competitors raising prices for some of their products into the RIA client.

Just curious how Envestnet is thinking about this competitive dynamic. And maybe you could just kind of unpack or flesh out what you mean by differentiated pricing approach for Envestnet solutions. .

Michael, this is Tom. I'll start, and maybe Josh can add. In the RIA space, we have changed our pricing. We're considered a premium product, and our pricing is premium compared to our competitors. And we do have pricing leverage based on the investments that we've made over the past couple of years. We have really the best trading platform in that space.

And the overall platform and client service feedback is really, really positive. And our approach has been to bundle mainly analytics and then integrate and cross-sell managed accounts and create a more holistic relationship with the RIA versus just a technology or software relationship. .

So if you look at just the software, you're seeing higher rates, higher pricing, bundling with analytics. But more importantly, we're cracking open a very, very different holistic relationship with the firm that has meaningful upside opportunities as you then integrate and scale the fiduciary opportunity. .

Maybe I would just add to Tom's point of bundling that which is previously sold separately or that which our competitors need to sell separately, that's a major differentiator for us. But as far as some of the ins and outs of pricing, things like minimums, things like break points, we've been taking a fresh look at it.

And most of the quarter-to-quarter stuff you see is generally a function of mix. As you know, Michael, our contracts are long dated.

Our clients are on long-term contracts, and a lot of these initiatives are going to play out over the course of the next couple of years ahead, and that's why we're so enthusiastic about the runway we have in front of us. .

Okay. Great. And just a quick follow-up on free cash flow. You highlighted the seasonality from 1Q. Just kind of thinking through how we should frame kind of cadence of free cash flow for the remainder of '24.

And I realize it's early, but any kind of initial thoughts or rework around how we might be thinking about normalized conversion ratio as we kind of look beyond maybe the 25% margin once we get there. .

Sure. Well, you're right. I mean Q1, we mentioned, obviously, had some seasonality there. That's been evident in the first quarter of '23, the first quarter of '22 and was evident again in the first quarter of '24.

But what we were able to deliver as far as improving our free cash flow of $42 million relative to where we were in Q1 is something we're proud of. We're proud of the fact that we are leaving Q1 with more cash on hand and a lower leverage ratio than we were a year ago. .

With regard to the general flow-through, the guidance that I provided as far as our overall cost outlook, that's everything. That's a fully cash-based approach, which is consistent with how we think, consistent with how we budget, consistent with how we are thinking about the company and thinking about the opportunity ahead.

So as far as conversion going forward, some of the cash consumers, things like severance, things like onetime restructuring, you should all expect 2023 numbers to not be appropriate run rates going forward. And we'll just keep you updated as we continue to make progress there. .

Our next question comes from the line of Alex Kramm with UBS. .

Just following up on the pricing question, but specifically, I guess, related to the guidance for the second quarter. It looks like a pretty steep decline in the implied fee rates quarter-over-quarter.

I assume that some of the onetime changes here in terms of the flows that you pointed out, those 2 items, just wondering, is that the bulk of it? Or would you highlight any other specific mix items that is contributing? And I'm asking because really, if I look at the last 3 quarters, the deceleration in pricing, again, implied pricing, has accelerated a little bit.

So just wondering, is there any other underlying trends you would point out?.

No, Alex, you've got it. I mean, the fee rate is declining, but I would say it's declining for the right reasons. These are new revenue opportunities, which are consistent with our strategy. From quarter-to-quarter, mix is the primary variable. And I would say the blended fee rate is probably two things, the two headlines.

One is just clients holding assets in cash, number one. And then this higher mix of reporting assets that I referred to earlier. Those are the major drivers. .

Figured I ask anyways. And then just another one, on the kind of first-party managed products, I've asked about this in the past, I mean you certainly highlighted some of the high net worth, some of the managed accounts here as growing faster. But if I look at that number in aggregate, that's $40 billion that you're standing at.

It's kind of been, both on a quarter-to-quarter, year-over-year basis, very much in line with the overall AUM and AUA growth. .

So look, it's keeping up. But at the end of the day, I think this was supposed to be a big focus area. So just wondering what you need to do to really accelerate that and having those growth rates stand out, and if there's anything else going on where maybe those products are just not getting the right traction in the marketplace, for whatever reason.

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Yes. I would say when you look at the data, the high net worth tax overlay and direct indexing growth rates, as I said in my remarks, are very strong. And if anything, they're accelerating, the 38%-plus growth rates in advisers, assets, flows, accounts. Where we're seeing net outflows is in our proprietary models business.

And these are models that we created 10-plus years ago and we created the marketplace and then opening it up with third-party managers, which thus created more competition if you look at it just from that lens. .

So those proprietary models of the net outflows, we've just recently launched our proprietary ETFs and we're recapturing some of those assets instead of them leaving the firm. And they're just less competitive over time just based on the broad marketplace and other options that are available.

But now that we're launching the ETF business or products and we've created an ability to recapture those assets, those outflows will decrease, and then you're going to see that the growth from the other initiatives really take hold because we see this high net worth DI, tax overlay as very sustainable, persistent growth.

So it's been really the drag from that long-term proprietary models business that's impacting the numbers. .

Our next question comes from the line of Surinder Thind with Jefferies. .

I'd like to start with a question about just the data insights engine and the 20 million insights that you're generating daily.

Any color on what you're seeing in terms of from an adviser perspective any change of behavior, interactions? How we should interpret that metric and how that's kind of been helping the business so far?.

Yes, Surinder, I would say a couple of things. So we're generating about 80 different use cases across those 20 million insights. And there's a handful that are really taking hold.

So a couple of examples would be tax opportunities, accounts or positions that we're serving up to the adviser where they would benefit from a tax overlay capability or accounts that the advisers managing, and there may be ways to manage it more efficiently, and we're serving that up both to the home office and to the adviser.

And then annuities that may be out of the surrender time period and maybe at a higher fee, and there are replacement products that are more suitable for the client. So when you dive in, there's probably 5 to 10 use cases that are resonating and advisers are using more and more. .

And then another important aspect is delivering these insights where the adviser does business.

So it's one thing to develop the insight and then send them an e-mail, we're actually delivering the insights within their core wealth user experience and operating platform, and that will make a big difference over time around the adviser's ability to see and action against that insight.

And then we've done a lot of work to deliver those analytics within our financial planning engine. So create a financial plan, come up with a recommendation and then connect planning to our wealth ecosystem where we can then transact and deliver more fiduciary solutions. .

So it's a combination of the insight teeing up the adviser to deliver against the financial plan, but then making it easy to follow that financial plan. And for us, the benefit is more AUM over time. So we're seeing traction.

It's still a lot of opportunity, a lot of greenfield, and we think there's a lot of interest in the insights as we continue to deliver them throughout the platform. .

And then a follow-up on some of the pricing questions here, or just on the AUMA side of the business. The fee rate has been relatively stable when we look over the last few years. But one of the things is that the AUM percentage has gone up kind of materially from roughly 40% a few years ago to 50% today. But the fee rate hasn't really moved.

Is there any color there? Is there a certain mix shift underneath in the product set that you're selling where it's just slightly lower fee AUM type products that are in that mix now? Help me to understand that. .

No. Surinder, I would think of it as, even though the mix is moving, as you correctly surmised, between AUM and AUA, AUA, and in particular, some of our big blocks of assets that are reporting only, are really low fee. And then when you look at it all together on a blended basis, you start to see that phenomenon.

The reporting assets, those are essential. They enable successful client relationships. They enable a foundation in many respects for clients to do more business with us. But you should think of that as, and to a certain extent, dragging down the blended fee rate as when you sort of lump everything together in terms of AUMA into a mix. .

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