SEI Investments Company (SEIC) Earnings Call Transcript & Summary

And then in the Investment Advisors business, how does the opportunity for SEI change as the wealth management industry consolidates? You're seeing RIAs simultaneously getting larger, more sophisticated? How do you adapt to that environment? .

Yes. I mean we see ourselves as a beneficiary as we see consolidation. As RIAs continue to consolidate. You see more of that. They're much more receptive to what I just mentioned of the -- buying into an integrated ecosystem. We still have -- we still sell individual capabilities, you can still buy custody. You can still buy our asset management products. But when we can tell an ecosystem story, we become the beneficiary. So as we see consolidation we really just become a beneficiary. They're looking for a complete platform, and we're really one of the only firms that sell that complete platform.

What about Stratos? What's the long-term vision for the Stratos platform?

Yes. So Stratos was a really important transaction or deal for us. And just to remind, the reason why we felt we needed to do the Stratos deal. Hicke, Ryan Hicke CEO, probably 3 or 4 years ago, I said you talked about two areas where we would expect some inorganic growth. One of them was in the US RIA. And the reason for that was multifold. The first was we felt we needed to be closer into the advice space. strategies did that for us. And so where you'll see margin compression, you'll see pricing pressure on different parts of the business or inside that -- inside the financial service industry. The one component that has been relatively untouched is the advice based. So whether an adviser charges 80 to 100 basis points for advice. 10 years ago versus day, it's been relatively unchanged. So we felt we needed to be closer to the advice space. On top of that, over the last few years, we had seen without having an RIA, we felt we weren't providing our adviser base who have been with us a very long time with an opportunity to potentially monetize their business. So as they were maybe thinking about an exit, we were seeing some outflows, not that they weren't happy with SEI. They really love our offerings, our platform, et cetera. but we didn't have an answer for it. So there was a little bit of a defensive position in order to making sure we had an RIA. So our advisers had a home to land in if they got to the point around monetization. So those were two key areas. The third was the obvious one plus one equals three. So now having an adviser channel where we can sell -- provide our custody platform, our asset management platform, into those advisers has been critically important. And I think a third thing that has been -- was a little bit of a surprise where we didn't have as much of a focus, at least in our original thesis was in our institutional business. So as we've educated the Stratos network advisers on our capabilities, including what we do around OCIO in foundations, et cetera. There has been a lot of curiosity from the advisers. And just as a reminder, we only closed the Stratos deal maybe 6 months ago, almost to the day. I think it was around December 1 or 2nd or somewhere around there. So sitting here at June 6, it's been about 6 months. But we've had a lot of interest. So we're continuing to educate that market. We feel like we've now just expanded our sales force, not just in institutional, but across the adviser network or investment advisers business unit from a sizable team, but to a much more scaled team across the country. And so that's been a really nice added benefit. But that's kind of the thesis for Stratos and what early returns have been is through Q1. It's -- as we mentioned at our -- when we did earnings, it's met up to all of our expectations, including the cultural fit, which was really important to Jeff Concepcion the founder of Stratos really important to us.

All right. Let's talk about AI. So a lot of opportunities for you. before we get that, the market narrative has shifted in the last few quarters from opportunities to risks? And how do you view AI changing barriers to entry in the servicing businesses what are the risks that you worry about? And how should investors think about [ SCI ] protecting the moat that's been built?

Yes. So obviously, we came to assess one of the talking about as we think about it, first off, in our business, we do believe we've built some notes. What -- how we think about it, AI lowers the barriers for point solutions, but not necessarily for integrated regulated platforms. And that's really what we have. We have integrated regulated platforms. Our client base looks at us in a way where they entrust us with their outsourced models, and we obviously take that very seriously. So having it -- it's not just one solution that we provide. We built moats around technology operations and that regulated infrastructure. So we think about AI from a risk standpoint like a brick wall, and we've said this now a few times publicly. We don't believe that there -- the brick wall necessarily has the opportunity to be completely disrupted. But we do see there could be bricks in that wall that have the opportunity to be disrupted and that's really kind of those point solutions. So there's a number of things that we're doing. Number one, we've -- a number of years ago, we created a Ventures committee. That Ventures committee is led by Sneha Shah. Today, we actually announced to elevated her role to the head of AI for the company, someone who wakes up every day thinking about artificial intelligence and the role we play from a governance, et cetera, technology and everything that goes along with it. So that's one thing we use. So the Ventures committee spends a lot of time working with the venture capital groups from around the country identifying is Jane Doe, John Doe saving in a garage, trying to disrupt certain parts of our business. And so making sure we understand what is out there? Is there investments we want to make, and we've done that in the past. We've made investments into companies to get closer, have a front row seat to certain things we want to be smarter about. So that's in the Ventures committee that's in the [ PE ] community, et cetera. That's number one. We've also classically as a lot of companies are doing today, have an internal disruption team, and we've identified areas of our business that we think are ripe for a disruption. And so that team all day long, has a very handsome budget and are helping or creating agents and brainstorming with our business units on the opportunity for disruption. So trying to disrupt ourselves before there's opportunities for others to do so. So that's number two. And I think those are probably the two largest areas where we're focused. And then just everything else that we're doing around creating the right levels of budget for our technology teams. We've announced the partnership a few months ago with IBM. IBM has been a great partner over the last 4 or 5 months, doing a full assessment of the organization. And that's really to make sure we're using agents that in classically in our fund admin business and other parts of your business has been very labor intensive. So how do we think about automation at scale, how do we think about where the right spot for agents are at scale. And so those are the three areas that we think about from a risk, but we feel and I think our clients feel that we're doing all the right things today.

So it sounds like you are very proactive in thinking through risk on AI?

Yes. Look, we're humble enough and not arrogant to think that we have not -- that we have figured it out because we have it, no one has figured out. But I think we're doing a lot of things that other companies are doing. We're putting the right tools in the right hands, creating the right budgets, putting the right governance controls around everything I just said. So I think we are thinking about it the right way. I don't feel the million dollar question that I think companies always ask themselves, are we behind? Are we on par or are we slightly ahead? I don't think we're behind. And so I'm really comfortable where we are. Again, I think we have the right controls in place right now. And I think the 3 or 4 things that we're doing has put our clients at ease and -- but again, we're not being lackadaisical.

And what about opportunities? Clearly, there are a lot of opportunities for AI to enhance the SEI business model, maybe enhance margins? What do you see as the biggest positive use case for...

Yes. I think the same things I just talked about from a risk are really the opportunities for us as well. I had mentioned 3 or 4 times at the opening of this that as companies have in our IMS business classically have thought of themselves as insourcers I think those folks with the rise of AI are thinking, do we really want to be making the same financial investments, time investments in order to get up the learning curve on AI? Or should we be relying on third-party partners to support us in that. That is an opportunity. There still are, I don't know, 20 to 30 large insources of fund admin that I think with the announcement in Q1 of those two large insourcers to outsourcers that have become client of SEIs. I think they're starting to ask themselves questions of everything I just said, is this really the right business model for us in early days, but we've had some additional conversations with those folks. I think the -- with the kind of the blip in the market in Q1 around when the market dipped around when the Street kind of woke up and said, "Hey, how are we thinking about AI? What are the what are the firms that are ripe for disruption. We had already been thinking about the scaling of the automation with IBM and creating agents alongside of them. So that's not new. That's been in the works for a while now. Yes. So that's kind of how we're thinking through it.

Turning to capital allocation. SEI continues to generate significant free cash flow. Historically, SEI has offered -- has operated with very little to no leverage depending on the period, sometimes negative leverage. And then you made the Stratos deal. So looking forward, how has your framework around capital allocation change over the last year or so?

Yes. So it has changed modestly. At Investor Day, we spoke about moving from a negative onetime leverage model to maybe somewhere in the future maybe to a onetime positive. And so that is still directionally where we're headed. And I think the uses of capital, we've said publicly, we will continue to do this. We expect to still return 90% to 100% of free cash flow back to our investors. That will be in the form of dividends and the remaining will be stock buyback. I think in Q1, we purchased back about $200 million of our company stock. We saw a little bit of an opportunity there with the drop in stock price related to some of the things that happened in the market around AI. That's proved to be beneficial. But so our strategy really hasn't changed. I think where you will see an opportunity for us to move from that negative onetime to closer to 0 or maybe even positive. We own 57.5% of Stratos. There are markers over the next 7 years where we will acquire the remaining portion of that. And so that is where we would expect to take on some debt really for the first time in many, many years or at least take on debt and not immediately repay it back. As we think about other inorganic opportunities for us. Historically, we've talked about two things, again, the one was U.S. RIA. We checked the box there. We made that acquisition. We talked about European fund admin. And so I think our thinking has changed a little bit there. I think we had thought about over the last couple of years, whether we needed to do a big bang, something to scale our IMS business overseas. I think we've stepped away from that a little bit. You may see small tuck-ins to support some maybe missing solutions in our overall solutions deck in IMS. And so -- but I wouldn't expect anything significant other than repurchasing the remaining options that we have on Stratos over the next 7 years.

And valuations across fintech and wealth tech have reset meaningfully from peak levels. So is that an opportunity for you?

Yes. We are trying to stay pretty vigilant in our strategy. So I talked about being strategic on a couple of things, the U.S. RIA, maybe something in the European fund admin space. We do get inbounds a lot. We evaluate those inbounds. Those are more opportunistic and strategic I think we've been pretty steadfast when those inbounds come in. Yes, we'll take a look. We'll understand is there anything we want to rethink. We have an M&A committee as all firms do. And so we'll visit those. But we're really trying to stay down the middle of the fairway on our strategy as opposed to being more opportunistic.

Let's talk a little bit about culture. So SEI has always had reputation for innovation, from your roots and an entrepreneurial culture. Despite now, you're now a much larger company. So how do you preserve that culture as the business scales?

We talk about that all the time. Ryan talks about that all the time, whether it's in a town hall, whether it's with the leadership team, but it's -- if anyone's ever been to Oaks, if you walk around the campus, it's a beautiful campus. The way where Al West, our founder, constructed the campus was very intentional to spur that entrepreneurial spirit. And I think making sure we never lose that is so critical. I think if you look at even some of the things we've done over the last few years, we talked about some of them just now. Striking that, hey, where are we missing, what do we want to invest in? We talk a lot about on campus best idea wins. We've had a lot -- we have contest around best idea wins. It's not just a term, but it's something we take to heart. And there's a lot -- I won't go into them, but it's a lot of things we've deployed by using the best idea wins concept. Some of the more meaningful wins or opportunities around striking, keeping that entrepreneurial spirit alive was really the creation of professional services practice. So that came through truly being entrepreneur. When Sanjay took a look at the private banking space, and it wasn't just all him. It was his team. We started looking around everything that third parties were selling to support the implementation of the SWP platform. It could be an assessment of pre-RFP -- it could be the change management or the sunsetting of the current technology, could be the transformation the origin of our Sphere platform, which you can think about that is our cybersecurity platform that we're now selling into the market. That was all borne through the classic [ SCI ] model. We had built a world-class cybersecurity -- we build it for ourselves. We build our cybersecurity platform ourselves for ourselves, for our technology. And as a result, it became so strong, we started saying, hey, is this something we should be marketing outside? And that's actually how that was created. A number of our businesses that we have today were created because we were actually doing it for ourselves. We did it really, really well. And clients were asking us, "Hey, that's really interesting. Would you mind talking about that and we end up creating services. That's how professional services were born. So striking that balance of how Al founded the company, it got to a certain size and scale, and we did have to adapt. We couldn't run the company exactly the way we were in order to get where we needed to go. And I think Ryan has done an amazing job of striking that balance about keeping that entrepreneurial spirit alive but also advancing the company forward at the exact same time.

So to wrap up, when you look across SEI today, where do you think the company is still underappreciated by investors?

Yes. I'd love that. That's my favorite question, and it's one that actually most of our analysts and investors ask first. I think in a couple of areas. I think our asset management business is the market hasn't built into the opportunity that we have in front of us. And by the way, rightfully so, I think people are watching. I think they understand the reimagination of asset management. I think they understand the four or five areas where we're building out product or we're investing in our technology platforms. I think they understand why we acquired Stratos. And I think they understand that. I think they're waiting and seeing how we execute across that. I think another huge one is we have a massive opportunity in selling asset management into banks. We've done a little bit of that, but I don't think we've done that at scale. We're putting a lot of new leadership roles in place in order to make sure the right level of attention. So I would say those two areas are probably the area that the market hasn't priced in quite yet.

Great. Sean, thank you so much for your time today.

Thank you, Ryan. Thanks for having me.