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DATE
Thursday, July 24, 2025 at 10 a.m. ET
CALL PARTICIPANTS
President and Chief Executive Officer — Seth Bernstein
Chief Financial Officer — Tom Simeone
Head of Global Client Group and Private Wealth — Onur Erzan
Head of Investor Relations — Ioanis Jorgali
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TAKEAWAYS
Assets Under Management (AUM): $829 billion in assets under management as of Q2 2025, a record high, with private wealth comprising 17% of AUM and contributing 35% of base management fees.
Firmwide Net Flows: Negative for the quarter, with active strategies seeing $4.8 billion in outflows, largely concentrated in April.
Active Equity Outflows: $6 billion firmwide, driven primarily by retail, partially offset by modest inflows into active ETFs, thematic, and international strategies.
Active Fixed Income Flows: Modest outflows in active fixed income, with $1.5 billion in taxable outflows nearly offset by $1.2 billion in tax-exempt inflows.
Private Markets AUM: $77 billion in fee-paying and fee-eligible assets, representing 20% year-over-year growth.
Organic Growth in Retail Tax-Exempt Platform: 14% annualized organic growth for the tenth consecutive quarter, with underlying muni platform market share gains.
Alternative Multi-Asset Inflows: $1.6 billion in alternative multi-asset inflows, mainly from private placements ABS, U.S. real estate debt, CLOs, mortgages, and middle market lending.
Pipeline AUM: Nearly $22 billion pipeline AUM, including sizable mandates in retirement, insurance asset management, and passive equities.
Operating Margin: On track for 33% in 2025, above the midpoint of the 2027 adjusted operating margin guidance range of 30%-35%.
Adjusted Earnings: Adjusted earnings were $0.76 per unit, representing a 7% increase compared to the prior year.
Net Revenues: Net revenues reached $844 million. Net revenues increased 2% compared to the prior year.
Base Management Fees: Base management fees increased 4% year over year. Adjusted base management fees for the retail channel were up 6% versus the prior year, while the channel fee rate declined 2% sequentially due to lower daily average AUM in higher fee active equity services.
Performance Fees: $30 million total performance fees (non-GAAP), Performance fees decreased by $12 million compared to the prior year; $22 million from private market strategies, $8 million from public strategies.
Compensation Ratio: 48.5% compensation to adjusted revenue ratio for Q3 2025 (non-GAAP), down from 49% in the prior year (Q2 2024), compensation and benefits expense was $419 million, up 1% versus the prior year.
G&A Expense: Decreased 6% year over year due to lower occupancy costs after relocating the New York office.
Non-Compensation Expenses: $293 million year to date; Full-year 2025 guidance tightened to $600 million-$620 million.
Firmwide Base Fee Rate: 38.7 basis points, lower than both the prior quarter and the prior year, mainly due to mix shift and flow impact.
Performance Fee Guidance: Full-year 2025 performance fee range raised to $110 million-$130 million, primarily from an improved outlook for private alternative strategies.
Private Wealth Net New Assets Growth Rate: 2.6% annualized net new assets growth rate for the private wealth client channel, with over $1.2 billion-$1.5 billion in quarterly dividends and interest over the last four quarters, which is excluded from reported net flows.
SMAs and Active ETFs: SMA AUM surpassed $54 billion, with over $700 million in second-quarter inflows; active ETFs at $8 billion AUM, doubling from the prior year.
Institutional Channel Flows: Slight net inflows in core active after adjusting for passive redemptions; upcoming $1 billion net inflow expected from an institutional index redemption over the coming quarters.
US Investment-Grade Systematic Fixed Income: Continued institutional traction and recent A rating from a top consultant.
Defined Contribution Platform: Approaching $100 billion in AUM, with $13 billion in lifetime income mandates.
Effective Tax Rate: 6.7%, in line with full-year guidance of 6%-7%.
SUMMARY
AllianceBernstein Holding L.P. (AB 0.26%) reported record AUM of $829 billion. and strengthened profitability with a 33% targeted 2025 operating margin, surpassing intermediate guidance by two years. Management raised full-year 2025 performance fee projections, pointing to stronger-than-expected private alternative deployment. A robust institutional pipeline and accelerated partner mandates—particularly from insurance and retirement clients—signal renewed asset growth opportunities despite near-term net outflows. Expense discipline, scale benefits from recent relocations, and strategic partnerships with key insurers were highlighted as sustaining positive operating leverage. Management addressed M&A discipline, selective advisor expansion in private wealth, and clarified capital allocation priorities, including appetite for sidecar and mid-size wealth management acquisitions.
CFO Simeone emphasized, "and are tracking better than our prior full-year 2025 guidance range of $600 to $625 million," leading to tighter expense forecasts.
Onur Erzan said, "We are more permanent capital. We are not looking to buy and sell." underlining AB's patient, opportunistic approach to wealth business expansion.
CEO Bernstein described the Equitable partnership as providing a "competitive edge," noting that over $15 billion of $20 billion committed has already been deployed into private market strategy with further upside identified.
Management expects the compensation ratio to stay at 48.5% for Q3 2025, following improved revenue mix and continued expense discipline.
Deployment cycles for new mandates are expected to quicken in the near term due to unique institutional pipeline composition, according to company statements.
INDUSTRY GLOSSARY
ABS (Asset-Backed Securities): A type of financial security backed by loans, leases, credit card debt, or receivables.
CLO (Collateralized Loan Obligation): A structured credit product backed by a pool of leveraged loans.
SMAs (Separately Managed Accounts): Individually managed investment portfolios owned by single investors and managed on their behalf.
RGA: Reinsurance Group of America, reference to a major insurance partner and pipeline contributor during the quarter.
Sidecar: A co-investment structure allowing external capital to invest alongside primary funds, often used in partnership with insurance clients.
Ruby Re: A referenced sidecar investment entity used for insurance-related capital deployment.
ILOW: Ticker for AllianceBernstein's international low volatility equity ETF product.
ABPCI (AB Private Credit Investors): AllianceBernstein's middle market corporate lending platform, a key contributor to private markets AUM and performance fees.
Full Conference Call Transcript
Ioanis Jorgali: Good morning, everyone, and welcome to our second quarter 2025 earnings review. This conference call is being webcast and accompanied by a slide presentation that is posted in the Investor Relations section of our website, www.alliancebernstein.com. With us today to discuss the company's results for the quarter are Seth Bernstein, President and CEO, and Tom Simeone, CFO. Onur Erzan, Head of Global Client Group and Private Wealth, will join us for questions after our prepared remarks. Some of the information we'll present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I would like to point out the Safe Harbor language on slide two of our presentation.
You can also find our Safe Harbor language in the MD&A of our 10-Q, which we filed this morning. We base our distribution to unit holders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation appendix, press release, and our 10-Q. Under Regulation FD, management may only address questions of material nature from the investment community in a public forum. So please ask all such questions during this call. Now I'll turn it over to Seth.
Seth Bernstein: Good morning, and thank you for joining us today. During the second quarter, investors grappled with concerns about escalating geopolitical tensions, policy uncertainty, and debt sustainability. Sentiment improved as trade tensions eased and risk assets ultimately delivered solid returns for the period. AllianceBernstein ended the quarter with record assets under management of $829 billion, which provides a helpful tailwind as we start the second half of the year. On slide three, I'll review key business highlights for the quarter. As I noted, firmwide assets under management reached a post-financial crisis high of $829 billion. Private wealth represents 17% of our assets and 35% of our base management fees as of the second quarter.
Approximately 10% of our $685 billion asset management business consists of permanent capital managed for Equitable. While market turbulence can impact short-term flows, it doesn't impact our connectivity with clients. Our pipeline AUM reached nearly $22 billion, reflecting sizable mandate additions across retirement, insurance asset management, and passive equities. We are making good progress in accessing long-duration capital pools that we can rapidly scale, leveraging our partnership with Equitable and our differentiated distribution and investment capabilities. These include insurance asset management, alternatives, and retirement, where we've consistently gained market share, including in the second quarter of 2025. However, we did see pressure on firmwide net flows, which turned negative in the second quarter with active strategies shedding $4.8 billion.
The outflows were largely concentrated in April during the height of the market volatility, and we observed steady improvement as this turbulence subsided, with June flows turning positive. Active equity shed $6 billion firmwide, primarily led by retail. Client redemptions were broad-based across strategies, although we did see slight inflows into our active ETFs, thematic, and international strategies. After six consecutive quarters of organic growth, active fixed income experienced slight outflows. The downturn in overseas demand for our marquee income strategies resulted in $1.5 billion of firmwide taxable outflows, which were largely offset by continued growth within our tax-exempt franchise, which generated $1.2 billion of inflows.
Our industry-leading retail muni platform continues to deliver impressive market share gains, growing organically at 14% annualized in the second quarter. Alternative multi-asset inflows totaled $1.6 billion, largely driven by strong deployments into our newly established private placements ABS strategy, our U.S. real estate debt platform, CLOs, mortgages, and middle market lending. Our private markets platform reached $77 billion in fee-paying and fee-eligible AUM as of quarter-end, growing 20% year over year. We're focused on delivering consistent and profitable growth supported by scale gains, improved operating leverage, and a durable fee rate. Our diversified asset mix coupled with our enhanced operational efficiency provides downside protection to our revenue base and margins while we retain upside leverage to favorable markets.
We're on track to deliver a 33% operating margin in 2025, assuming flat markets versus the fourth quarter of 2024. This would put us above the midpoint of our 2027 margin range target of 30% to 35%, two years ahead of schedule. We see further potential for margin expansion over time as we scale our business. Finally, we continue to broaden our distribution coverage by expanding existing partnerships, forming new ones, and extending the addressable market for our differentiated investment capabilities via vehicle versatility. Year to date, we've added four new general account relationships across six strategies and five new mandates across existing relationships. These relationships require high-touch client service beyond conventional asset management.
We've invested significant operational resources and institutional expertise to deliver a holistic client experience that is scalable, unlocking incremental revenue opportunities beyond management fees. We entered the second half of 2025 with 18 active ETFs and nearly $8 billion in AUM, more than double the prior year level. The majority of our flows were coming from net new assets. Our SMA platform has surpassed $54 billion in asset under management, generating more than $700 million of inflows in the second quarter driven by munis. We were among the industry pioneers in tax-aware SMAs, still delivering strong investment outcomes for our clients and the highest standards for client service. Moving on to slide four, I'll highlight our strategic relationship with Equitable.
Partnering with a leading insurance provider gives AllianceBernstein a competitive edge, supporting our client-focused asset-light approach. Leveraging the permanent capital commitment from Equitable helps us seed and scale our higher-fee, longer-dated private alternative strategies. To date, we've deployed over $15 billion of the $20 billion commitment Equitable has made to AB private market strategy. The attractive yields produced by these strategies allow Equitable to offer compelling products to its policyholders, driving growth in sales and more general account assets for AB to manage. This creates a positive flywheel effect which benefits both companies.
New capabilities we've developed for Equitable, such as residential mortgages and private ABS, can then be commercialized and offered to other insurance and institutional clients, helping drive sustainable growth in private markets AUM. We remain on target to grow our private markets AUM to $90 to $100 billion by 2027, up from $77 billion today. Slide five reflects a summary page with our key financial metrics, which Tom will cover shortly. Turning to slide six, I'll review our investment performance starting with fixed income. During the second quarter, major government bond markets saw steepening yield curves amid escalating geopolitical and trade tensions. Despite the uncertain backdrop, credit markets displayed remarkable resilience, supported by high all-in yields and low net issuance.
The Bloomberg US Aggregate Index returned 1.2% while the global aggregate returned 4.5% in the second quarter, reflecting US dollar depreciation versus major currencies. Our portfolios continue to perform well in this challenging market, particularly through curve positioning and credit selection. More than half of our fixed income assets outperformed over a one-year period, while 87% outperformed over three years and 75% over the five-year period. Our tax-aware muni SMAs continue to generate strong relative performance across all periods. Global high yield performance has softened recently, underperforming both the benchmark and the category over the one year, largely due to underweight exposure to emerging market sovereigns. However, our three and five-year relative returns remain compelling vis-a-vis the peer category.
Our American Income portfolio maintains strong absolute and relative performance in the second quarter, mainly driven by yield curve positioning. AIP is outperforming its benchmark over the one, three, and five years while also outperforming its category over the one and three-year periods for the institutional share class. Volatility in rates and foreign exchange, coupled with concerns around unpredictable fiscal and trade policies in the United States, have dampened demand for US dollar-denominated assets. While the safe haven status of dollar-denominated assets is being questioned, the US dollar remains the world's most liquid currency, supported by compelling rate differentials and the world's deepest capital market. Diversification is a healthy process, particularly given the severely overweight exposure to US assets.
We have built a robust all-weather platform that can help clients optimize their geographical exposures and capitalize on potential reallocation. We're already seeing increasing interest for our European income portfolio. Balance in credit and duration offer a euro-denominated barbell approach. The strategy has attracted over $200 million in inflows in the second quarter and continues to outperform its benchmark year to date. Today's environment also increases potential excess return from security selection. Active systematic fixed income brokers may help investors harvest these opportunities. We continue to see increased client interest for our systematic strategies with over $1 billion in inflows in the second quarter.
Turning to equities, following the short pullback in early April, US equities quickly rebounded to new highs, with the S&P 500 rallying 10.6% in the second quarter. US equity gains remain concentrated as big tech surged, with the S&P growth outperforming value by more than 15%. European and emerging markets outperformed US stocks in the first half of the year, largely driven by a weaker dollar. Our relative performance was mostly unchanged versus the prior quarter, with 24% of our assets outperforming in one year and 48% over the three-year periods, continuing to reflect the narrow leadership of a few mega-cap companies. Our five-year performance improved as 50% of our equity AUM outperformed.
In the current environment, we maintain a proactive and disciplined approach to identifying high-quality, profitable companies with sustainable business models and significant recurring revenue streams. These defensive characteristics serve as a buffer against sudden spikes in market volatility. Importantly, we have a diverse selection of active equity strategies, strong breadth, and high-quality product offerings balanced across geographies. Examples include our highly-rated international low volatility equity strategy, which was recently launched in ETF wrapper under the ticker ILOW. We have over thirty global, international, and emerging market services with established track records that have exhibited strong performance.
Nearly all of them are outperforming their respective benchmarks for composite over the three and five-year period, and nearly three-quarters of the retail products sitting in the top quartile or top decile of their Morningstar categories for either the three or five-year periods. This includes one of our largest retail offerings, International Strategic Equities, which continues to deliver alpha year to date and sits at the top 3% of its Morningstar category. We also launched our first active ETF in emerging markets. We recognize the enduring appeal of US stocks and we believe the US market will continue to offer exceptional opportunities.
We're also encouraged by the increased focus on fiscal and governance standards across Europe and Asia that could potentially attract more capital in these regions. In this landscape, flexibility is important. And opportunistic adjustments to regional and sector exposures are crucial to capitalize on emerging opportunities. We're witnessing growing momentum in systematic equity strategies since institutional investors are rekindling their appreciation for this style. We won a $500 million mandate for our global core equity portfolio that utilizes fundamental stock selection combined with proprietary quantitative risk and return tools. The strategy has outperformed over the one, three, and five-year periods, delivering consistent alpha with a lower tracking error.
Finally, our private alternatives platform remains invested, delivering better outcomes for our clients. AB private credit investors, our middle market corporate lending platform, continues to exhibit solid long-term performance in line with stated objectives, supported by the resilience of our invested sectors and the rigorous underwriting process. AB Carvalho's investment footprint spanning the US and Europe underscores our belief in the benefits of geographic diversification for optimizing risk-adjusted returns. We're seeing increased deployment opportunities within our commercial real estate debt platform in the US and Europe as the commercial real estate market has continued to show signs of stabilization. Now turning to slide seven.
Retail flows turned negative in the second quarter as macro turbulence halted the streak of seven consecutive quarterly inflows. Active equity shed $3.7 billion across a wide range of different services, with US large-cap growth accounting for approximately $1.5 billion of those outflows, primarily concentrated within the United States. It's noteworthy that US large-cap growth flows in Japan remain slightly positive for the quarter. Otherwise, client interest was limited to thematic, global, and international strategies. Taxable fixed income also generated $2.4 billion in outflows as demand for our marquee income strategies such as American Income and Global High Yield remained weak in the second quarter.
As rate volatility subsided, we observed a slight improvement in demand dynamics, particularly for AIP, where outflows decreased compared to the prior quarter. Encouragingly, we are seeing constructive demand for the European income strategy, which replicates our barbell approach for euro-denominated assets. We're also excited about our ETF-driven market share gains in the taxable fixed income space within the US retail channel, where we've historically been underexposed to the asset class. We continue to gain retail market share in tax-exempt for the tenth consecutive quarter, growing at a strong 14% annualized rate. Retail Alton MAS generated $300 million in inflows in the second quarter.
Our adjusted base management fees were up 6% versus the prior year, while the channel fee rate was down 2% sequentially, reflective of lower daily average AUM for higher fee active equity services. Moving on to slide eight. Excluding the impact of passive redemptions, our core active strategies generated slight inflows within the institutional channel during the second quarter. Notably, a single institutional index redemption is expected to bring in a billion in net inflows over the coming quarters. The client's entrusting us to redeploy the proceeds from the redemption of incremental capital to manage in passive equities. This mandate is already reflected within our pipeline.
Institutional organic growth was primarily driven by inflows of approximately a billion each into taxable fixed income and alternatives. Our US investment-grade systematic fixed income strategy continues to gain strong traction with institutional clients and has received solid support from consultants, recently earning an A rating from a top consultant. Within alternatives, we continue to deploy at a healthy pace despite market volatility. Net of distributions, we put over $900 million to work across private placements, commercial real estate, asset-based finance, and private credit. Although active equity outflows continued in the second quarter, the trend continues to moderate year over year and sequentially.
Our pipeline includes $5 billion from RGA, and we're thrilled to expand our relationship with this important partner. Note that these assets are related to the recent RGA Equitable Reinsurance transaction, which we expect to result in an overall net outflow of approximately $4 billion of lower fee AUM. Other notable wins in the second quarter included $3 billion in customized retirement and $500 million wins in third-party insurance and structured equity. Our best-in-class defined contribution manages nearly $100 billion in assets, including nearly $13 billion in lifetime income. The decrease in pipeline fee rate is influenced by the asset mix and the magnitude of the wins in the second quarter. Turning to Slide nine.
Net flows into our private wealth channel flipped to negative, weighed by seasonal tax-related selling coupled with turbulent macro conditions. As we've discussed in the past, our private wealth net flows exclude reinvested dividends and interest income, which is typically reported within net new assets across key wealth management peers. On a net new assets basis, our client channel grew at a 2.6% annualized rate. Quarterly dividends and interest have ranged between $1.2 and $1.5 billion over the last four quarters. This is a durable and underappreciated source of growth for our private wealth asset base. Demand dynamics within the channel favored passive equities and all multi-asset.
Our passive tax loss harvesting strategy eclipsed $7 billion in AUM, growing organically in the second quarter at a 7% annualized rate. We fundraised over half a billion dollars in private alternatives in the second quarter. General redemptions were primarily concentrated within active equity, totaling $1 billion in outflows. Taxable and tax-exempt fixed income posted marginal outflows. We continue to grow our high net worth and ultra-high net worth client base, underscoring the distinctive value proposition that Bernstein offers to this important client segment. Base management fees grew 5% year over year and declined marginally on a sequential basis. Now I will pass it to Tom to cover our financial results. Tom?
Tom Simeone: Thank you, Seth. Good morning, everyone, and thank you for joining our call. We're pleased to report strong financial performance in the second quarter, reflecting market-driven growth in asset management fees, continued expense discipline, and enhanced operational leverage. Adjusted earnings for the second quarter came in at $0.76 per unit, representing a 7% increase compared to the prior year. Distributions in EPU grew uniformly as we distribute 100% of our adjusted earnings to unitholders. On slide ten, we present our adjusted results, which exclude certain items not considered part of our core operating business. For a detailed reconciliation of GAAP and adjusted financials, please refer to our presentation appendix or our 10-Q.
The second quarter, net revenues reached $844 million, a 2% increase compared to the prior year. Base fees saw a 4% increase year over year. Total performance fees of $30 million decreased by $12 million from the prior year, primarily due to lower public market performance fees. Dividend and interest revenue, along with broker-dealer related interest expense, declined compared to the prior year, reflecting lower cash and margin balances within private wealth. Investment gains doubled to $8 million, while other revenues remained flat versus the prior year. Moving to expenses, our second quarter total expenses remain relatively flat at $571 million.
Compensation and benefits expense of $419 million, which includes other compensation costs of $10 million, was up 1% versus the prior year, reflecting 2% higher revenues offset by a lower compensation ratio of 48.5%, in line with our guidance and below the 49% compensation ratio in the prior year. Given the volatile market backdrop, we will continue to accrue at a 48.5% compensation to adjusted revenue ratio in the third quarter of 2025. Compared to the prior year second quarter, promo and servicing costs were roughly flat, while G&A expenses decreased by 6%, reflecting lower occupancy costs due to the relocation of our New York City office.
Year to date, non-compensation expenses amount to $293 million and are tracking better than our prior full-year 2025 guidance range of $600 to $625 million, driven by continued expense discipline and enhanced operational efficiency. Therefore, we are tightening our non-compensation expense projection to fall within $600 million to $620 million for the full year, with a seasonal uptick later in 2025. Expect promotion and servicing to make up roughly 20% to 25% of non-comp expenses, with G&A accounting for 75% to 80%.
Second quarter interest on borrowings decreased by $3 million versus the prior year due to lower cost of debt and lower debt balances following repayments we made using the proceeds from the Bernstein joint venture and the private unit issuance. It is important to note that we plan to utilize the additional debt capacity in the future to support our commitment to the Ruby Re Sidecar and capitalize on potential growth opportunities that may arise. ABLP's effective tax rate was 6.7% in the second quarter, in line with our full-year guidance of 6% to 7%. Turning to Slide eleven, allow me to walk through the trajectory of our firmwide base fee rate, net of distribution expenses.
In the second quarter of 2025, our firmwide fee rate decreased to 38.7 basis points, down versus the prior quarter and the prior year. The decline was primarily driven by a mix shift in AUM and flows. During periods of market volatility, the simple average AUM may not accurately reflect the daily asset base fluctuations of individual funds. For example, despite the strong recovery in the US equity markets, the average daily NAV for key services like US large-cap growth was lower in the second quarter of 2025 compared to the prior quarter. Consequently, our base fee growth lagged the market appreciation of the underlying assets.
Flow dynamics also had a negative impact on the fee rate in the second quarter due to outflows from higher fee retail services coupled with organic growth in lower fee categories such as SMAs, ETFs, insurance asset management, and retirement. We continue to see good momentum in these secularly growing long-duration capital pools as we leverage our partnership with Equitable and our differentiated distribution capabilities. We are excited about the value proposition for our clients and shareholders from these scalable long-duration assets, and we prioritize sustainable organic growth and long-term profitability over focusing solely on the fee rate.
Over the past five years, the fee rate has remained relatively stable in the 39 to 40 basis point range as our regional sales mix and strategic growth initiatives have helped to mitigate industry-wide fee erosion. Looking forward, we expect the fee rate trajectory will continue to reflect the mix of organic growth and market movements have been more supportive in early 3Q. Slide twelve offers a breakdown of performance fees across private and public strategies. Second quarter performance-related fees from our private market strategies totaled $22 million, showcasing consistent alpha generation from our middle market lending platform.
Additionally, public strategies contributed $8 million, predominantly fueled by our top-rated US select long-short portfolio, which has demonstrated resilience and outperformance across market cycles. We now project total performance fees for 2025 of $110 million to $130 million, up from our prior estimate of $90 to $105 million. This upward revision is primarily driven by the flow-through of slight upside in public markets and the more active deployment outlook for our commercial real estate debt platform. Assuming flat markets, we view the lower end of our guidance as a floor rather than a ceiling. Although, we caution that last year's upside was largely driven by public alternatives and the robust equity market performance.
For the remainder of the year, we expect our private alternative strategies will be the primary contributors to our performance fees, as they have been in recent years. These strategies include commercial real estate debt, CarVal, and middle market lending, also known as AB private credit investors or ABPCI, which is the largest contributor. Turning to slide thirteen, despite slightly lower average AUM in the first half of 2025 or 4Q24, coupled with a negative mix shift, our year-to-date operating margin remains in line with the 33% expectation. We continue to view 33% as a reasonable baseline for our full-year 2025 operating margins, assuming stable market conditions.
Focusing on this quarter, the adjusted operating margin of 32.3% was up 150 basis points versus the prior year, reflective of lower real estate expenses since our move to Hudson Yards. We will remain disciplined on expenses while also investing in growth to generate long-term value for our unitholders. Targeted growth investments may include onboarding new investment teams and launching new products. We expect to drive future growth and profits. Before we proceed to the Q&A session, I want to express my sincere appreciation to all my colleagues for their significant contributions. We are steadfast in our commitment to efficiently allocate capital, create value for our clients, investors, employees, and stakeholders, while simultaneously diversifying and expanding our business.
With that, we are pleased to take your questions. Operator?
Operator: Thank you. The floor is now open for questions. If you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Please limit your initial questions to two to provide all callers an opportunity to ask questions. You're welcome to return to the queue to ask follow-up questions. Your first question comes from the line of Craig Siegenthaler of Bank of America. Your line is open.
Craig Siegenthaler: Good morning. This is Ivory on for Craig. With Pacific Life Insurer now joining your multi-insurer lifetime income platform, how are you thinking about scaling your retirement income business more broadly? And how should we think about AB's share of economics on the retirement income platform? Is this more of a pass-through structure?
Onur Erzan: Hi, Sonar. Thanks for the question. Let me answer it in a couple of different ways. And one is, as we highlighted in our earnings announcement and call, the insurance segment is very critical for us, and we continue to expand our engagements and deepening of the insurance segment in many different aspects of the business, and lifetime income is one of those. We are one of the pioneers in lifetime income. Obviously, we have seen an uptick in interest in lifetime income solutions given the demographic aging of baby boomers, as well as some of the Secure Act 2.0 dynamics. So there's no material change in our product structure. We continue to add insurers and some insurers drop off.
So that's a bit of the backdrop on the PacLife announcement, but we're excited about our relationship with them and ability to do more over time. In terms of the economics on these products, ultimately, we continue to focus on delivering the guaranteed income for our clients. So although these can be relatively sizable mandates, they tend to be lower fee from an asset management perspective. While some of the economics obviously accrue to the insurers based on the liability structure, and then finally, we continue to work on different lifetime income solutions, both with our main shareholder, Equitable, and as well as other third-party insurers.
Over time, we might come to the market with different fee economics that could be even more accretive to our overall top line.
Craig Siegenthaler: Thank you. And just as a quick follow-up following the amended exchange agreement with Equitable, can you clarify how we should think about the likelihood of further exchanges into?
Seth Bernstein: Sure. Let me start. And, Tom, and it's Seth Bernstein, can add. Look, the actual conversion from private to public view from public and private units is really driven by a more beneficial tax treatment for the private unit. So it really has no bearing on the daily trading volume or anything else, and it has been something that has been done before. So there's nothing unusual about it. Tom, do you have anything you want to add?
Tom Simeone: Yeah. I guess the only thing I'd add there is I'd remind everybody that this brings everybody equitable back to similar to what they had pre-2022 before the CarVal acquisition.
Seth Bernstein: You mean in terms of their totals? Holding Oh. At eighty?
Onur Erzan: Yes.
Operator: Great. Thank you. Your next question comes from the line of Alex Blostein of Goldman Sachs. Your line is open.
Alex Blostein: Hey. Good morning. This is Anthony on for Alex. I wanted to hit on the, you know, capital allocation strategy. There were some recent headlines on maybe potential M&A. So you could speak to your willingness to go down that route and what that would look like?
Seth Bernstein: Alex, hi. It's Seth. Just sorry. With regard to the optimization of capital that Tom was referring to or with respect to our investment I think M&A. M&A. Just wanted to clarify. It's M&A. Okay. Sorry. Yes. So, look, we continue to look at a number of opportunities, whether it's insurance sidecars or other forms of partnerships with key insured clients around the world. And it's been pretty active, and we think that we have an opportunity, particularly if we can utilize Equitable's underwriting skills in analyzing those risks. To actually utilize our capital, potentially equitable capital, or a combination of the two to realize incremental flows into our key private alternative strategies. And so there's obviously a limit.
We don't want to become an asset-heavy or a capital-heavy type of entity, and we would raise the money through issuance of units. To fund that. As a general proposition just as we did in the case at Ruby Re. So I don't think it will ever be a material amount of money on our balance sheet. And we are going to watch it very closely. But we do think it's a competitive edge we have, particularly with Equitable's underwriting skills. That we want to take advantage of. Onur, if there's anything you want to add?
Onur Erzan: Yeah. That one minor add and one additional extension. These sidecar investments, obviously, we've been looking at for multiple years and looking at the return profile, these tend to generate low to mid-teen kind of ROE. So they're also attractive on a standalone basis, and any economics we get on the investment management side is accretive or additive to that ROE. So we really like the ROE profile. Number one. Number two, I think some of the obviously, press has been around our active posture in wealth management. And that shouldn't be new news, if you will, going back to previous earnings calls and other market communication, we are always active in the wealth management space. We like wealth management.
We have a scale platform in terms of independent platforms with $150 billion. And we have been in this business for a long time, and we believe we do a good job of serving our clients and growing our business. The way we think about M&A is an enabler. It's not a hammer looking for the nail. We are not a private equity-backed roll-up. But we believe we are operating leverage in our business and scalability in private wealth. And as a result, we can easily double, triple our adviser headcounts. We organically continue to hire advisers. In attractive geographies and segments. We will continue to add experienced advisors and teams.
And in certain cases, adding a small to midsize business might be a faster path to getting that expanded growth. That being said, we're always very selective from a culture perspective, from a platform perspective, as well as our financial discipline. But the good news is we are getting a lot of inbounds and this is true both for insurance transactions as well as wealth management transactions.
Seth Bernstein: And just to add, I guess, Alex, it's important that Onur made the point about small to midsize. Because we're very cognizant of the prices for these kinds of businesses. So, we need to be careful. That's it for me. Thanks.
Operator: Your next question comes from the line of Bill Katz of TD Cowen. Your line is open.
Bill Katz: Great. Thank you very much for taking the question. Good morning, everybody. Maybe just coming back to the margin discussion for a moment. I appreciate the affirmation of the 33% guide. It does look like either on end of period number now, even think through the averages, that you're running a bit ahead of where you were at the end of the year. So maybe a two-part question. How to think about the incremental margin as we look out the second half of the year? And since you're already running at the midpoint of your 2027 guidance, how do we think about the trajectory into 2026 and beyond?
Tom Simeone: Hey, Bill. Thank you for the question. As I think we're now at a 33% margin on a year-to-date basis. And that's what we're hoping for, planning, and forecasting for the second half of the year just as we noted in our guidance here. So I think it's going to be equal 33 first half, 33 in the second half. And then as far as our guidance into 2026, we would plan to be you know what? We're not prepared to answer that just yet. Haven't done the 2026 forecasting yet. And we'll provide that information possibly at the end of the year.
Bill Katz: Okay. Thank you. And then maybe one for Onur or Seth. I'm so curious. Since you're generating significant incremental yield or cash flows through the financial advisors, but not sort of disclosing it in a way that's sort of comparable to what your peers do. What's the holdback to sort of shifting the organic growth calculation part one? And then part two, just in terms you mentioned you could scale up two to three x in terms of financial advisors. Is that just on the existing book of the platform, if you will? And then seems to be a lot of pressure we're hearing from some of your peers around private equity-sponsored players for recruitment.
Could you speak a little bit about what you're seeing in terms of transition assistance as you think about scaling beyond your sort of de novo focus. Thank you.
Onur Erzan: Sure. Thanks for the questions, Bill. So, yeah, let me answer those questions. Number one, why do we talk about net new client assets in addition to net flows? It's very simple. We have a wealth management business that's comparable to other pure wealth management plays or wealth managers embedded in larger institutions. We wanted to make sure we make life easy for analysts and other buy-side community to be able to make apples-to-apples comparisons between our growth rates and most of the wealth management industry works on net new client assets versus the asset management metric of net flows. So that's the reason why we want to provide that information.
There's no catalyst other than ongoing improvements in terms of how we represent the key metrics in our business. In terms of my point around doubling or tripling the adviser, my point is given we have been in this business for a long time, given we have a very established infrastructure, we have our own custody and clearing, we have a robust investment organization, manager selection, direct indexing, etcetera, etcetera. For us, it's pretty straightforward to add new advisers to our platform. It doesn't require massive improvements to our platform to add new advisers or sales points, if you will. So that was my key point around that.
And in terms of our transition support in a highly competitive industry, relative to private equity-backed platforms, etcetera. Again, we have been bringing over advisors to our business for decades. We have strong transition capabilities, both in the technology team as well as in the investment team. So if you think about it, our private wealth business has thousands of employees. It's a very well-established platform compared to some of the RA's and in terms of our scale, probably we compare very well against even the very largest RA's. So I believe we can compete head to head.
And not to mention, we have the benefits, the balance sheet, the backing of a larger public entity, AllianceBernstein, with also the global infrastructure behind it.
Seth Bernstein: But we take your point around the notion around net new assets because look, it's clear we have a billion two billion five a quarter. That sits there that we don't in the net flows calculation doesn't get reflected, but given that we're an asset manager, principally, that's how we've been reporting. So that's why we've tried to give you more color.
Onur Erzan: Yeah. It's maybe not very different than some other peers. Franklin talks about both as an example as well. Right.
Operator: Thank you for taking the questions. Your next question comes from the line of John Dunn of Evercore ISI. Your line is open.
John Dunn: Thank you. It was a nice increase in the institutional pipeline. Do you look at kind of timing of that funding? Are the new mandates you just added gonna take a while to flow through?
Onur Erzan: Honor, again, let me take that. I mean, look at the end. Typically, it takes depending on the asset class, I mean, blended, it takes twelve to fifteen months to deploy. In general, obviously, it's longer for some private assets and much shorter for publics. I think, yeah, you're going to have a little bit of an accelerated timeline this time around given the RGA transaction, its impact it will have on us. As Seth mentioned in his opening remarks. So there's going to be probably a bit of a higher velocity this time given the unique composition of the pipeline. But that's kind of how we think about it.
And we continue to see also strong commercial activity as also Seth mentioned. We have been advancing on a couple of strategic insurance relationships that might that has the potential to add meaningfully to our alts pipeline as well. If that happens, although on average, it's a good thing, as you recognize strategic partnerships and private alts that might be a little bit of a longer deployment cycle as well, but that's the picture.
John Dunn: Got it. And then, you know, just because it's such an important driver of flows, can you talk about some of the drivers of demand for American income and the outlook from, you know, continued improvement over the rest of the year?
Onur Erzan: Sure. Yeah. I mean, in the second quarter, things got a little rougher with the liberation day, uncertainty, tariffs, and impact on the rate outlook and the dollar. Right? So at the end of the day, American Income by definition has strong US dollar exposure and treasury exposures. As a result, we were a little bit in the middle of that. We have seen normalization starting in June, and then that continues in July. So we have seen positive days in July just to give you a little bit of I mean, one day doesn't make a trend, and I don't want to extrapolate that. But, ultimately, we see definitely great signs of stabilization. But it's a cyclical product.
We have seen this over time. When the rate outlook is stable, when you have a healthy upward sloping yield curve, etcetera. There are times from a macro perspective, AIP does very well when the duration is in demand. And in other environments, it pulls back, and it pulls back to assets pulled back quite fast as well. So we're not structurally concerned, but we recognize a cyclical product.
Seth Bernstein: I guess I would add that you know, as a consequence of the tariff announcements, the dollar weakened pretty significantly, particularly in Asia, and that obviously But I have to say it does seem to have stabilized and normalized and we are seeing more positive days. With the caveat that Onur had provided. I'd also say we're seeing better flow activity domestically in fixed income as well. So that in retail. So that has been how a more institutional focus in the fixed income and even in the equity spaces.
So look, the really pronounced low volatility of markets is interesting given the, you know, the underlying uncertainties, but it's certainly seeming to moving people to be deploying more than they had been six, eight, weeks ago. So I don't you know, these are sort of insights that could change with changing policy announcements, but that's where I think we are now.
John Dunn: Thank you.
Operator: Your next question comes from the line of Benjamin Budish of Barclays. Your line is open.
Benjamin Budish: Hi. Good morning, and thank you for taking the question. You've talked about the wealth business and sort of adding new advisers over the years. Wondering if you could talk more specifically about some of the more recent news about seeking more organic growth opportunities in that channel. Just curious if you can comment on, you know, why now, what's changing, what are your broader ambitions? It seems like this is a focus on the ultra-high net worth channel.
Tom Simeone: But any other color there? And given, you know, we see a lot of other wealth managers that compete in this way, you know, there's a little bit of a different level of capital intensity given TA payments and things like that. How do you think about the sort of capital needs of these ambitions?
Onur Erzan: Yeah. Sure. Yeah. First of all, again, although the press coverage might have increased our intentions or what we talked about is not new. Again, we talked about it, I think, over the last two, three years. In terms of our adviser growth, we typically target mid-single-digit adviser growth every year from an organic perspective. Year to date, we are tracking towards that. So that's healthy. In terms of the inorganic stuff, as I mentioned, it's we're not we're not trying to hit a target. We don't have a number of acquisitions to make, an AUM gap, or anything like that. It's we had a target, we would have shared it.
So as a result, this is more an extension of our strategy and an enabler of our strategy. So M&A by itself is not our strategy. In terms of what we typically look at, we continue to look at more on the as Seth also emphasized, small to midsize RA space. And what we have seen in the marketplace is actually there is a little bit of a change in the multiple, a pretty significant change in the multiple if you go to the instance, the five-plus billion AUM range. The reason is there's a scarcity value, particularly for private equity platforms. As they get bigger, they are looking for larger acquisitions.
To get there faster given their exits timelines, and all that. We don't have those kinds of pressures in our business. We are more permanent capital. We are not looking to buy and sell. So as a result, we have the ability to be patient. Have the ability to look at the lower size RAAs that are in our target markets. Yes. AltaNet would be one focus area. It's not the only focus area. There are other interesting verticals, if you will be like. For instance, the entertainers at least business owners, global families, family office, So there are different flavors of these.
So we like platforms either that adds more geographical breadth to our business or more specialized capabilities either in terms of client access or underlying expertise. Again, let me remind you, we only have twenty locations. I mean, private wealth is both a national business, but also a local business. So as a result, that's the reason for looking for additional, hires, teams, and businesses as they become available at the right price. In new jurisdictions.
Benjamin Budish: Okay. That was all for me. Thank you very much.
Operator: Again, if you wish to join the queue, please press star one on your telephone keypad. Your next question comes from the line of Bill Katz of TD Cowen. Your line is open.
Bill Katz: Great. Thanks for taking the follow-up. Just thinking just strategically now, to the extent that you continue to scale up your alternative platform, and performance fees become a larger percentage of the overall revenue pie, how should we think about the comp ratio in particular? Is there any leverage to the platform or conversely other payouts on performance fees a little bit higher than the so the overall rate? Thank you.
Seth Bernstein: Well, let me start and Tom may jump in. Bill. But first of all, most of our credit focus isn't performance fee driven. Just by the nature of what we're doing. With higher credit quality pieces going to the insurance marketplace. There is the performance fee element, and I suspect that will continue. And as you know, we also have it on the public equity side. As well. But your inclination that the rev share on performance fees tends to be more favorable to the team than the underlying base fees, if that would happen. But it's just not that huge a number. For us.
So I do think that there is leverage in the system as we get larger and private alts. But, Tom, why don't you type in?
Tom Simeone: Yeah. No. I agree with everything you had just said, Seth. And, obviously, as we talk about the compensation ratio, we continue to measure what we need to pay our people competitively and evaluate that against our revenue. We'll continue to do so whether it's base fees or performance fees.
Bill Katz: Great. Thanks for taking my question.
Operator: Your next question comes from the line of Dan Fannon of Jefferies. Your line is open.
Dan Fannon: Oh, great. Thanks for squeezing me in here. So just a question on gross sales. You know, no surprise given some of the turbulence in the early in quarter that gross sales slowed. But just as you think about kind of what's happened as the quarter progressed, and as we, you know, are sitting here in July, from a gross sales perspective, do you see that more as 2Q is more dip more as temporary, or are we seeing, you know, kind of more momentum on a go-forward basis?
Onur Erzan: Yeah. So, actually, year to date, our sales is, I think, up, in the asset management side, 1%. So, again, I'm not overly concerned about the sales trends, and we eat net, not gross. If you look at the redemptions, for instance, on the institution side, our redemption rate came down as well. So as a result, although it's an important metric in terms of momentum in the business, I mean, I look at both gross and outflows, and I'm also quite happy with some of the improvement in the redemptions we had in the institutional channel.
I think we probably, as I mentioned, a little bit in the context of AIP, in my previous comments, we hit a little bit of air pockets maybe, particularly, for a six to eight-week time frame. Early April to mid to late May, Memorial Day. We definitely have seen some signs of momentum starting in June and July is a continuation. So as a result, I remain relatively optimistic and bullish about our ability to grow our flagship strategies and expand into new areas. And we definitely see a lot of opportunities, as I mentioned, in insurance, our ETF platform continues to scale. I will remind us that in the ETF business, there's over the way j curve.
You launch a new product. Typically, it takes a while for the product to mature to an AUM level, etcetera, or age. To be put in major platforms. So we'll see some of the tailwind benefit of ETFs are monthly sales volumes on ETFs continues to grow exponentially, and we have the ability to expand in ETFs as another growth area like the new Taiwan ETF, which opened a completely new geography for us. So all in all, it's hard to predict exact sales volumes, and there's definitely some remaining uncertainty in terms of geopolitics, tariffs, policy, etcetera.
So there could be definitely some continued sloppiness in sales, but I'm also optimistic that we have new ways to win or additional ways to generate business in terms of different distribution channels, different vehicles, and, again, I focus on net, so it's both a retention game as well as a sales game.
Dan Fannon: Understood. Thanks for all the detail.
Operator: There are no further questions at this time. Mister Jorgali, I turn the call back over to you.
Ioanis Jorgali: Thank you, Jean Louis. Thank you everyone for participating today. If you have any questions, please reach out to Relations. We look forward to hearing back from you. Bye.