Ladies and gentlemen, thank you for your patience in holding, and welcome to the SEI Fourth Quarter of 2020 Earnings Call. At this time, all participant phone lines are in a listen only mode and later there will be opportunities for your questions. Just a brief reminder, today's conference is being recorded. I'm now happy to turn the conference over to Chairman and CEO, Al West.
Thank you very much, and welcome, everyone. All of our segment leaders are here with me on the call as well as Dennis McGonigle, SEI's CFO and Kathy Heilig, SEI's Controller. I'll start by recapping Q4 and full year 2020. I'll then turn it over to Dennis to cover LSV and the investment in new business segment. After that, each business segment leader will comment on the results of their segments.
And finally, Kathy Heilig will provide you with some important company wide statistics. As usual, we'll field questions at the end of each report. So now let's turn our attention to the financial reports of the Q4 2020. 4th quarter earnings excuse me, revenue grew 5% from a year ago. 4th quarter earnings decreased by 2% from a year ago.
And 4th quarter EPS of $0.86 grew by 2% from the $0.84 reported in 2019. 4th quarter asset balances grew by $27,000,000,000 while LSV's balances grew by $11,600,000,000 During the quarter, we repurchased 1,800,000 shares of SEI stock at a price of $54.36 per share. That translates into $99,000,000 of stock repurchases. During the entire year in the form of FERC repurchases and dividends, we passed $529,000,000 of capital to shareholders. This quarter, we also continued our investment into growth generating initiatives.
The newest effort is One SEI, which is a large part of our growth strategy. As you will recall, One SEI leverages existing and new SEI platforms by making them accessible to all types of clients, all adjacent markets and all other platforms. Now turning to revenue production. 4th quarter sales events net of client launches totaled $8,800,000 and are expected to generate net annualized recurring revenues of $4,900,000 Now we are not discouraged with this quarter sales results. They do not reflect the sales activities occurring throughout the company in all of our target markets.
We treat the results as a timing issue, which will correct itself. And Unithead will speak to their specific sales results and their opportunities. And to grow and prosper in the future, we know that things will never be the same. So we have been very busy adopting to new mental models and realities, such as remotely distributed workforce. We have a lot of positive momentum moving into 2021.
We have strong backlog of sales and conversions in a number of key prospects late in the sales cycle. We also have made progress in strategically repositioning our Asset Management business segments. We are poised and ready to capture the opportunities inherent in significant change. And that concludes my formal remarks. So I will turn it over to Dennis to give you an update on LSV and the investment in our new business segment.
After that, all segment heads will update their results in their segments.
Dennis? Thanks, Al. Good afternoon, everyone. I will cover the Q4 results for the Investments in New Business segment and discuss the results of LSV Asset Management. During the Q4 2020, the Investments in New Business segment activities consisted of the operation of our Private Wealth Management business, our IT Services business opportunity, the modularization of larger technology platforms to deliver on our One SEI strategy and other investments.
During the quarter, the investments in new business segment incurred a loss of $11,400,000 which compared to a loss of $9,800,000 during the Q3 of 2020. This increased loss reflects an increase in investments, specifically related to our One SEI strategy, approximately $8,700,000 is tied to that effort. We also recorded an adjustment to the valuation of our contingent obligation for the Huntington Steel acquisition, increasing expenses by approximately $900,000 Regarding LSV, our 39 percent ownership contributed $30,600,000 in income to SEI for the Q4 of 2020. This compares to a contribution of $39,100,000 in income for the Q4 of 2019. Assets during the period grew approximately $11,600,000,000 LSV experienced net negative cash flow during the quarter of approximately $4,600,000,000 offsetting market appreciation of approximately $16,200,000,000 Revenue at LSV was approximately $102,100,000 for the quarter with no performance fees.
Finally, for the company, our effective tax rate for the quarter was 19.6%. I'll now be happy to take questions.
Looks like we do have a question here from the line of Ryan Kenny of Morgan Stanley. Your line is open.
Hi, Dennis. Good afternoon.
Hey, Ryan.
So on the last earnings call, you mentioned a $3,000,000 uptick from health insurance costs in the Q3. So just wondering where that number stands in the 4th quarter and how we should think about the trajectory of health insurance spend going forward?
Yes, it was essentially
flattish
to down a little bit in the Q4. So I mean, it's really case since we self insure, it's kind of case by case within the workforce. But I'd say it's pretty I would kind of guess, Emanuele would be in this range, same range for the course of the year, if not maybe down a little bit other than we are adding we have added more employees to the company. So that in and of itself will drive up will increase our health care costs, but we had some special health situations with certain individuals that really drove up what kind of anomalies, if you will, unfortunate anomalies, I would add.
Got it. And then on the $8,700,000 increase from 1 SEI, Just wondering if you could give an update on how you're thinking about the trajectory for the 1 SEI spend through 2021. I think you said before that it should start to come down gradually through the year. So just
wondering if that's still the case? Yes. So
that was just
it wasn't an increase. It was just how much we spent in the quarter, which was up slightly over Q3, not I wouldn't say materially. But as we progress through this year, that's kind of the peak quarter was Q4, and it will start to come down as we deliver
finished
activities from that work. And it won't go to 0 by the end of the year, but it will be significantly lower.
Got it. Thanks.
Yes.
Looks like next we have the line of Chris Donat of Piper Sandler. Your line is open.
Good afternoon, Dennis. One for you and Al about the $8,800,000 sales events and Al's comment that it was a timing issue and not reflecting the sales effort. Should I read into that, that so far in January, sales events have been pretty good or is that the wrong conclusion to draw?
So rather than you read into anything, why don't we wait for Mr. Meyer to go?
Okay. I can wait.
Okay.
And then
if I can try on another question, just following up on what Ryan was asking, bigger picture for expenses and thinking about your 2020 expenses at $1,200,000,000 should we expect something in that neighborhood for 2021 or maybe a little less with less investment in 1 SEI and I recognize sub advisory is always going to be market dependent. But anyway, just help on thinking about 2021.
Yes. So there are some costs, variable costs associated with revenue. So you mentioned one of the key ones, which is sub advisory expenses, which was one of the areas of cost increase in the Q4. That's all good news, though. We want to see that.
So as I look out for the rest of the year on expenses, I still kind of peg around kind of inflationary type rates because we will have compensation inflation as the year progresses with our workforce, particularly as we had last year and that middle part of the year into going to the Q3. We are growing in particularly in certain business lines that do then lead to some additional headcount. So I would say it's we'll get some offsets with the One SEI spend coming down. We also are capitalizing less of our development spend, which is so the net effect of that is gets to the expense line. We're doing a lot to try to work that down as well.
I would like to sit here and say that we'll be we would be flat, but I think we'll still see some level of increased spending, but I wouldn't say it's there's nothing unusual in that.
Okay.
Thanks, Mike. Year over year expenses were total year for the company, we're pretty flat, up a couple maybe 2% or so. So I think that's if we can accomplish that again, we'll be in pretty good shape. Okay. Our number one focus is get the revenue in and get it as much of it to the bottom line as possible.
That's the goal. So that's still the goal.
And next we have the line of Robert Lee of KBW. Your line is open.
Great. Thanks. Happy belated New Year everyone. Thanks for taking my questions.
Thanks, Rob. You too.
Thank you. Just a quick one. This is probably incorporated into your broader comments on expenses, but I quickly reincred the release.
I noticed
there's a pretty decent increase in equity based
comp and
maybe some changes next year. Maybe just quickly, how we should be thinking about that, how may we would drove that and where how would that be flowing flow through the segments or kind of in corporate, just trying to of it as the geography of it.
Yes. So the option based expense follows the people. So it would hit the segments as well as G and A because it follows the employee themselves who are who have been awarded option grants in this. And the increase in option expense is a function of a couple of things. One is certainly, we do grant options as a general rule every December and we went through that grant process this past December.
So those new options that have been granted are now in the expense number. We do expect those to divest kind of on schedule as our option plan outlines. We also, as we talked about after the Q3, we pushed out a year investing estimates on one particular tranche. So that just has the effect of extending the expenses into the future. So that adds to that number.
But a big part of it is the option grants that we made in our usual annual cycle. But it does file the people. So it will show up in all the segments as well as G and A.
Great. And then maybe just a quick follow-up. I know in the past, a lot of your option grants have been partially kind of EPS driven as investing and how soon, how fast. I mean, I guess, you can wait for the proxy, but were there any changes kind of in the recent clients? Any color on kind of the baked in kind of earnings growth to kind of hit investing or accelerate investing?
Yes. I usually like to wait till the proxy gets out there. But that being said, I'd say that our Board, when they look at the option grant process, that's really who that's the governing body that drives that. They as management believes, we are entering over we're already doing pretty well, I think, as a company. But over the next 3 to 5 years, we feel pretty bullish about our growth prospects.
And they set the vesting targets kind of in line with expectations on kind of near term growth coupled with longer term growth expectations. And I think our shareholders, as a general rule, if we hit those targets, they'll be satisfied and should be well rewarded in the stock price. The thing that is on top of our earnings goals, however, just to emphasize is our option grants invest in 50% chunks, but they can vest no sooner than 2 years for the first 50% and 4 years for the second 50%. So we still have that kind of 2 year, 4 year minimum investing cycle in addition to the but then they don't invest at all if we don't hit the EPS targets.
All right.
Great. Thanks, Dennis.
No problem, Rob.
At this time, we actually have no further questions queued.
All right. With that, I'll turn it over to Steve and he can answer Chris Donat's question. Steve, are you still on?
It looks like Steve's line has dropped and he'll be reconnecting just shortly for us.
Okay. Sorry about that everyone. If we can just hold on 30 seconds for Steve. Hey, Steve.
Hey, sorry about that. I got dropped off.
Yes, no problem. Well, you're on. You can Chris Donat's waiting for your answer to his question.
I heard that set up. I appreciate it. Thanks everybody. Sorry for the delay. Good afternoon everyone.
2020 was a challenging year across our industry and the world due to the pandemic, but despite this challenge we were able to continue to drive momentum in new business events, client expansion, implementations and our growth strategy for private banks. The 4th quarter and annual 2020 numbers and comparisons are listed in our earnings release for your review, so I will only highlight a couple of key areas in the financial results. Specifically, Q4 2020 revenues totaled $119,700,000 which was up approximately 1% compared to the 4th quarter of 2019 and up 4.2% versus the Q3 of 2020. This was primarily due to one time revenues along with an increase in recurring revenues from increased assets. We do not expect the majority of the one time revenues to repeat next quarter.
4th quarter 2020 profit of $4,600,000 for this segment was down slightly from the Q4 of 2019. This represents the absorption of previously announced losses, new revenue generation, and a modest increase in expenses. 4th quarter 2020 profit compared to the Q3 2020 profit was up about $2,900,000 mainly driven by our increase in both recurring and non recurring revenues. Turning to sales activity for the quarter, we closed $3,800,000 of gross recurring sales events, which resulted in $2,100,000 of net recurring events for our investment processing business, offset by a negative $1,100,000 in asset management events. This offset from asset management brought our total net recurring events for the quarter to $1,000,000 for the segment.
Also in the quarter, we closed $1,200,000 in one time sales. One time sales for the year totaled $16,500,000 and helped dampen the impact of lost business. I'm pleased to announce that during the quarter we signed an agreement with a new client, a large trust company headquartered in New England. We expect this client to migrate to SWP from a competitor platform in the second half of twenty twenty one. In addition to converting their wealth management business, the client will also be outsourcing their back office to SEI.
They previously managed their operations in house. As Al mentioned, our sales results were a function of timing. After the quarter closed, but prior to this call, we signed 3 additional SWP agreements. The first is with long time Trust 3,000 client, Banger Savings Bank. Banger Savings Banger, Maine, has been an SCI client since 2011, and we expect to migrate their Trust 3,000 business to SWP in the first half of twenty twenty two.
Next, we signed an agreement with a West Coast large community bank who will migrate to SWP from a competitor platform in the first half of twenty twenty two. As we continue our One SEI strategy, we believe this firm has an opportunity to leverage additional SEI platforms and solutions and is currently evaluating SEI's asset management distribution products for the benefit of their business and their clients. Finally, we are pleased to announce that we signed an agreement with another new client, UMB, United Missouri Bank, to migrate their private wealth management book of business to the Headquartered in Kansas City, UMB is the 2nd end to end assessment and decision making process to be fully completed in a remote environment as our engagement began after our offices had gone to a work from home model as a result of COVID-nineteen. We are proud of the way both organizations were able to virtually together to conduct and execute a meaningful business agenda despite the challenges brought forth by the global pandemic. As Al referenced, this is an example of us changing our mental models, in this case around sales, which bodes well for the future.
We are excited to work with all these firms as they migrate towards the SEI Wealth Platform and look forward to supporting their future growth initiatives. These three clients are not included in our Q4 sales events and will be included in our Q1 events. From a global perspective, we continue to see expansion and growth in the UK from the Fusion Schroeders migration and continued progression with the HSBC implementation. As an update on our backlog, our total signed but not installed backlog is approximately $70,500,000 in net new recurring revenue at the end of the Q4. Turning to implementation activity, in the Q4 we successfully converted Edward Jones Trust Company from Trust 3000 to SWP.
Edwards Jones has been an SEI client since 2,001. I'm happy to report that this is another client who is successfully brought live in a 100% remote environment. From an asset management standpoint, total assets under management ended the period at $25,500,000,000 representing a 9% increase from the Q3 of 2020. Our AUM increase was due to market appreciation. Our cash flow for the Q4 of 2020 was a negative $456,000,000 As we move into 2021, our focus is on maintaining our strong momentum and to continue growing our business, bringing on new clients, expanding with existing clients and entering new markets.
We will also focus on driving scale in our business as we push towards providing a sustainable and accelerating margin growth. We will continue to manage through headwinds as we enter the year, but we'll do so with a focus on the future. We are excited and optimistic on our growth opportunity. That concludes my prepared remarks and I'll now turn it over for any questions you may have.
It looks like we do have the line of Ryan Kenny of Morgan Stanley. Your line is open.
Hey, Steve. How are you? Good.
How are you, Ryan?
Good. Just on the backlog, I think I heard $70,500,000 is where it currently stands. I just wanted to get an update in terms of the timing, how much you expect to come through this year versus next year?
Yes, so I think right now looking at it, and again this is a number somewhat moving, but right now as we look at the backlog, about 58%, 60% of it is going to fund within the next 18 months and the remainder will fund after that 18 months, probably the following past 18 to about 24, 26 months.
Got it. Thanks.
Sure.
Next, we have the line of Chris Shutler with William Blair. Your line is
On the 3 wins that you announced that were not in Q4 that will be in Q1, can you give us a sense of how large those are on a recurring revenue basis?
Yeah, so
if you take all three together, we're talking probably just under $7,000,000 in recurring net recurring revenue, But we have a lot going on in Q1 positive wise as well as some potential headwinds. So there's a lot of activity in motion that can impact the number. But we have more work to do, but what I'd say is we're off to a good start.
All right, great.
And I know you gave the one time revenue in the quarter. Was it 1.2 or was it 2? I didn't catch that number.
Sure. It was 1.2 and one time for the quarter, 16.5 for the year.
Got it. Okay. Thanks a lot. I'll hop back in queue.
Sure.
Next, we have Robert Lee with KBW.
Great. Hi Steve. Thanks for taking my questions. Hope all is in line.
Sure, Rob. Hope all
is well to you.
All good. Thanks. Just curious, so 2 of the 3 that you signed subsequent to start of the year are existing clients. I mean, can you just kind of talk a little bit about with the taking on the SWP platform, were those generally kind of revenue enhancing or is it kind of revenue flat? I mean just and kind of how you and if it's kind of revenue flat, how you kind of expect those relationships to evolve as your first question?
Yes, so you're a little unclear there, Rob, but I think what you said is, so of the 3 signings post that quarter end, actually one of them was an existing Trust 3,000 client, 2 were new to SCI. And what I'd say is my obviously with the one that's the move from Trust 3000 to SWP was a net up in moving to SWP, and the other ones were obviously at our market rate. I'd say from a revenue standpoint and where they are to start was kind of where I thought they would be. And as I mentioned, I think we have aspirations that we can grow with these clients.
Okay, great. And just getting on to the asset management business programs within the segment, I just want to make sure I heard it right. Cash flows were minus $460,000,000 is
that Yes, dollars 456,000,000 negative.
And just kind of curious, I mean, can you maybe touch on it, but can you just update us on a couple of new things some new things in past years, so just trying to get kind of an update on things. Yes,
so listen, I think obviously that business, we provide a program for mainly our banking clients, and we're part of an overall program of these banks, so we're a piece of it. I think that has been under a little pressure this year as banks have decided to move money either into cash or to other places or other parts of the program. So that is obviously reflected in the net negatives we've had. And I think ongoing, I do think during the year though, we did have we didn't lose one client during the year. We did have new clients that helped mitigate some of the outflows.
But I think obviously, the concern with that a little bit is we're part of a program, we don't control the whole program. So as banks change either their strategies or their programs, that's obviously something strategically we look at because it would be positive for us or negative. So I think there's been a number of initiatives as well as another new programs that we've launched this year, but obviously the outflows have weighed them down. But it's something we're hoping that as the market continues, we'll continue to be a bigger part of the overall bank's programs with these, but obviously if they decide strategically to do something else, that could have a negative impact on us.
Great. And if I could just throw one more at you. Sure. You've also talked about reinvigorating the UK business. I think if I'm not mistaken, maybe you did some change in personnel there past year or so.
Could you maybe update us on kind of what you're seeing there? How you feel about that part of the business, which I guess at this point maybe about 10 years ago kind of got you off the ground, but it sounds like more dormant recently? Yes, so what I'd
say is I think that when I look across all the businesses, the UK was probably impacted the most from the pandemic from a slowdown of sales. So while the pipeline still remains active, it's obviously slowed very significantly. There are several deals that we are working through the pipeline on and I'm encouraged by them, and I'm encouraged by the size of the pipeline we have and the additions we're making. I guess the one caveat is it's just taking a lot longer. A lot of the initiatives have slowed and or they haven't stopped, but they've delayed.
And with the pandemic going on a little bit more severely over in the UK, I don't think that's going to fall out really in this quarter. It will probably take another quarter or 2, I think, before we start to see and this is industry wide, start to see more activity.
Next we do have the line of Owen Lau of Oppenheimer. Your line is open.
Sorry, I lost my connection a little bit. If you have addressed that, I apologize for that. So it looks like you control the expense quite well given your revenue growth in the Q4. And I recall you mentioned that you will continue to make investments, but it will tell off in the second half of twenty twenty one. Is there any change in that timeline?
Thank you. Yes. No, Owen. There's no change. Listen, we're going to still make investments, and we feel good about how we've managed expenses.
I think as Dennis said, as we continue to grow, there might be more expenses we add. But as I've started to say in past quarters, we're really starting to focus on the scale of this business and we're looking to drive a more sustainable and accelerating margin level. So we will look to manage our expenses as well as reduce our expenses where we can, and that will be one of our priorities for this year. But the one thing we won't do is manage expenses to the extent where we heard revenue coming in. Obviously, if we have a number of large deals we're working on and if they were to happen, we would certainly support them with any new business, new people, new expenses we needed to.
But I feel that where we are in track record of expense kind of from Q3 to Q4 that's what we can expect going forward.
Got it. And then another quick one, could you please comment a bit on your strategic I
think
strategic partnership? Thank you.
Sure. Just one clarification, canoo is part of a strategic partnership we formed with our Family Office Services, formerly known as Archway, and that rolls up in our investment manager unit, but I'll answer the question here. Wanted to make that clear to everybody. So it is a partnership that we feel helps expand certainly our reporting and aggregation capabilities. That's a widely used system and capability in the industry and it feels it just gives us more power to our platform.
So it's something that we felt that we needed to do will help us continue to support the growth we've seen and future growth down the road.
And next we have the line of Ryan Bailey, Goldman Sachs. Your line is open.
Good afternoon, Steve.
Good afternoon, Ryan. How are you?
Good. Thanks. I was just wondering if you could talk about the addressable market for the segment and your thoughts around expanding into the RIA space. I was just wondering how you think about timing of when that could start contributing to the sales pipeline?
Yes. I think the market listen, it's still I think the market we have both in the US and the UK is still active. I think it's smaller than I would like, especially when I look at compared to some of our other markets like an IMS. One thing we've started to do obviously is start to branch that out to more of a wealth manager based approach. The large RA initiative we have could give us upwards of 1800 new prospects that we could go after.
We've actually started to already prospect in that space and we're hopeful that this year it will help drive some of our sales.
At this point, we actually have no further questions.
Great. With no other questions, I'll turn to the Investment Manager segment. 2020 marked another strong year of growth and momentum for investment managers across the business, including in our results, sales, expansion with clients, and execution of our growth strategy. Revenue for the Q4 of 2020 of $129,600,000 was 13% higher as compared to our revenue in the Q4 of 2019. Profit for the Q4 of the segment of $49,400,000 was 17.6% higher as compared to the Q4 of 2019.
3rd party asset balances at the end of the Q4 of 2020 were $760,400,000,000 approximately $30,000,000,000 higher than the asset balances at the end of the Q3 of 2020. This increase was due to market appreciation of $36,300,000,000 offset by net client fundings of a negative $6,300,000,000 The negative fundings this quarter were due to new client fundings being offset by 1 client shutting down a product line and liquidating their fund complex. Turning to market activity, during the Q4 of 2020, we had a strong sales quarter with net new business events totaling $9,000,000 in recurring revenue, as well as a record quarter of re contracts of $43,000,000 in recurring revenues. These events include the following highlights. In our alternative market unit, we closed a number of strategic new names, while sales to existing clients continue to be robust as these clients continue to launch new products.
SEI was selected to provide fund administration for several new credit fund launches for a $200 plus 1,000,000,000 global alternatives manager, demonstrating our industry leading platform and continued commitment to the growing private credit space. SCI was also selected after an extensive RFP process by a $20,000,000,000 private equity firm, first time outsourcer for full fund administration. In our traditional market unit, we had another strong quarter in our collective investment trust business. We also had continued success executing on our growth strategies, adding new and existing clients onto our data aggregation and middle office services platform, all of which is consistent with our land and expand strategy. In Europe, we added several new names, including our top 10 global financial institution in the 4th quarter.
In our family office services unit, we released a comprehensive technology upgrade to the industry leading Archway platform. The upgraded platform provides the foundation for rapid innovation within the family office technology segment. In addition, family office services continue to see steady demand in the single family office segment with the signing of multiple new sales events. Our backlog of sold but unfunded new business stands at $38,600,000 at the end of the 4th quarter. As we progress into 2021, we will continue to focus on our growth strategy and look to continue our strong momentum in new sales and expansion with existing clients.
We will also look to continue the expansion of our platform primarily into the front office with our investor platform, which we believe will provide an additional source of growth. We remain optimistic and excited about our growth opportunities. That concludes my prepared remarks, and I'll now turn it over for any questions you may have.
It looks like
first we'll go to the line of Robert Lee of KBW. Your line is open.
Hi, great. Thanks again, Steve. You're welcome. Just margin I have a margin question. I mean margin 38%, probably by my records kind of maybe even an all time high.
I'm not sure. And I do know it bounces around, but kind of feels like it's been running towards the high end of where you have historically. I mean, how should we be thinking of kind of margins going forward? I mean, you've always kind of run-in this 35, 36 range. Is that still what we should be thinking or are you kind of reaching a new level of scale that it should be somewhat higher?
I'm going to sound like I broke your record here, Rob. So I feel comfortable with the business in that 35%, 36%, you know, in the mid, and I've always said it will bounce around a little bit. I'm more comfortable when you look at it year over year, and if you look at it year over year, it's still in that 36% range. I think Q4, we did a good job managing expenses. I think there was a number of factors in that, including some expenses that did not repeat from Q3 and some investment down tick.
But part of the key for our continued and sustained growth in this business, which I think is the key that we're looking for banking as well is, we've always looked to expand out the future markets, expand out our solution, invest in our solutions and platform, and we'll continue to do that. And with that continued investment spend, which again we don't capitalize, we expense, that will mute down the margins a little bit. But will we get a couple of quarters can we start to tick up a little bit here and there? Yeah, and I think when we asked this, if you were to ask this and look back 5 years ago, I kind of caveat it in the 34%, 35% range. So I do think there's a progression.
I just don't think it's as big as a progression as we saw this quarter.
Okay, fair enough. Can I ask you just to repeat, you mentioned one of your comments around the client liquidation? I missed the comment in the first part of it.
So if you look, for the first time that I can remember, we had kind of a negative net events on the asset growth side, and we did have positive client fundings this quarter, but they were wiped away by one client who had a specific target date fund family really targeted to one client, and they, for strategic reasons, shut that down. So those assets going out was what caused the negative client fundings.
Okay, got it. Thank you.
At this time, we have no further questions queued.
Great. With that, I'll turn it over to Wayne to discuss the Advisor segment. Wayne?
Thanks, Steve. The world headline for 2020 was the coronavirus. The 2020 headlines for the SEI Advisors segment were the incorporation of digital advisor recruiting in response to the pandemic, a further opening of our platform to 3rd party investment brands and added flexibility in our pricing model and the way we engage advisors. The financial results of this segment with numerical comparisons to last year are included in the press release. Color explaining some of those numbers include 4th quarter revenues rose due to positive capital markets, partially offset by negative cash flow.
Expenses were down and margins were up due to one time savings mostly related to the pandemic. Ongoing operational expenses were pretty much awash with both increases and decreases, most notably an increase in direct costs due to asset valuations and a decrease in our technology spend. During the quarter, we had $245,000,000 in negative net cash flow out of SEI Managed Assets and a positive $160,000,000 in assets under administration. Total platform assets stand at 87,000,000,000 Of this, total $75,000,000,000 were assets under management. While cash flow into our bundled pricing assets under management was negative, cash flows into our newer unbundled pricing products was strong.
During the quarter, we recruited 78 new advisors, a best quarterly performance of the year. Our pipeline of new advisors remains active. For 2021, we will concentrate on 4 main areas. 1st, we will continue to enhance our technology platform to provide a compelling front to back business platform. We view our single source completely integrated front to back platform a differentiator.
2nd, we will continue to broaden our investment platform to include non commoditized components with examples being direct indexing and tax management overlays. 3rd, we will educate advisors on the applicability and benefits of both our historical investment management products with bundled fees and our newer unbundled fee products. Finally, in response to advisor needs, we have realigned our sales force to ensure adequate focus, accessibility and contact with advisors, seeking our capabilities to assist with their growth agendas. I now welcome any questions you may have.
1st, we have the line of Ryan Kenny, Morgan Stanley. Your line is open.
Hi, Wayne. Good afternoon.
Good afternoon.
So just hoping you could give some more color on the advisor recruitment strategy. I know before COVID, a lot of it was done face to face and then it turned virtual. So just wondering what the appetite is to stay digital and virtual post vaccination. And if there is an appetite, would there be any material expense benefit you could save prolonged into next year? Thanks.
I guess the way I'd answer it is there may be some expense benefit, but that's not really our focus. I think we will continue with the methods we're using now. And what they primarily are is when you look at the early parts of the sales process, we can make them national in scope as opposed to geographic in scope. And as we conduct recruiting events, we can more finely segment the clients as to what they're looking for as opposed to just what geography they happen to be located in. So that, I believe, makes us much more effective in recruiting advisors, and I expect that will continue more because I feel it's more effective than because of the pandemic or the existence of the pandemic.
Thanks. That's helpful.
Your comment about the revenue was up year over year, but expense was down. You mentioned the one time saving due to the pandemic. Can you please quantify for us, is this fair to say that the delta between 4Q 2019 and 4Q 2020, it's kind of the saving we should think about? Thank you.
Yes. I think that's a fair comment. I think you need to look at the Q4 of 2019 as much more indicative of the operating expenses of the unit, with the one modification being as our assets under management increase, our direct cost line increases. But we're seeking savings in other areas. But that delta, I would say, between those to what has gone up in our operating expenses compared to 2 years, we saved it in one time savings.
Got it. And then with the vaccine, would that kind of change your view that the expense may go up in 2021? How should you think about the impact of the vaccine distribution on advisors? Thank you.
I would not say I do not expect the expenses to go up because the we're back live in person. Obviously, things like travel and perhaps conducting events, live events, the cost of that associated. But we're structuring and conducting virtual events and the expense associated with them, and we'd like to we don't want to save money by not doing events. We just want to spend the money on virtual events as opposed to live events. So I would not there will be some increase, but I think the increase in expenses will be largely due to the increase in the assets we manage.
Got it.
It's helpful. Thank you very much.
Next, we have Robert Lee of KBW. Your line is open.
Thanks. Hey, Wayne, how are you?
I'm great.
Good. Good.
A couple of questions. First one, and I apologize if you mentioned it, kind of advisor headcount, new signings in the quarter. And then maybe a second question is, as you kind of I think it'd be helpful to kind of at least for me to kind of get a sense of how do we think of the revenue dynamics between kind of bundled versus unbundled in the sense of when you talk about having good flows in your unbundled services versus the bundled services being negative. How do we think of that revenue dynamic between the 2? I mean, is it negative, you can wash?
I'm just trying to get a sense of how to think of the moving pieces underneath as the business shifts.
Okay. I think your first question, Rob, was new advisor and the number was 78. I think the more in-depth question is how do you think about the pricing of the unbundled products. And I would say generally, and I'm generalizing, unbundled products all in are less expensive and lower sources of revenue than the bundled products. And I think that's a reflection of investor and advisor needs.
And I think as we go out to educate advisors as to what fits best for them, An unbundled pricing product is a little bit harder to explain and it has more moving parts. Bundled is much simpler and straightforward. But you are correct, we are seeing more growth in the unbundled pricing model and the revenue recognition rate is a little bit lower, to be direct with
question. And maybe since I'm just being a little slow, I mean, obviously, bundled is pretty easy to centralize. So if I'm thinking of an unbundled investment product, at least for me, it may be helpful just kind of what's been kind of a popular product where you see traction with and maybe a little bit of how that pricing works, just to understand it better.
Yes. The easiest example, and one of the very successful products, I would say, is an ETF wrap program where the pricing of the underlying investment implementation, if you will, kind of the beta generation, is embedded in the ETF, which is not an SEI product. We use a multitude of 3rd party. We pick which whether it be iShares or Vanguard, wherever it is, and we assemble that. And then we charge, we unbundle the price and we'll charge a portfolio level fee that is the asset allocation, the tax management, the cost of the technology, the operation, the custody, that sits on top of that, as opposed to if you go into our mutual fund wrap program, all of it's bundled into mutual funds.
Does that clarify?
Yes, it does. Thank you. Thanks.
Next, we have the line of Chris Schuler of William Blair. Your line is open.
Hey, Wayne. I just wanted to follow-up on that last one. Can you give us a sense like rough averages how different the pricing is unbundled versus bundled? Is it like 5%, 10% or is it materially more than that?
Yes, I think it's probably more than 20%.
Okay, got it.
And then just on What I would say is what I would just sort of put that in I mean, the unbundled ETF product has been around for 5 years. I mean, what you see is kind of reflect as we migrate to that, it kind of smooths into the numbers you see.
Yes. Okay. I think this is sort of in line with pricing question, but I think in this business as well as maybe in the institutional investor business, there's been some benefit over time from increased adoption of alternatives. Maybe just refresh my memory. Actually, has that been a benefit in your business that's helped the fee rate or is that just in the the institutional business?
What I would say,
that is primarily in the institutional business. Well, it's not in my business, let's put it that way. It's in the institutional business. And one of the major factors there you need to understand in my business, to the extent 90% of the affiliate fee advisors are affiliated with broker dealers. The broker dealers own the compliance oversight and alternatives complicate that job for them.
Yes. Okay. That all makes sense. Then just lastly on the you talked about tax management overlays, direct indexing. Just remind me what kind of the timing of that rollout is?
Well, the direct indexing product is rolling out in 2 weeks. So the initial direct indexing product will have tax loss harvesting and a negative ESG option built into the core product in what comes out, I think it's February 5 or something, I don't know the exact date, but it's around there. And then tax loss, active tax loss management is something we will incorporate into the direct indexing product later in the year. Now we already have that incorporated into our active management estimate. But if you think about it, if you can take tax active tax loss management and put that into a passive portfolio, that makes it much more valuable.
So you don't have to pay for the active component and the tax over there. You can just say, I just want the beta and then tax loss manage it for me.
Yes, makes sense.
I mean, you can't do that when you own an ETF, when you own the basket of securities, you don't own the individual names like you do in direct index.
Understood. Sorry, just one more quick one just on expenses, Wayne. Is Q4 a good jumping off point? No. So maybe could you just elaborate on that one?
I think that there's a lot of what I would consider non recurring savings in Q4 this year. So I would probably say, I don't want to commit to the expenses, but I'd probably look at Q4 last year as being more indicative.
Of where? Of the what the jumping off point should be? Okay, got it.
Yes.
Okay. Thank you, Wayne.
And next we have Ryan Bailey of Goldman Sachs. Your line is open.
Good afternoon,
Hi, Ryan.
I was just wondering if you could help me think about the flows that are coming into the unbundled option or the AUA, is that from existing advisors who are in the bundled option and kind of shifting assets across? Or is this completely new advisors? Do you have any sense of the, I guess, the of what's driving that growth?
Yes. I would say that it is about fifty-fifty. But our objective here is the asset management world has changed. And we're trying to put both our advisors and the clients in the products that make sense for them. And if that means shifting from the bundle to the unbundled, that's fine by us.
We'd rather get them in a better solution. And then it's also very appealing to new advisors. So currently, it's about fifty-fifty between existing and new.
Got it.
Okay. And I guess for the existing piece, I'm not sure how much insight you have into this. Is it they are bringing across new accounts or are there sort of new money that's coming in or is it more of a conversion?
It's a little bit of both. I mean, I think that they're not bringing new accounts onto the platform until they convert the existing book into the new philosophy. It's one way to think about it. So this is setting us up for more growth with them.
Got it.
Okay. All right. That makes sense.
And then on the AUM side, we've kind of moved through some of the initial COVID volatility and it sounds like the digital mocking strategy is sort of taking off. I was wondering like do you feel that the flows are going to turn more positively on the AUM side into 2021 or is it kind of closer to flattish over the near term?
No, I feel more positive about going to 2021.
Okay. All right. And that's is it largely because curve is behind us and it's sort of operating other things or is there a driver?
Yes. I
mean, I don't want to don't take this the wrong way. I don't want to say it's because COVID is behind us. I think that we've adapted to the new digital world and we've learned by it. And I think that now we have a model that makes a lot of sense. And now it may get modified going forward, but we have some things now that just kind of work better that COVID forced us to adopt.
Next, we have Robert Lee of KBW. Again, your line is open.
Thanks for taking my follow ups. Wayne, I just I want to make sure I'm understanding the minus 2 45,000,000 dollars negative cash flows, is that just bundles or is that kind of if I'm looking at bundled and unbundled combined, that was total cash flows in the between AUM and AUA in the segment. Is that the right way to think of that?
Yes, both the AUM and the AUA numbers I gave you are the entire totals for the unit. Okay,
all right, got it. And then I'm just kind of curious, sticking with the unbundled theme, I guess, of the call, how do you think of that kind of when you're talking to existing advisors about your capabilities and obviously you've been doing the ETF program for a while now, But how do you position that competitively? Is it performance versus other kind of other services out there when they're kind of robo services, if you will, or model portfolios? I mean, how do you position that to be differentiated from other programs your advisors can do elsewhere? Is it just performance really driven?
Well, it's actually the opposite. I think that as you unbundle it, it allows you to sell the individual components, the individual value proposition of each component as opposed to one fee, whether do you want everything on the left side of the menu or do you want to pick what you want? I mean, so do you need tax overlay? Okay, that's unbundled. Do you need the HD overlay?
That's kind of unbundled. If you want the various components of it, we can unbundle it. And they can pick and choose what they consider valuable and what they're willing to pay, so it just makes it much more customized for them. It's in keeping with kind of the overall theme you see with everything, which is this mass customization at both the investor level and the advisor level.
At this point, we have no further questions queued.
Okay. With that, I will turn it over to Paul.
Thanks, Wayne. Good afternoon, everyone. I'm going to discuss the financial results for the Q4 of 2020 as well as the entire year. Q4 2020 revenue of $82,300,000 increased 2% compared to the Q4 2019. Full year revenue was $317,600,000 decreased 1% compared to 2019.
Market appreciation positively impacted revenue, while net client loss was the primary detractor. Operating profits for the Q4 2020 were 45,500,000 dollars 8% higher than the Q4 of 2019. 2020 full year profits were $167,700,000 and were flat compared to 2019. Higher capital markets and lower operating and travel expenses were positive to profit, offset by net client fundings. Operating margin for the quarter was 55% and for the year was 53%.
Quarter end asset balances of 90 $7,200,000,000 reflect a $7,100,000,000 increase versus the Q4 of 2019. Net asset events for the Q4 were a negative $300,000,000 Gross sales were $1,400,000,000 and client losses totaled $1,700,000,000 dollars Total new client signings for 2020 were $5,400,000,000 which represents $12,800,000 in revenue. This was accomplished predominantly in a virtual environment. 4th quarter new sales were diversified across U. S.
Endowment Foundations, healthcare and UK Trade Management. The client loss numbers for the quarter and the year were primarily driven by acquisitions, CV terminations or curtailments and unsuccessful rebids of competitive tenders. The OCAO marketplace is extremely competitive and client rebids are common, so we anticipate client decisions to continue. This should also be a tailwind for new signings. The unfunded client backlog at year end was $500,000,000 Finally, our focus in 2021 will be to continue to diversify new business growth out of the U.
S. Defined benefit market for OCIO, actively demonstrate our value proposition to current OCIO clients and market extensively in order to close larger investors for our new ECIO, enhanced Chief Investment Officer, offering. We will also look at both organic and unorganic opportunities to fuel future growth. Thank you very much, and I'm happy to answer any questions you may have.
First, we go to the line of Ryan Kenny of Morgan Stanley. Your line is open.
Hey, Paul. Good afternoon.
Hi, Ryan.
So just wanted to get an update on the strategy. So maybe starting on the geographic side, I know you're mostly in the U. S, but also have a sizable book in the book in the U. K, Ireland and Canada. So just want to get a sense of where you see the growth going forward from that lens and how big the appetite is to expand more broadly into other regions?
Sure. So as you indicated, the big segments are U. S, Canada, UK, South Africa and then a little bit nominal in the Far East. So we have different growth strategies for each one of the subcomponent markets. And in the subcomponents, some of the niches like endowments and foundations in the U.
S. Are certainly big plays. We see growth in the UK with regard to continued evaluation of fiduciary management. We see growth with the consolidation of Master Trust in the DC marketplace in the UK. We also see opportunities across the globe with our new initiative, e CIO, which is really spearheaded and targeted to very large sophisticated investors that we introduced on the last call.
That is probably about 1400 suspects globally that represents about $25,000,000,000,000 of potential assets. And again, that's a technology and non fiduciary service integration and helping their staff be more So that's the good news is those types of investors are diversified around the globe, and we would see that as a key strategy. We are evaluating again a more larger commitment in the Far East and that's something I think as a company we need to evaluate as opposed to just an individual segment. So hopefully that answers your question, Ryan, about some of the focus globally.
Got it. That's helpful. And then just from a product lens, are there any capabilities that you feel like you would benefit maybe from more scale or as an add on?
Yes, we think from an OCIO perspective, from a product lineup and from a capability, we are one of the largest in that marketplace and viewed as a kind of best practice in that marketplace. So other than a couple small components of different types of alternative launches that we normally would do, we don't think we have a product One of the issues we have, which others have, is with such a crowded space, we have a issue of differentiation. When you have 80 different players who are in this space, it's hard for the consumer to distinguish from that vast number of competitors. So consolidation would help. Certainly, we spend an exhaustive amount of time with our clients and getting client referrals and client references because those are key to getting new business opportunities.
On the ECIO, we think we have a full suite of capabilities from a technological perspective, but there are things that we're looking at externally that might help augment the suite. And that's something that we'll continue to do as we roll out that new initiative to those do it yourself investors. Thanks.
Thank you.
And next we have Robert Lee of KBW.
Actually, same question I asked Steve on the investment managers, I mean, on the margin, I mean, 55% may be running around an all time high, if my numbers are correct. I mean, certainly, you've had very healthy margins here for a while, but was there anything we should think about that was suppressed maybe expenses in the quarter? And what's how should we think of it going forward kind of you've been in this kind of 51, 52 ish type of range. Is that the right way to think of it for a while?
Yes, I would say outside of just great leadership, Robert, some of the realities of that profit margin are the markets. The markets clearly exploded in the Q4. Obviously, it exploded in the Q3. The way we recognize revenue in our group are four periods. So for the Q4, it would be September 30, October 31, November 30, December 31.
All four of those periods were high watermarks in those respective months. So that was a real positive. And consequently, the revenue increased fairly dramatically. And in fairness, most of that was market related, not kind of new initiative related. Now we're starting the year with a nice base.
It looks like January will be a nice month as well. So we're off to a good start at least from that component. The expenses are down and like my other colleagues, expenses are down because of travel, not that we're not trying to travel, but the vast majority of our clients and prospects want to experience virtually. So historically, we've spent about $600,000 a quarter in travel. We've really not spent much of that over the last three quarters.
We would anticipate not really spending much of that in the 1st two quarters, but at some point, we will head back to the clients because they will want us to head back. But the way we'll do it is measured and we'll do it differently. We may not have to send as many resources in the various geographies. We do think virtual will always be an aspect of a delivery for institutional investors. It might not be the only aspect, but it will probably be a critical aspect.
So visiting clients 5 or 6 times a year may not be as necessary in the future the way it was in the past. So I think the margins, to get back to your original question, low 50% area is probably a more normalized margin range. And this quarter was certainly an exception for those reasons I noted.
Great. Thanks for taking my question. I apologize for the dogs barking in the back.
No problem.
Next, we have the line of Chris Schuler, William Blair. Your line is open.
Hey, Paul. I just want to put a finer point on that question around margins or expenses. Similar question to what I asked Wayne, But is the if we look at the Q4 expense number, is that a good jumping off point for 2021? And I ask because if you look back, I think over the last 5 years typically, other than last year where expenses were down just slightly into Q1 sequentially. And in the other 4 years, I think they were down $2,000,000 $3,000,000 $4,000,000 sequentially.
So just how to think of, I guess, Q4 into Q1, excluding any kind of change that might have to do with the markets?
Yes. So as far as expenses, I would say, like Whiting had answered, a year ago, expenses are probably closer. It's probably not that high. It's probably a little bit lower than that as far as the jumping off point. Q4, again, there's a lot of savings there with respect to client events and client travel that we wouldn't estimate it may continue in the 1st and second quarter, but we would not estimate that, that would be kind of a normalized kind of run rate with what we're seeing in the Q4.
So we had a little bit of a comp reduction in the Q4 as well that we would expect and we hope will not normalize or will not be the same in 2021 with being able to close more business and pay more sales comp. So I would say it's probably not as high as a year ago, but it's probably closer to a year ago Q4 than it is to the current Q4.
So the sales comp reduction in Q4, how much was that?
It was probably small, dollars 250,000 wasn't a big number.
Okay, got it. Okay. Thank you, Paul.
Yes.
And next we have Owen Lau of Oppenheimer. Your line is open.
Thank you. Hi, Paul. So I just want to go back to the enhanced CIO. I hear you that the opportunity is huge in this space. But could you please give us a bit more color in terms of the marketing transaction?
Have you started generating any revenue yet? Or any other feedback from your clients or prospects? Thank you.
Yes. So, Ellen, we have not generated any revenue yet. We're actively in the market. We have talked to many suspects. Have converted many suspects to prospects, and some of those prospects are getting into a finer evaluation of our overall capabilities.
As I indicated, it is different than investment management. It is an administrative platform that is coupling technology and non fiduciary services, And it is a method to help those chief investment officers become more efficient and more effective at effectuating their kind of internal investment process. So OCIO takes a place of the CIO, eCIO helps the CIO be more efficient. We would expect it to be basis points. We have every belief in our marketing efforts of charging basis points.
The yield with respect to basis points will probably be different in ECIO, where it might be in the 20s to low 30s for OCIO, it's probably in high single digits to low teens for ECIO. But that will make up a sales force in scale because we're going to be dealing with multibillion dollar organizations. So to date, we're really excited about a lot of the work that we've done. We've hired some dedicated people, focused exclusively on the marketing efforts. We've done a lot of enhanced digital marketing.
We've found that CEOs want to talk, which is great, and they're very comfortable in having virtual meetings. And now it's just a question of kind of converting those prospects to clients and moving more suspects to prospects.
Got it. Just final one. Based on your progress so far, do you have any expectation when you can start generating revenue from that? Or you're not ready to kind of talk about that for now? Thank you.
I would love to give more specifics, as Steve did, with some post quarter deals. I don't have that yet. So think I'd be remiss to give a specific timeframe, but we're working as far as we possibly can to get those deals over the go on.
Got it. Thank you very much, Paul.
Thank
you. At this time, we have no further questions by phone.
Okay. I would like to turn the call over to Kathy Heilig, SCI's Controller.
Thanks, Paul, and good evening, everyone. I have some additional corporate information regarding this quarter. In Q4, our cash flow from operations was $93,400,000 or $0.64 a share, bringing year to date cash flow from operations to $488,700,000 or $3.28 per share. 4th quarter free cash flow was 76,600,000 dollars and year to date free cash flow was $410,000,000 For the 4th quarter, capital expenditures excluding capitalized software, were $11,300,000 which did include $2,300,000 for facility expansion. Year to date capital expenditures, excluding capitalized software, were $54,400,000 with about half of it relating to the facility expansion.
We project our 2021 capital expenditures, again excluding capitalized software, to be about $21,000,000 which does include about $6,000,000 relating to the facility. We also would like to remind you that during today's presentation and in our responses to your questions, we have made certain forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notice regarding forward looking statements that appears in today's earnings release and in our filings with the Securities and Exchange Commission. We do not undertake to update any of our forward looking statements. And now please feel free to ask any other questions that you may have.
And it looks like we do have a question from the line of Chris Schuler of William Blair. Your line is open.
Hi. Just a couple of final ones on expenses, if you don't mind. First, just to confirm, Dennis, in your initial comments, I think you said to basically expect low single digit base expense growth in 2021 excluding any changes in sub advisory. Is that correct?
Yes. I'm trying to be cautious on this because as we know things change pretty can change pretty quickly. So I think that's Yes.
I think without the markets, how that Yes.
I think that's a fair guess.
Okay. And then just to confirm that, call it, 2%, 3%, whatever the number is, does that include the increase in stock comp that you're projecting or does it exclude that?
It would exclude that.
It would exclude that. Okay.
Yes.
And then just lastly, I just want to confirm on the SEI the 1 SEI spend. I know you said it won't be 0 by the end of the year, but should we expect it to basically be pretty close to 0 in 2022?
It will be again, I hate to go out on a limb because technology folks have and solution development folks have a great way of finding additional things to do. But I would say it's the most comfortable item is saying it will clearly be below half of what it is
now. Okay.
Yes, between half and more than half.
And at this time, we have no further questions queued by phone.
Very good. This is Al. So ladies and gentlemen, we're fighting on 2 fronts. First, the COVID pandemic and second, growing revenue and profits during disruptive times. On the first front, we were very fortunate to have planned well and been able to keep our workforce healthy and productive.
And on the second front, despite short term headwinds, momentum is building throughout our Have a great day. Thanks for attending our call.
Ladies and gentlemen, I'm still connected. That does conclude