SEI Investments Company (SEIC) Earnings Call Transcript & Summary

Good afternoon. Before we begin, I have a quick disclosure to read. So for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So we are delighted to have with us Dennis McGonigle, CFO of SEI Investments; as well as Wayne Withrow, Head of Independent Advisor Solutions. Dennis and Wayne, thank you so much for joining us this afternoon.

Thanks, Ryan. Happy to be here.

Thank you.

Great. So Wayne, maybe we can just kick off with a broad question on the Investment Advisors business. So on one hand, there's a lot of underlying structural tailwinds in the advisory space. And on the other hand, the TAMP space is very competitive. So maybe you can just walk us through some of the biggest drivers of growth for the business going forward and some of the biggest things you're seeing in that business?

Yes. I'd say you are correct, there are some tailwinds, and there's substantial headwinds. I think the biggest headwind is the headwind that everybody sees, which is fee compression in the whole asset management business. That is facing everybody, it is most prevalent now, what I would call more of the product-type people. So the actual investment managers, it is now -- it's coming into the investment advisory space. And I think we'll be intensifying there also. The closer you get to the client, the less intense the fee proposal on the back end, but I think the fee pressure will get there. The bigger -- or not bigger, but another big trend of -- it's getting stronger and stronger is the whole growth of technology in the advisory space and the importance of technology in advisory space. As the world -- we all know it, I mean Amazon, Google, Googlization of the world, everything is being technology-driven, and the advisory business historically has been a very personal business, person to person, face-to-face kind of business, and especially the Independent Advisor space has grown based upon relationships over time. Now with more and more people being -- and COVID could have brought us on even more so than ever, being more comfortable working in an environment such as this. The importance of that face-to-face personal relationship becomes -- moves us some way and the importance of digital capabilities becomes much, much more important. Now on the Independent Advisor space, they don't necessarily have the size and the scale and the resources to compete with some of the bigger providers in that space. So for firms such as ours, the importance of providing robust technology solutions that they can outsource and use is much, much more important than it has been in the past. And that's how we're prioritizing our investments in this space.

And when we think about sales in the Investment Advisors business, how important is reopening to get sales to tick up in return to the office specifically?

Yes. I think that reopening helps sales, but I wouldn't phrase it that it is critical to reengaging sales. I think the whole COVID and this whole environment, what it has done, is it makes end customers and investors and advisors more accepting of sort of a digital interaction and a way to distribute digitally. So I think opening up that digital distribution channel side-by-side, with the person-to-person channel is actually a very, very large opportunity. So opening up will help, but capitalizing -- changing the way you do business and capitalizing on the opportunities that COVID has presented to us, I think it's actually the most important factor.

And then you've touched a lot on the topic of technology and how critical that is for your business and really for any provider in the TAMP space. So just wondering how do you, as SEI stand out against competitors? And how would you score your current tech stack relative to where you want to be?

Yes. I mean that's -- Ryan, that's kind of a loaded question. I mean, of course, I'm going to say we have the best tech stack [indiscernible]. It's much more robust, much more user-friendly and all that. But in all honesty, I think our tech stack is better than anything that's otherwise available out there. I would especially point out areas like our online model management capability, including tax management, tax modeling, all that, I think, is unparalleled in the industry. We have areas where we're investing more and more to further enhance that. Yes, do we have the best custody platform? Yes. Do we do have online fee collection? Do we have aggregation? Do we have performance measurement? Yes. But we stand apart in sort of our online trading and model management capabilities. We stand apart in our customer reporting capabilities. And with our recent Orange acquisition, I think we'll be sort of on the cutting-edge of digital interaction and digital collaborations with advisers and their investors.

And then you mentioned customized reporting. We just put out a report where we did a deep dive into the wealth management industry and all wealth management, including the RIA and Independent Advisor space is really focused on delivering customized solutions to end clients and to advisers. So just want to understand what investments you're making to really be at the cutting-edge of delivering customized solutions to your advisers?

Yes. We call it personalization. It would be the phrase that we'd use. And everything needs to be personalized now. And where that is -- I know you're interested in this, Ryan, from some conversations we've had, where it's kind of more prevalent is kind of in the investment space. Where I'm going to have a 60-40 portfolio across the efficient frontier, and I'm going to do that, and maybe that would fly 5 or 6 years ago. That doesn't fly today. People want more personalized investment solutions. When you look at sort of the area of ESG, for example, people want to say, I want a portfolio, but now I'm interested in promoting some type of social agenda, too. And I think that's the newest trend going on. And as we get in more and more, later on this year, we'll be introducing sort of what we would call sort of a positive ESG trend capabilities. So you want to say, okay, I don't want to invest in sin stocks, I don't want to invest in firearms. So whatever you want to say. There's plenty of ETFs or plenty of products you can buy today that exclude categories. But can you say that when I look at my model portfolio against the index, I want to have a double allocation to people that support environmental costs. So you can positively tilt portfolios to support a cause. And that's in furtherance of this personalization trend that you see. So you need to have the reporting, you need to be able to interface with clients to show you're delivering on that, but we actually need to be able to deliver -- build and deliver the personalization and then report on it.

And is there anything you can do or that you are doing with direct indexing or fractional shares in order to enable that personalization in something like ESG?

Yes. So we have -- we introduced a direct indexing product on February 1 this year. So we have a direct indexing products, which covers the major indexes it currently has, a tax overlay that you can have, and it currently has an ESG overlay on that, that you can buy or not buy, depending upon what your preference is. Later in this year, we'll be introducing, what I just talked about, which is sort of this positive ESG trend. So you'll be able through the power of technology, almost create a personalized direct index that satisfies your ESG agenda. So I want a 200% overweight in the environment, I want 150% overweight, a reduction in sin stocks, whatever it is, and that would be the [ lion ] index, if you will. And then once you load that into the system, the trading and the management can all occur on an automated basis. And we have direct index. And so it would all occur sort of a beta environment and not an alpha environment. It's available today in an alpha environment. But the world wants more passive, too.

Sounds great. So what kind of demand are you seeing for ESG right now? And how significant to your growth, do you feel like that channel is for the future?

Yes. I think right now, the way I would describe it is ESG is a lot more [ cost than access ]. I think that it's in all the news and everybody -- we have it and we have pretty robust sales in ESG. But I think this is -- we're still in the early stages of the ESG trend. And I think a lot of that is because you need technology to support sort of affirmative or positive ESG tilts and stances as opposed to these exclusionary stances, which is what most of the technology supports today. So I would say that will be a fairly significant part of the growth going forward. And to couple it, you have to couple many of these together, to couple of together with their direct indexing capabilities, so you can get ESG in kind of a passive environment as opposed to ESG in an active environment, which is where it primarily exists, at least at the individual investor level. Where if you want to get there, that will really open up the markets.

And then shifting a little bit towards private market opportunities for your end clients. We're also hearing that there's a lot of increased interest from wealth end clients for access to private markets, shifting down into high net worth, mass affluent, what kind of demand are you hearing from your adviser, clients or access to private markets? And what type of tech solutions or capabilities are you offering them in order to maybe offer that now or be prepared to offer that in the future?

Yes. So we have a private investment solution that we offer to clients. The reality of it is, so the -- well, a large majority of the Independent Advisor marketplace. If you have a $500,000 or $1 million RIA, when you look at kind of accredited investor standards and those things, the ability for them to really take advantage of private partnerships in those isn't really there as much. Now we offer that product, and we do. And when we have clients that have true high net worth clients that don't want to take advantage of the products, we custody those, we take them on board, we can process them for select clients that are large enough where it makes a difference. We've looked occasionally. We're still actually in the middle of a project now, where you can take advantage of some changes in the SEC rules to make this available in kind of the nonaccredited space, which is kind of like what an iCapital or someone like that would do. I don't know how much of it is and is available in the mass distribution market. It's a good topic to talk about. But what really is the opportunity, I'm not entirely positive.

And then is there anything on the crypto side or digital asset side that your platform would ultimately enable?

We don't really have any projects underway for crypto in the adviser space. I know that we have crypto capabilities, and I think we actually have crypto funds in the IMS space. So we have the individual adviser space. We have the ability to process and pool and offer products in that space, but we're currently not offering that product in the Independent Advisor space.

And as a company, Ryan, just to jump in here. The -- yes, we were pretty active in the distributed-ledger technology space a few years ago. And it actually ran a pretty good proof of concept with some of our bank clients on asset-backed securities. And how to track collateral and use DLT to support that process and make it more efficient. We will run a POC on cryptocurrency within our operation to test kind of the investment processing, the custody side of that, the needs of the processing side of that type of asset and kind of check the boxes on, can we hold the accounting process, can we trade it, can we clear and settle it? There are some questions that sure still need to be answering around. How do you price the asset at period end? What time of day on the last day of the quarter do you pick as the price point for the asset that would show up on a client achievement? So we are going on a path of, again, more of a proof-of-concept on just how do we hold that type of an asset on our systems. Once we are successful with that, then I think it opens up the opportunity for us to be more -- to the extent, clients really want to trade it or want to own it in client accounts that were able to from a processing and a custody standpoint.

Yes, you're going to -- you really need to distinguish the operational side of it that Dennis is talking about, and how have we really incorporated into our investment philosophy and our asset allocation. And they're really 2 separate questions.

Right, exactly.

Makes sense. And then just more broadly, zooming out onto your tech capabilities. We touched on ESG, personalization, crypto, private markets. Are there any other themes that you're seeing that maybe you need to be more prepared for that you are preparing for when you think about how your platform needs to evolve over the next several years to stay cutting edge?

Yes. I think the big -- in my space, the biggest thing is this whole digital collaboration. And again, COVID kind of helped us along the way here, where end investors want to -- more and more so want to interact in a digital environment. And not only do they just want to interact in terms of getting information, but they want to be able to collaborate and communicate real-time in a digital environment, not necessarily coming into a device or office, not necessarily calling on the phone. If you -- if I look at the screen and I'm looking through an account and I'm working, can I manipulate it real-time with my adviser online. That's kind of the future of the technology for the advisory space. And that's -- the Orange acquisition is getting us there, and that's where we are absolutely focused. It's all about helping the advisers deliver what the end clients want, so the advisers can grow. And if the advisers can grow, they're going to want to retain us as a service provider because we're supporting their growth. It's not so much that we're -- it's important that we cut their cost to make it more efficient. It's more important that we help them grow.

And then you made the Orange acquisition. Are there any other types of capabilities that you may be looking to buy versus build, both in your business, Wayne, and also at the company level?

I guess, Ryan, I don't know if Dennis has anything to say. We have a lot of things under consideration. And we talk about things day-to-day, which in this -- in this form, I'm not sure that it probably makes sense for me to talk about what we're -- what we'd be looking that's maybe acquiring or not acquiring?

Yes, I would just say we have a road map of capabilities, we would like to have or enhance, and then in a much broader strategic landscape for the company through which we look at, "do we buy, do we build" kind of decision. And just because you want to -- you say, it would be better if we bought it, it doesn't mean it's out there. You have to -- and if we even adapt it, you can get it. So I would say all the transactions we've done over the past few years of a -- we're not a high-volume acquisition company. That's -- you can probably write that one down. That being said, the 3 deals we've done, really have their own distinct kind of strategic component to it. One was speed up our entry into a market, family office space and enhance our capabilities in the support of clients, who were selling to family offices. So the multifamily office space, and that was the Archway deal, expanding our geographic footprint in our ultra-high-net-worth Private Wealth Management business line. That was the Seattle firm we purchased and then Wayne's transaction recently Orange, which was to enhance our -- really use M&A as a way to speed up our -- the development of our capabilities through buying them versus building them. So Orange didn't kind of come out of nowhere, was -- when they saw Orange, they say, wow, what they have is on our road map to build. Let's evaluate, do they really have what they say they have is a lineup of what we're looking to do. And in this case, it did. So that -- so an acquisition made more sense. So it's through that kind of broad lens that we're looking at different transactions. And we -- hopefully, the market hears us when we say let us discern what's a good idea or not for SEI. Don't assume that we wouldn't be interested in something because you never know. Let us make that decision or call, so bring us the ideas of our business.

Then let's shift a little -- Go ahead...

I mean it's safe to [ assume exactly this time ] if they fit. We look at them all the time. We just not need to -- we're just not looking to do a financial transaction. It needs to make strategic sense for our future vision of what we think the business needs to be.

Right.

And then let's shift a little bit towards pricing because I know, Wayne, you mentioned that, that's a really important component of your business right now. So how much pricing pressure are you seeing in the advisers business? And what's really driving that?

Right. Well, I mean, I think that in the adviser business, the pricing pressure you see is the sustained pricing pressure you see in all asset management businesses. I would point out just so the point is not lost. And if you look at our margins and you look at our profitability, that exists today and has existed over the past couple of years. That has been in the face of -- in our response to all this pricing pressure. I mean we were not immune to it, and we responded to it. And we've had pressure on our revenue recognition rates, but we've managed to achieve scale. We've managed to reduce expenses. We've managed to operate our model where we can reduce -- suffer the declines in revenue and still maintain our margins. And that's a pretty important focus for us going forward. I think the pricing will -- pricing pressure will continue, but I think we have the advantage of size and scale and being technology focused. We're able to respond and maintain profitability.

And Wayne, you've talked about unbundling on the last several earnings calls, how should we think about how that impacts your revenues? Is it a net positive or a net negative?

I'd come in at 2 ways. Ryan, I'm a "how do I grow the business" kind of a guy. So I think I would look at it, first off, that we had a bundled fee solution, a totally bundled fee solution. And that appealed to a large percentage of the market. Now I would say demographically, unbundling of fees and unbundling of the value proposition and the fees associated with that has become more and more of a trend. And there is a market that prefers that unbundled fee approach and unbundled value proposition. So by going to the unbundled fee approach, the first thing it does is it expands our addressable market, to go to someone that we really weren't targeting before. The other thing now -- so that's the first answer. And the second answer is yes. The unbundled fees does help us reduce price somewhat. And it allows us to more customize the price that goes -- back to your personalization comment, it allows us to personalize the pricing a little bit more than we could when it was a bundled price and everybody sort of pays the same thing. And that's a very positive. The results you have seen over the past couple of years that reflect some of that unbundling, reflect that fee pressure, that reduction in price that we've seen as we go down this unbundled strategy. So it's an expansion of the market. And yes, it does have a lower revenue recognition rate would be the short-hand answer.

Got it. That's pretty clear. So then thinking about margins. So pretax margins in the adviser space have ticked up over the last several quarters to the low 50s range. How sustainable is that? And how should we think about how you're managing margins going forward?

Yes. I mean I'd love to -- especially about [ was on the call ], I'd love to take credit for making those margins go where they are, but I really don't know that I could take credit for that. I think that we are focused on margins, focused on expenses, focused on growing the business all the time. I think that some of the increase has been kind of focus related, to be honest with you, as some of our costs have declined. I think where they are now is not where we are targeting them to be. And our long-term goal is to expand our addressable market to expand our revenue base. We may have continued pressure on margins. So you may see them come down some. But I think on an absolute basis, that will allow us to be more competitive, allow us with our scale, to grow this business much faster than perhaps any reduction we would see a margin. So in absolute terms, we could grow the profits nicely, but you need to balance them as you manage the business.

And the COVID-related impact, was that mostly travel-related to sales?

Yes.

Got it. So then maybe broadening out to some of the new initiatives that SEI has been launching. So it's really a question for Dennis. So you've launched the global regulatory compliance system and the SEI IT services offering. So for both of those new platforms, can you maybe comment on the types of clients that you're targeting? And what type of demand and sales you're seeing so far?

Yes. The Global Regulatory Compliance services is initially targeted at the investment manager space market. So the traditional, nontraditional space, it's componetized technology and services that helps firms better automate their compliance process and stay in compliance as a result. So there -- and I would say, more principally, we're in the U.K., pushing harder that market really did get affected by COVID. But that being said, it's been a good cross-sell product within some existing clients within the broader client base, but I would say that over the past 12 months, it's probably a little bit more modest than we would like to have seen, but part of that had to do with the environment we were selling into. IT services is newer. We launched that maybe 18 months ago or so. We have signed some clients to that, mainly smaller banks and financial institutions. That's a really good -- we believe we have a terrific service and a great offer for the market that is really dealing with the challenges, how do they protect not just client data, but the network within which they operate within. So the 2 larger product bundles there around network services and data privacy, data protection, they get a lot of attention, and it's becoming a little -- more and more active market for us with more opportunity. And then the other tag along services around compliance and hosting. They're there. And if a client wants to take advantage of them, but the real value is in those first two. And that's -- so it's going well. The launch is going well. Client acquisition has occurred. We're viewing those early handful of clients as they will help us be proof of concept. One of them are consortium clients. So they'll help us sell-through the consortium, we believe when they are kind of through their early-stage process with us. It's an opportunity for us to sell to non-clients of SEI. So you don't have to be a client of SEI to purchase these services or to take advantage of our capabilities. In fact, we believe it's a great door opener to relationship with SEI through which we can sell other things on the back end. So, so far, so good.

Great. And then we're now 2.5 months into the quarter. So just wondering if you could give an update on the type of activity you're seeing across the different businesses in terms of sales and activity?

Yes. I mean I won't comment on second quarter. I think that would be -- I would get a phone call right after this, if I did. But first quarter, we know how -- we reported on sales. The one element that's kind of buried in the actual results in the quarter is how active our sales forces are. And they are very active. So the pipeline activity is strong. The prospect activity is good. The digitization of some of our marketing and selling activities has advanced and continues to advance. The 1 market that's still a little bit of a challenge is the U.K. market. And that today's news is that they're pushing the opening of -- opening up of that market back another month. It's just kind of an indication of what the U.K. folks are dealing with. That being said, we're active. Wayne, maybe you want to comment on how active your group is?

Yes. I mean I think that we really haven't seen a slowdown in activity. And I think that in the beginning of COVID, it slowed down perhaps a little bit, but I think it's now -- we see throughout the first quarter, activity was accelerating throughout the year. And we would expect that, that would continue.

And then how should we think about maybe any trends going on in the institutional business?

Yes. I mean it's a tale of 2 cities there, because gross sales are in that business have been good. So we're -- our ability to we always get the RFP for the most part, maybe not say always, but most of the time, we get the RFP. We compete effectively. We make [ to the finals ] and we win our share of business. So we're always in the game when our firm, a sponsor of assets is looking to make a change or consider ECIO for the first time. The headwind that we have is and Paul's talked about this. The corporate DB market just continues to kind of adjust as we go forward to the fact that corporations, unless they have to, because of employment contracts or employment agreements, really don't want to have DB plans anymore. So it's just a question of their funded status, how and when they can close their funded status and then what they do with the plan once the assets are in position to be able to annuitize it and shut it down. So -- and then also most DB plans are in older industry enterprises. And so the M&A activity in that space creates consolidation and the transaction itself creates the opportunity to shut those plants down. So we're somewhat a victim of that, but we knew that was coming, which is why we diversified the business, going back 5, 6 years and really put a lot more effort in the foundation of endowment space. The hospital network space, [indiscernible] plans, municipalities have been relatively new market for us. And now the ECIO solution set that we're in market with and are seeing, I guess, Paul would say we're not over a hard time getting meetings. We haven't gotten decision at least through the first quarter yet, but we are getting conversations with folks. So that's always a good sign that people are at least engaged in what we have to say. So that segment is going to be in the short term, on a net basis, a little more challenged. But longer term, we feel like there's really good opportunities that we can capitalize on.

Great. So unfortunately, we're out of time. But Dennis and Wayne, thank you so much for joining us this afternoon.

Thanks, Ryan. Thanks for asking us.

Thank you. Bye, everyone.