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AssetMark Financial Holdings Inc (NYSE:AMK)
Q1 2020 Earnings Call
May 05, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, everyone, and welcome to AssetMark's first-quarter 2020 earnings conference call. [Operator instructions] Today's call is being recorded. Now I'd like to turn the call over to Taylor Hamilton, head of investor relations. Please go ahead, Mr.

Hamilton.

Taylor Hamilton -- Head of Investor Relations

Thank you. Good afternoon, everyone, and welcome to AssetMark's first-quarter 2020 earnings conference call. Joining me remotely are AssetMark's chief executive officer, Charles Goldman; and Chief Financial Officer Gary Zyla. Today, they'll discuss the results for the first quarter and provide an update on AssetMark's business outlook for the remainder of 2020.

Following our introductory remarks, we will open up the call for questions. We also have an earnings presentation that Charles and Gary will reference during their prepared remarks. It can be accessed on our IR website at ir.assetmark.com. Before we get started, I'd like to note that certain statements made during this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements represent our outlook only as the date of this call. Actual results could differ materially. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether a result of new information, future events or otherwise. Further information on these and other factors that could affect our financial results is included in filings we make with the SEC from time to time, including the section titled Risk Factors in our annual report on Form 10-K on file with the SEC and available on our Investor Relations website and in our quarterly report on Form 10-Q for the quarter ended March 31, 2020, which we expect to file next week.

Additionally, during today's conference call, we'll be discussing net revenue, adjusted EBITDA, adjusted EBITDA margin and adjusted net income, all of which are non-GAAP financial metrics. These non-GAAP metrics are not calculated in accordance with GAAP and may be calculated differently than similarly titled metrics presented by other companies. A discussion of why we use non-GAAP financial metrics and quantitative reconciliations of adjusted EBITDA, adjusted EBITDA margin and adjusted net income to the most directly comparable GAAP measures are available on our press release and our quarterly report on Form 10-Q for the quarter ended March 31, 2020, both of which will be available on our Investor Relations website. And with that, I'll turn the call over to my colleagues.

Charles, take it away.

Charles Goldman -- Chief Executive Officer

OK. Thank you, Taylor, and good afternoon, everyone, and thank you for joining our first-quarter earnings conference call. I know everybody knows these are challenging times, and we really appreciate you taking the time to be with us today. Most of all, we really hope your family, your friends, your colleagues are all safe and healthy during this COVID crisis.

Before we begin our prepared remarks, I want to start by saying that our hearts go out to those families who have been impacted by COVID-19, either directly or indirectly. I also want to call out the work of the many healthcare professionals, first responders and individuals who are at the front lines battling this pandemic. Thank you for your courage and your selflessness. Lastly, I want to thank our leadership team and all the associates at AssetMark for their dedication to our clients.

I'm incredibly proud of how AssetMark has rallied in the face of this crisis, and we're 24/7 to ensure the safety and well-being of each other and to continue to serve our clients at this time of great need. We're doing our part to help flatten the curve. We have canceled all in-person events and eliminated all business travel. All of our 700-plus associates are working from home and have the necessary technology and infrastructure to mitigate business disruption and to maximize our abilities to serve advisors.

We have quickly implemented new technology tools to help all of our employees stay connected and be productive while they work at home. OK. Let me start on Page 3, where we're going to focus on five key messages during the call today with an emphasis on how COVID-19 is impacting AssetMark operations, financials and strategy. Before we address that, Gary will take you through the Q1 2020 results, which were highlighted by strong top- and bottom-line growth and record net flows of $1.8 billion.

We will also be providing you a data that we do not normally disclose to provide you with more context during these uncertain times while not creating a new obligation for future disclosures. After hearing from Gary, I will discuss how we are currently running the company, which we believe will position us to win now and in the future. Our platform is built for these times and this environment. This is an opportunity to stand out from competitors by doubling down on our mission of making a difference in the lives of advisors and their clients.

As you see in our third key message, we entered the crisis in a position of financial strength, and we remain in a position of strength as we manage the business through COVID-19 and into the post-COVID environment. Next, I'll provide some color on advisor behavior and what insights we can extrapolate from that behavior to help us better serve advisors and their clients. Lastly, I will end the call discussing what we expect going forward. And with that, I'll hand the call over to Gary to go over our first-quarter results.

Gary?

Gary Zyla -- Chief Financial Officer

Thank you, Charles, and good afternoon to all those on the call. These are challenging times, and I, like Charles, cannot be prouder of how our associates have rallied together and selflessly committed to making a difference in the lives of our advisors and their clients. We are honored to be able to support our advisors during these uncertain times. As usual, I will start with a discussion of our platform assets then talk about our revenue, expense adjustments and then our earnings.

From there, I will discuss our balance sheet and a few other key financial highlights. Starting on Slide 4. In the first quarter of 2020, platform assets were $56 billion, up 12.7% year over year but down 9.1% quarter over quarter. Weighing on our platform assets during the first quarter was the market downturn where we realized market impact for the quarter, net of fees, of negative $9.5 billion.

This translates to a decline of 15.4% on our platform assets in the quarter, compared to a 20% decline in the S&P 500 during the same period. Despite the market downturn, as you would have seen in our monthly AMK report, we realized record net flows of $1.8 billion in the first quarter and added $2.1 billion of assets to our platform from the acquisition of OBS Financial, which closed in late February. The first quarter marked the 12th consecutive quarter with net flows over $1 billion and the 29th consecutive quarter with positive net flows. Annualized net flows as a percentage of beginning-of-period assets was 11.9%, ahead of our long-term target of 10%.

When we think about our $1.8 billion of net flows in the first quarter, about 70% came from existing advisors, while 30% came from new producing advisors, or NPAs. As Charles will discuss later, the economic impact of COVID-19 will be most materially felt in the second quarter of 2020. Next week, we will release our April AMK report, which will show over $400 million in net flows in the month and ending platform assets just shy of $60 billion. While this is a good sign of continued strength, we are cautious in our outlook in the near term.

Turning back to the first quarter, our key operating metrics were strong. We added 217 NPAs, our highest total since the second quarter of 2019. Our total advisor base at the end of the first quarter was a little more than 8,400 advisors, of which 2,138 were defined as engaged advisors. As a reminder, we define an engaged advisor as one with over $5 million in assets in our platform.

You may realize our engaged advisor count was down 92 quarter over quarter, while we added 67 engaged advisors from the acquisition of OBS and an additional 71 new engaged advisors in the quarter. We did have 228 advisors drop from engaged status, mostly driven by market depreciation. A little over 80% of those 228 advisors dropped below the $5 million engaged advisor threshold into the $4 million to $5 million range as a result of market impact. This decline is a function of the market and not a function of the relationship with us.

Of our 2,000 engaged advisors who maintained an engaged status during the market downturn, over 60% contributed positive net flows to our platform in the first quarter, another positive metric in our strong organic growth. Now let's turn to Slide 5 to discuss the quarter's earnings. Entering the first quarter, our assets were at $61.6 billion, leading to reported revenue of $114.9 million, up 24.5% year over year or 20.9% when excluding the impact of GFPC and OBS acquisition. As a reminder, a large majority of our revenue for the quarter is based on the beginning of quarter-asset level.

As previously discussed, we focus on our revenue net of related variable expenses. In the first quarter of 2020, our net revenue of $78.6 million was up 23.3% year over year or 19.5% when excluding the impact of GFPC and OBS. Now let's turn to the components of our net revenue. In the first quarter, asset-based net revenue was up 28.5% year over year to $70.6 million, driven primarily by the growth in platform assets.

Our net yield for asset-based net revenue was 45 basis points in the first-quarter 2020 versus 49 basis points in first-quarter 2019. The decline was primarily driven by the addition of GFPC and OBS, which are custodied at Fidelity and platform fee compression as a result of product mix shift. Spread-based net revenue is the interest that we earn on client cash held at the AssetMark Trust Company. In the first quarter of 2020, we realized $6.7 million of spread-based net revenue, down 5.8% year over year.

The decrease in spread-based net revenue was driven by declining yields, partially offset by higher cash balances. Average client cash over the first quarter was $1.97 billion, on which we received a blended annualized net yield of 1.36%. Spread-based net yield contributed 4 basis points to our overall yield, although down 2 basis points year over year. End-of-first-quarter cash at AssetMark Trust Company was $3 billion, up 60% quarter over quarter.

Of the $3 billion in cash at AssetMark Trust Company, $381 million was in our high-yield cash program, which increased about 75% quarter over quarter. Given the fed rate changes in March, which happened later in the quarter, we saw a small impact to our yield for the quarter, down 29 basis points from the fourth-quarter 2019. For context, our spread-based net yield averaged approximately 60 basis points in April and is currently around 30 basis points as of today. Lastly, other revenue was down year over year due to the declining rate environment affecting our net yield on assets by approximately 1 basis point.

Clarity and transparency. The calculation of our annualized revenue yield, net of variable expenses, is shown on Slide 10 in the appendix of our earnings presentation. On Slide 11 of the appendix is a walk from our first-quarter annualized net yield on assets to first-quarter 2020. Before we turn to earnings, let me run through our adjustments to expenses in the first quarter.

We added back a total of -- sorry, we added back a total of $22.1 million pre-tax, which is comprised of four items: first, $13.2 million in noncash share-based compensation; second, $5.1 million in amortization-related expenses to our 2016 sale; third, $3.6 million in acquisition-related expenses associated with our acquisition and integration of GFPC and OBS; and fourth, $0.2 million of add-backs related to reorganization costs and business continuity plan costs in response to COVID-19. In the second quarter, we expect this expense to be between $1 million and $2 million. As a reminder, we believe the expenses associated with the acquisition of GFPC should cease by -- at the end of 2020, stepping down in the back half of the year. For additional color and adjusted expense reconciliation table per income statement line item can be found on Slide 12 in the appendix of our earnings presentation.

Now let's discuss our earnings for the quarter. Our adjusted net income for the quarter was $17.7 million or $0.24 per share, an increase of 26.3% year over year. This is based on the first-quarter diluted share count of 72.5 million. The year-over-year increase in adjusted net income was driven by higher adjusted EBITDA of $5.6 million and lower interest cost of $1.9 million, offset by higher amortization of $1.5 million and higher taxes of $1.1 million.

Our marginal tax rate for the first quarter of 2020 was 25.4%. In addition to adjusted net income, we view adjusted EBITDA as an equally important measure of our company's health. For adjusted EBITDA, we add back the same expense item that set with the amortization-related item. Our first-quarter 2020 adjusted EBITDA was $28.4 million, up 24.8% year over year, reflecting strong year-over-year growth in our top line.

Adjusted EBITDA margin for the quarter was 24.7%, in line with expectations and up slightly from the first quarter of 2019. The first quarter had minimal margin expansion over the first quarter of 2019 because of several investments in the business. First, $1.6 million of recurring cost related to our IPO as we were still a private company in the first quarter of 2019; second, $1.1 million in investments and capabilities, of which 60% is from increased rent and 40% is from increased headcount and use of professional services; and lastly, $1.5 million in increases in core SG&A costs due to an increase in event attendance, such as our annual gold form event, subscriptions and other items. As a reminder, our model in normal times is to invest incremental profits back into the business while achieving 50 to 75 basis points of margin expansion.

During this time of depressed asset levels, we will be less focused on margin expansion, and as always, fully focused on the need to serve our clients and maintain our organic growth. Now let's look at the reported first-quarter balance sheet. I would highlight two items. First, cash continues to serve in the position of strength.

We ended the quarter with $80.2 million in cash, even after 100% cash purchase of OBS Financial. Excluding the purchase of OBS, our cash condition grew 5.5% quarter over quarter driven by operating activity. We still have a $20 million credit line that is available to the company, if needed. As discussed in previous conversations, we collect most of our revenue in advance at the beginning of the quarter, increasing our cash holding.

For context, at the end of April, our cash balance is now $120 million, which reflects the cash we collected in the quarter, and part of that will fund our remaining operations for the quarter. Second, capital expenditures primarily reflect our long-term investments in technology to create new capabilities, increase scale and improve service. In the first quarter, our capital spend was $6.5 million or 5.7% of total revenue. Next, turning to our 2020 outlook.

Given these unprecedented times and the significant economic uncertainty it introduces, we have made the decision to withdraw our 2020 expectations for the time being. Once we believe that we have sufficient visibility to provide revised expectations, we will do so. Before I end, I want to point you to Slide 6, which includes deal highlights on our February acquisition of OBS Financial, as well as the impact OBS had on our financials in the quarter. This summary should make transparent the impact of the acquisition on our key metrics in the quarter.

We want to formally welcome the 20-plus associates and the OBS advisors to the AssetMark family. With that, I'll hand it back over to Charles to continue his prepared remarks.

Charles Goldman -- Chief Executive Officer

Thank you, Gary. I appreciate that. So turning to Page 7, I want to provide you with some thoughts on how we are running the company during this time. As I said and always say, we are focused on our mission to deliver on the promises our mission implies.

We remain focused on our consistent strategy defined by three differentiating strategic pillars. Our platform through a combination of compelling technology, personalized services and curated investments is built to help advisors during the good times and the not so good times. Let me share with you how we are making a difference in the lives of our advisors and their clients now more than ever. First is our fully integrated and compelling technology platform.

From January 1, 2015, to March 31, 2020, we invested $209 million in technology, capital and operating costs. The recent investments in our technology and the innovations that we have made are paying dividends. These include our portfolio construction and analysis tool that assists advisors in creating and monitoring investor portfolios, which is more important than ever, as advisors and their clients navigate volatile markets; a streamlined account-opening solution that reduces the time to onboard new accounts to our platform; and lastly, a goals-based investor portal that serves as a hub for communication between advisors and their clients. Second, as you know, we deliver personalized and scalable service.

This is really where we get to shine for our clients and do the best for them every day. We are continuing to provide white-glove service, even as we are receiving increased call volumes and demand. Let me put that into perspective for you. In March of this year, our trading volume increased by 341% versus the average month in 2019.

Additionally, inbound calls increased 21% in March compared to January and February. We have been able to maintain outstanding service levels even with these heightened volumes. When volumes were at their highest, our service and operations team canceled time off and worked nights and weekends to stay current. As we faced and overcame each challenge of suddenly moving our workforce remote, we captured and communicated those lessons that might be helpful to advisors and their staffs as they move to remote work.

We are staying close with our advisors and ensuring that they and their staffs feel confident, appreciated and well cared for in this environment. We have increased our outbound calls by 23% and our outbound emails by 22% to make sure our clients are proactively supported. We have also leveraged webinars to connect with our advisors. Since early March, we have hosted over 125 webinars with over 7,100 attendees.

Over the last two months, our sales organizations has had calls or video conferences with 99% of our engaged advisors and 88% of 2019 and 2020 new producing advisors. We continue to be inspired by stories from our advisors about how AssetMark is helping them stay focused on running their businesses and helping their investors stay focused on their goals. Our final strategic pillar is our holistic and curated investment platform. Our platform offers a wide range of well-suited products that help our advisors' clients reach their long-term goals.

As a result of this breadth of solutions, we are seeing money move within our platform at accelerated rates. This means advisors are finding what they need at AssetMark instead of somewhere else, which is evidenced by our strong net flow performance through April. This is a huge competitive advantage for us, especially when you compare us to any single-strategy TAM. Our redemption rates remain at precrisis levels, and we are seeing reallocations on the platform as advisors are evaluating the risk tolerances of their clients.

Additionally, new products, such as high-yield cash, which we introduced in 2019, also allow us to keep more dollars on the platform. Simply put, we are there for our advisors, and our advisors are loyal to our platform. Investing in our platform has proven to pay dividends, and we firmly believe that a combination of technology, service and investments differentiate us in the market, resulting in a competitive advantage. Now let me flip to Page 8, where I want to talk about our financial position.

AssetMark entered this crisis in a position of strength, and we remain well capitalized with a resilient balance sheet, low net debt and the ability to generate cash. At the end of the first quarter, we had over $80 million of cash on our balance sheet. We have $123.7 million of debt that matures in 2025, and our annual interest cost is low at $6.3 million. Since 2016, we have financed the company primarily through cash flows from operations.

Over the next 12 months, we expect that our cash and liquidity needs will continue to be met by cash generated by our ongoing operations. While we are pleased with our financial position, we understand that these are very uncertain times, so scenario planning is critical. We have planned for multiple scenarios, and we have taken aggressive action to manage our business as the situation continues to evolve. We have evaluated downside base and upside scenarios with different market assumptions with the downside tied to the depths of the 2007, 2008 global financial crisis.

Even in our downside scenario, we are able to generate positive cash flows with no additional expense or capital cuts. Let's discuss how our revenue is being impacted and the proactive decisions we have made on the expense side to date. As Gary mentioned, in the first quarter, our platform assets decreased by 9.1% driven by a negative market impact, net of fees, of $9.5 billion, which was partially offset by strong net flows in the acquisition of OBS. We expect our yield on assets, inclusive of OBS, to be 45 basis points in the second quarter.

Revenue will be down quarter over quarter due to billing our second-quarter revenue on platform assets of $56 billion versus the $61.6 billion we billed at in the first quarter. Obviously, the directions of the market, including the positive market experienced in April, will have a significant impact on the revenue we collect in the second half of the year. Also, causing a reduction in our revenue is the lower spread income due to the fed funds rate target of zero to 25 basis points. We forecast second-quarter net yield on cash to be down about 100 basis points from the first quarter of 2020.

To combat this new revenue reality, we have taken actions to reduce expenses to ensure we are cash flow positive while being well-positioned for growth. And that's the key idea, cash flow positive while being well-positioned for growth. Through a variety of cost measures, including the elimination of a handful of rules, reduction of travel, events, conferences as well as volume-related items, such as variable compensation, trading costs, we have eliminated $22 million from our operating expenses from our 2020 budget. We have also reduced our capital budget by about 20% by decreasing third-party spend for projects and postponing some of our office build-out.

In addition to positioning the company to win in the short term and the long term, the leadership team and I are also adopting to the new normal post crisis. We believe that there will be fundamental strategic changes to our business. We are trying to define and evaluate those changes over the next few months in two broad areas. First, strategically, consumers and advisors will behave differently post this crisis.

One of the areas we will be focused on is the changes we expect in investor behavior, risk tolerances, product preferences and the nature of how investors want to interact with advisors will all likely change. Additionally, we believe advisor behavior will change. This change is driven by both investor demand and changes to advisor economics. Use of technology, preferences for outsourcing, partner selection and need for business consulting, we expect, will increase.

Over the next few months, we will analyze these assumptions and adjust our investments to best position AssetMark, our advisors and their clients to succeed. Second are changes in the way people work. Employees will not return to the office as if the crisis never happened. We believe remote work will be a reality.

Over the coming months, we will be analyzing what types of functions should be remote versus in the office, our remote employees in different roles and functions can best be managed and how to sustain and improve the culture that our advisors, our associates and our shareholders value in us today. Of course, these changes will have an impact on our real estate footprint. Understanding these potential changes and how we can meet new and changing needs will be a necessity, and it will also be an opportunity that we intend to take advantage of. Moving to my next theme, I want to share what we are hearing from advisors right now.

First, advisors are more focused than ever on making sure that their clients have the right risk profiles, and portfolios are structured to match those risk tolerances. As advisors reallocate, we have seen a derisking of portfolios. At the beginning of the first quarter, 39% of assets on our platform were in fixed income and cash. As of April 21, fixed income and cash represented 44% of assets on the platform.

Second, the demand for good-quality information by our advisors is higher than ever. AssetMark is providing timely insights for our advisors and their clients. In addition to the webinars that I mentioned earlier, we have a dedicated web page on COVID-19 and the markets providing our advisors market updates, commentary and business consulting. Feedback on all of this content has been fantastic.

Lastly, advisors are seeking technology and tools to communicate with clients. We are offering free enterprise Zoom video communication licenses to our engaged advisors. We have also negotiated discounted rates on strategic partners, specifically those technologies that aid marketing and lead generation to help our clients grow their businesses even in this environment. AssetMark is delivering on its promise of being there for advisors.

Our platform is making advisors' lives simpler so that they can focus on serving their clients. We have met with our client advisory board, platinum clients and our other advisors in small groups, and we are receiving emails from our advisors daily. They are telling us about the value that we are creating for them and their clients. One of our advisors in Florida emailed, "I'm relying on AssetMark heavily in all facets during this time.

AssetMark remains the best decision I've made in my professional life." Another advisor in Maryland commented, "Every day, I'm more confident that our business is secure because of our partnership with AssetMark." I have to tell you, it's wonderful to hear firsthand and to engage with advisors to hear that we are making a difference for them right now. So let me give you a few thoughts on what we expect going forward. As we plan for the near-term future, we all know that it is difficult, if not impossible, to predict what is going to happen. The environment is uncertain, and any prediction is perilous.

We do expect that, in the short term, the macro environment will be challenging, but this creates an opportunity for us to continue to be there for our advisors and capture market share by investing in the services and capabilities that advisors need. AssetMark's management team has a long history of managing financial services companies through volatile times, including the financial crisis of '07 and '08. While the COVID-19 pandemic is without precedent and has created significant uncertainty, we remain convinced that the proactive actions that we have taken so far and the planned actions we have described today will position the company for long-term strength. So before we turn it over for final questions, I thought I would just thank everyone on the call today.

I wanted to mention the tremendous responsibilities that my leadership team and I feel for our associates and our advisors. The bar to being an effective leader is higher now than ever. My leadership team and I will make informed decisions that will be in the best interest of our 8,400-plus advisors and 700-plus associates. By doing this, we believe we will create and deliver long-term value to our shareholders.

So with that, I'll conclude my final remarks and turn it back to the operator for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Alex Blostein from Goldman Sachs. Your line is open. Please go ahead.

Charles Goldman -- Chief Executive Officer

Alex, you may be on mute.

Alex Blostein -- Goldman Sachs -- Analyst

Oh, sorry about that. Can you guys hear now?

Gary Zyla -- Chief Financial Officer

Yes.

Alex Blostein -- Goldman Sachs -- Analyst

I know all sorts of issues for the operator and the phones nowadays. I hear you. Thanks for taking the question. So wanted to get your thoughts, Charles, on the outlook for organic growth in the current environment.

So you guys obviously provided a pretty robust update on April with $400 million of still net inflows and obviously pretty challenging market conditions. Longer term, it seems like you are still quite excited about the opportunity for outsourcing and everything the AssetMark brings to the table, which makes sense. But curious will you expect more of a kind of near term as the backdrop remains pretty uncertain?

Charles Goldman -- Chief Executive Officer

Yes. Alex, thanks for the question. Great to have you on the call, and great to hear your voice. Right now, we're seeing about a 20% reduction in activity, so basically gross sales.

And as we look at our various metrics in the funnel, that's what we're seeing. It's very hard for us to predict much out past, say, a month or six weeks, just given the uncertainty of how businesses are going to open or not, the return of COVID in a big way or not. But what we are seeing is about a 20% reduction. The other thing that we're hearing from advisors, and we've had, as I mentioned, just a myriad of meetings.

Advisers are active, much more active than, frankly, I think we might have thought they'd be in seeking out new clients and working on new business, both from their existing advisors, existing clients rather and from new clients. We are seeing a lot of activity out there. And the last point I would remind you is that given that markets are down and now back up some, the same $1 million account is now coming in at $900,000, right? So that market impact on assets coming in is also impacting that 20%. So the 20% kind of includes both, what we're seeing in terms of activity and slightly lower-asset values.

Alex Blostein -- Goldman Sachs -- Analyst

Got it. That's helpful. And I guess, so you mentioned a 20% reduction in sort of gross sales. How does that impact redemption rates as well? Because it feels like they might be slowing down as well as advisors are focusing more on their customers and managing their portfolios and maybe redeeming less so, therefore the impact on net might be less than 20%.

Is that the right way to think about it?

Charles Goldman -- Chief Executive Officer

Oh, yes. I think that -- well, a couple of different points. So we are seeing low redemption rates. We're really pleased by seeing the activity on the platform with people rebalancing portfolios, transfers and things like that.

We really like what we're seeing there. And the redemption rates are quite solid. Now remember, one of them -- they are different metrics, right? So the redemption rate is on the whole book, of course, and growth rate of gross sales is -- we don't generally talk about it on the full book. But yes, we are seeing lower redemption rates.

Alex Blostein -- Goldman Sachs -- Analyst

Great. And then a follow-up just for Gary. So again, understanding the uncertainty in the environment, but pulling the margin guidance, given the fact that assets are back at $60 billion, and you guys identified $22 million of expense reduction, maybe is a little bit surprising. So maybe give us a range of expense outlook you guys might anticipate for 2020, obviously not necessarily holding you guys to a specific margin target, but this way we can kind of try to extrapolate where the margins could ultimately go.

Gary Zyla -- Chief Financial Officer

Sure. So let me clarify. As we're talking through redemption rates and whatnot, we've seen our redemption rate really -- we had very low redemption rates over the past two years. They have been very consistent through March and April.

Redemption dollars have gone down because now it's a rate on a lower base. But just to be clear, the rates are -- they're low, and they are consistent in the -- to the low rate we've had over the past two years. To your question, Alex, about our expense outlook. What we primarily cut back on that $22 million are what you might bundle mostly as -- or at least, in large part, temporary cutbacks, travel, events, etc., variable compensation cutback that would impact this year and not future years because we do expect once the economy is back running full steam ahead as well on our expenses.

I would say, we're right now expecting our expense level this year to look like last year's expense level. And that -- I can't really give much more detailed path. And I hope that gave you a sense of where we think our expenses are trending for this year.

Alex Blostein -- Goldman Sachs -- Analyst

Great. And that's including for the $22 million reduction that you guys talked about?

Gary Zyla -- Chief Financial Officer

Yes.

Alex Blostein -- Goldman Sachs -- Analyst

Got it. Great. All right. Thanks very much.

Operator

[Operator instructions] Your next question comes from Chris Shutler from William Blair. Your line is open.

Chris Shutler -- William Blair and Company -- Analyst

Hey, guys, good afternoon. Gary, just real quick, I wanted to clarify on the last comment. So of the $22 million that you're taking out of the expense base, that's an annualized number. Is that correct? And -- I just want to make sure I have that correct.

Gary Zyla -- Chief Financial Officer

So no, that would be -- well, that is the annual number for this year. And that is what we're going to be -- from our planned expense base, we took out $22 million for this year. So it is only for the year but is the annual impact this year, yes.

Chris Shutler -- William Blair and Company -- Analyst

OK. Got it. And then, Charles, last quarter, you talked about broker-dealers as both partners and competitors. Just given the changing rate environment, the fact that some of these BDs have levered up pretty significantly, some of the bigger ones, do you see some of the firms that are important partners of AssetMark today moving down the path where they're pushing their home/office asset management capabilities even more as a result of all this.

I'm just trying to understand where you think this challenging macro backdrop for BDs, how that could impact AssetMark good or bad?

Charles Goldman -- Chief Executive Officer

Yes, Chris, good to talk to you. It's interesting -- I'm going to answer it slightly different than the way you asked, what are we seeing versus what we think we'll see. I think it's just too early to know if there's going to be a lot of changes coming from the broker-dealer world. We certainly are seeing, particularly on the insurance side of the broker-dealer world, a lot more willingness to work with TAMs.

Most of the insurance broker-dealers a few years ago decided they were going to build out their own proprietary platforms, and it's turning out as one would expect to be quite difficult, expensive, an ongoing expense. So you see you have to invest in all the people to support it, not just the technology, but the people on the field and the training and everything else. And the economic difference of that has turned out not to work well. And so we're seeing in a world where rates have gone down, and that's been an important part of everybody's economics, a shift in the insurance part.

To be specific about the bigger broker-dealers that you're talking about, we maintain both good relationships where we partner. All of the big ones we have ongoing dialogue, and we're working actually right now on ways we can improve the flow of paper and improve the advisor experience, the client experience. So there's a lot of good going on in those relationships. However, they're also recognizing and they know that they need to invest in their own proprietary platforms.

And so they are pushing those proprietary platforms. The one newest issue that's come out is Reg BI. Under Reg BI, it will be very difficult for those broker-dealers that are compensating advisors for one platform versus another to continue to do that. And we think that's a good thing.

It means that we'll have to compete on the merits, the quality and the economic experience for the end investor as opposed to paying the advisor. So I don't know that I can say that other than on the insurance side, there's a big change yet. But I suspect, given the pressure that's on people's economics, that we'll see some changes in behavior. I would hope that it's mostly toward making a better experience for advisors.

Chris Shutler -- William Blair and Company -- Analyst

Got it. OK. And then lastly, just any quick update on the key initiatives that you've discussed over the last couple of calls, so digitization and, I guess, the RIA channel, specifically?

Charles Goldman -- Chief Executive Officer

Yes, yes. So we continue to make excellent progress on our key technology initiatives, particularly around RIA and the OSJ segment to allow them to trade more securities on our platform. We're excited about that, and we're making very good progress and feel good about that, both talking to clients and -- as well as the technology. I think we're making very good progress across the major projects that we hope to deliver this year.

And the capital cuts I mentioned earlier, really around the building out of space and around pushing some of the projects that were really geared toward the later part of the year into 2021 and don't expect any real issues with that.

Chris Shutler -- William Blair and Company -- Analyst

OK. Thanks a lot.

Operator

Your next question comes from Ken Worthington from JP Morgan. Your line is open

Ken Worthington -- J.P. Morgan -- Analyst

Hi. Good afternoon. Thanks for taking my questions. I'll take sort of the opposite side of Alex's earlier questions and go the inorganic route.

So equity markets have bounced back, interest rates have not, so some financial revenue is not recovering here. And you mentioned the mode of work will be different going forward or maybe different going forward needs new uses of technology. So first, is this the sort of environment where you would look to engage in deal dialogue with potential targets? You highlighted the strong balance sheet. So it seems like you're in a position to do it, if you so choose.

And then given some targets, you may not be as well-positioned to engage with clients digitally as well as suffering less rate and asset-backed revenue. Is there enough pressure to maybe see improved receptiveness to deal dialogue in this type of environment?

Charles Goldman -- Chief Executive Officer

Ken, great questions. So it's really interesting thing. The answer to your first question, are we willing to and do we want to engage in deal dialogue? Absolutely. We remain focused on both consolidation and capability deals when they make economic sense and create real value for our clients and for shareholders.

So we continue to have those dialogue -- those discussions out there. It's been weird -- I don't know if you feel this way, but it's been a weird eight weeks here since we've all been at home. The number of industry conversations that are going on seems quite high. But they -- I've spoken -- if you speak to bankers, private equity targets, to your second question, the pressure to do deals, it sure doesn't feel like that yet.

And I'll tell you why. First, there's the question of what are you buying right now. In terms of -- if you're buying EBITDA, what is run-rate EBITDA right now? We all know what trailing 12 months is -- but you have no idea what run rate really is because you can make assumptions about today, but it's very difficult to make assumptions about tomorrow. The second thing that's really hard to know is what is the multiple, right? You can look at public company multiples, but private company multiples is very hard to know.

And so what I think is happening from all the discussions I have around the industry is there's a real difference between what buyers think is value and what sellers think is value. And I don't think we've yet seen enough pain or prosperity, whichever it turns out to be to push those things together. So my own personal forecast is, yes, there's a lot conversations going on. We continue to enjoy great industry relationships, and we'll continue to have great conversations.

We like our capital structure and our position. But I don't know yet if there's going to be enough pressure one way or the other to give you any sense for if there will be deals or not.

Ken Worthington -- J.P. Morgan -- Analyst

OK. Great answer. And yes, I feel it's real. And then maybe the second question, Schwab announced Schwab Stock Slices for fractional shares.

How meaningful do you see fractional shares in terms of being an innovation to the wealth management industry? And does AssetMark expect to utilize sort of products or services around fractional shares to deliver to your clients?

Charles Goldman -- Chief Executive Officer

So to answer the second part of the question, I don't know if we're going to ever look at it or not. We have a very robust product development and technology capability, and we evaluate every single move that we see competitors or other companies do. We look very carefully at investor behavior and advisor behavior to try to understand and anticipate needs. It's why you've seen us add so many ETFs and fixed-income strategies and individual security strategies in a business that primarily was a mutual fund business a decade ago.

We try to be on top of that, and we think that's driven a lot of growth for us. And if fractional shares turns out to be one of those that we see broad adoption of advisors and investors, we'll certainly take a hard look at it. My own personal prediction, I've looked at that issue for more than 15 years. And every time I say that, somebody will remind me that it's probably been 20 or 25.

And it just has never really taken hold. And the reason is there's lots of good ways to get diversified portfolios without that technique. It's tended to be more adopted by individual investors managing their own portfolios trying to do something. In the same way you see another portfolio, construction, individual security ideas like Motif and others has now gone.

That have come and gone because the markets generally are quite small for them. So my own personal prediction is that there's probably not a lot of demand for that in our world, but hey, you never know. So we will keep a close eye on it.

Ken Worthington -- J.P. Morgan -- Analyst

Great. Thank you very much.

Operator

Our next question comes from Alex Blostein from Goldman Sachs. Your line is open.

Alex Blostein -- Goldman Sachs -- Analyst

Thanks for taking the follow-up. I'll take myself off mute this time around. So I wanted to go back to some of the bigger-picture implications that Charles, you, highlighted in some of your prepared remarks. And I think one of the things you mentioned is change in advisor economics, which so, a, I'm not sure if I heard it right, but it sounds like that's what you said.

And up until now, it feels like advisor economics have been actually fairly stable. So do you anticipate just the volatility in the portfolio or lower perspective returns or something else to drive some changes in those economics and kind of maybe flesh that out for us a little bit?

Charles Goldman -- Chief Executive Officer

Yes. Thanks for that question. I was wondering if somebody might ask that. So when we look at all the benchmarking studies on advisor pricing, it's exactly as you say.

It hasn't moved at all forever. You read about it in investment news and other places, but it just hasn't changed. When we look at our own advisors because we do billing, we can see exactly what they're charging. It really is quite industry standard and hasn't moved around.

We also don't see people moving to flat fees for mass-affluent clients either. So it's not that. Rather, it's 2 two factors. One, of course, is AUM-based pricing.

When AUM is down, it puts pressure on advisors. And there's no doubt AUM's been down. It's come back a little bit, but with the volatility that we're experiencing, God only -- again, I don't know what the rest of the year is going to look like. We all listen to everybody's guesses.

But when AUM is down, it puts pressure on advisors. I mean, just immediate pressure right out of the bottom line, right out of their pockets. So we think that's a big issue. The second big issue that we think impacts our economics is right now the amount -- it might have been yours or Chris mentioned it, maybe it was Ken, that advisors are spending a lot more time talking to their clients than they normally do.

And that amount of effort and work is putting tremendous pressure on their key cost structure, which is down. So the amount of hours and efforts that they've got to put in to those meetings preparing for them, having discussions, doing more analysis, follow-up is putting pressure on their economics and time. And lastly, technology. Again, we believe that a lot of investors who weren't ever signed up for e-delivery and never thought they'd use Zoom or whatever, Webex or any of these other technologies are now using them, and they're using them with their grandkids, and they like it, and it's easy.

And it's better than driving. They want to maybe drive out and go to dinner, but drive into their advisor's office, not so much. And so the need to use technology and integrate the experience in the technologies, not just getting a free Zoom license from us, it's integrating the experience of having a meeting and discussing portfolios and showing modeling and all the things that -- planning, all the things that advisors do in that experience is hard. And so when you add all that together, we think that that's going to impact advisor economics and make it tougher and the need to outsource, get that expertise, free up time, which we've been able to prove outsourcing does, is going to be more and more attractive.

Alex Blostein -- Goldman Sachs -- Analyst

Got it. All right. Gary, just a cleanup for you. When you talk about targeting flat expenses in 2020 versus 2019, are you talking about sort of the total expense base or the operating expense base? So should we only be thinking about employee comp and SG&A and kind of depreciation, amortization? Are you including asset-based and spread-based expenses within that as well?

Gary Zyla -- Chief Financial Officer

No. When we're talking about that, we're talking about the operating expenses. So the employee -- what you said for employee comp, the SG&A, professional fees, etc., we view the variable cost as part of that net revenue number that we have, which is what we're earning net on our assets. That really -- we don't expect that will change much, right, going forward.

Alex Blostein -- Goldman Sachs -- Analyst

All right. That's right. Great. Thanks again for the follow-up.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Taylor Hamilton -- Head of Investor Relations

Charles Goldman -- Chief Executive Officer

Gary Zyla -- Chief Financial Officer

Alex Blostein -- Goldman Sachs -- Analyst

Chris Shutler -- William Blair and Company -- Analyst

Ken Worthington -- J.P. Morgan -- Analyst

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