Sei Investments Co Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for your patience in holding, and welcome to the SEI Fourth Quarter of 2020 Earnings Call. (Operator Instructions) 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 fourth quarter 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 fourth quarter 2020. Fourth quarter revenue grew 5% from a year ago. Fourth quarter earnings decreased by 2% from a year ago, and fourth quarter EPS of $0.86 grew by 2% from the $0.84 reported in 2019. Fourth quarter asset balances grew by $27 billion, while LSV's balances grew by $11.6 billion. During the quarter, we repurchased 1.8 million shares of SEI stock at a price of $54.36 per share. That translates into $99 million of stock repurchases. During the entire year, in the form of repurchases and dividends, we passed $529 million of capital to shareholders. This quarter, we also continued our investment in the 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 for all adjacent markets and all other platforms. Now turning to revenue production. Fourth quarter sales events, net of client losses, totaled $8.8 million and are expected to generate net annualized recurring revenues of $4.9 million. 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 view these results as a timing issue which will correct itself. A unit head 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 adapting to new mental models and realities, such as the remotely distributed workforce. We have a lot of positive momentum moving into 2021. We have a 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. Now 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 fourth quarter results for the investments in new business segment and discuss the results of LSV asset management. During the fourth quarter of 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 $11.4 million, which compared to a loss of $9.8 million during the third quarter of 2020. This increased loss reflects an increase in investments, specifically related to our One SEI strategy. Approximately $8.7 million is tied to that effort. We also recorded an adjustment to the valuation of our contingent obligation for the Huntington Steele acquisition, increasing expenses by approximately $900,000. Regarding LSV, our 39% ownership contributed $30.6 million in income to SEI for the fourth quarter of 2020. This compares to a contribution of $39.1 million in income for the fourth quarter of 2019. Assets during the period grew approximately $11.6 billion. LSV experienced net negative cash flow during the quarter of approximately $4.6 billion, offsetting market appreciation of approximately $16.2 billion. Revenue at LSV was approximately $102.1 million 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.

(Operator Instructions) Looks like we do have a question here from the line of Ryan Kenney of Morgan Stanley. Your line is open.

So on the last earnings call, you mentioned a $3 million uptick from health insurance costs in the third quarter. So just wondering where that number stands in the fourth quarter and how we should think about the trajectory of health insurance spend going forward?

Yes. It was essentially flat to down a little bit in the fourth quarter. Since we self-insure, it's really case-by-case within the workforce. But I'd say it's pretty much in the same range for the course of the year. If anything, maybe down a little bit, other than we are adding more employees to the company. So that, in and of itself, will increase our health care costs. We have had some special health situations with certain individuals that really drove up anomalous expenses, unfortunately.

And then on the $8.7 million increase from One SEI, just wondering if you could give an update on how you're thinking about the trajectory for the One 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 $8.7 million was how much we spent in the quarter, which was up slightly over the third quarter, but not materially. As we progress through this year, the peak quarter was the fourth quarter, and it will start to come down as we deliver finished activities from that work. It won't go to zero by the end of the year, but it will be significantly lower.

(Operator Instructions) Looks like next, we have the line of Chris Donat of Piper Sandler. Your line is open.

One for you and Al about the $8.8 million sales events. In 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. 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 $1.2 billion, should we expect something in that neighborhood for 2021? Or maybe a little less with less investment in One SEI? And I recognize sub-advisory is always going to be market dependent, but anyway, just help us think on the rest of 2021.

Yes. So there are some variable costs associated with revenue. One key one is sub-advisory expenses, which was an area of cost increase in the fourth quarter. That's generally good news for us. As I look out for the rest of the year on expenses, I still peg around kind of inflationary-type rates because we will have compensation inflation as the year progresses, particularly as we had last year in the middle part of the year into the third quarter. We are growing, particularly in certain business lines, which leads to additional headcount. We'll get some offsets with the One SEI spend coming down. We are also capitalizing less of our development spend, which increases the expense line. We're doing a lot to try to work that down as well. Year-over-year for the company, total year, we're pretty flat, up maybe 2% or so. If we can accomplish that again, we'll be in pretty good shape. Our number one focus is to get the revenue in and convert as much of it to the bottom line as possible. That's still the goal.

(Operator Instructions) And next we have the line of Robert Lee of KBW. Your line is open.

Just a quick one. It's probably incorporated into your other comments on expenses, but I noticed a pretty decent increase in equity-based comp. Maybe some changes next year. Maybe just quickly how we should be thinking about that, kind of what drove that? And where will that be flowing — will it flow through the segments or kind of in corporate? Just trying to think of the geography of it.

Yes. Option-based expense follows the people, so it would hit the segments as well as G&A because it follows the employee who have been awarded option grants. The increase in option expenses 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 new options granted are now in the expense number, and we do expect those to vest on schedule as our option plan outlines. We also, as we discussed after the third quarter, pushed out a one-year vesting estimate on one particular tranche. That has the effect of extending the expenses into the future. But a big part of it is the option grants made in our usual annual cycle, and it will show up in all the segments as well as G&A.

And then maybe just a quick follow-up. In the past, a lot of your option grants have been partially EPS driven. Were there any changes in the recent grants? Any color on earnings growth targets to hit or accelerate investing?

I usually like to wait till the proxy gets out there. That being said, our Board governs the option grant process. Management believes we are doing pretty well as a company and over the next three to five years we feel bullish about our growth prospects. They've set the vesting targets in line with expectations on near-term growth, coupled with longer-term growth expectations. Our shareholders should be rewarded if we hit those targets. The option grants vest in 50% chunks, but they can vest no sooner than two years for the first 50% and four years for the second 50%. So we still have that two-year, four-year minimum vesting cycle, and they don't vest at all if we don't hit the EPS targets.

At this time, we actually have no further questions queued.

All right. Well, with that, I'll turn it over to Steve, and he can answer Chris Donat's question. Steve? 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.

Sorry about that. I got dropped off.

Yes. No problem. You're on. You can—Chris Donat is waiting for your answer to his question.

I heard that's up. I appreciate it. So 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 fourth quarter and annual 2020 numbers and comparisons are listed in our earnings release for your review, so I'll only highlight a couple of key areas in the financial results. Specifically, fourth quarter 2020 revenues totaled $119.7 million, which was up approximately 1% compared to the fourth quarter of 2019 and up 4.2% versus the third quarter of 2020. This was primarily due to onetime revenues, along with an increase in recurring revenues from increased assets. We do not expect the majority of the onetime revenues to repeat next quarter. Fourth quarter 2020 profit of $4.6 million for this segment was down slightly from the fourth quarter of 2019. This represents the absorption of previously announced losses, new revenue generation and a modest increase in expenses. Fourth quarter 2020 profit compared to the third quarter 2020 profit was up about $2.9 million, mainly driven by our increase in both recurring and nonrecurring revenues. And turning to sales activity. For the quarter, we closed $3.8 million of gross recurring sales events, which resulted in $2.1 million of net recurring events for our investment processing business, offset by a negative $1.1 million in asset management events. This offset from asset management brought our total net recurring events for the quarter to $1 million for the segment. Also in the quarter, we closed $1.2 million in onetime sales. Onetime sales for the year totaled $16.5 million 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 2021. 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 three additional SWP agreements. The first is with a long-time TRUST 3000 client, Bangor Savings Bank. Bangor Savings, headquartered in Bangor, Maine, has been an SEI client since 2011, and we expect to migrate their TRUST 3000 business to SWP in the first half of 2022. 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 2022. 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 product 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 SEI Wealth Platform. Headquartered in Kansas City, UMB is the second 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-19. We are proud of the way both organizations were able to virtually come 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 first quarter events. From a global perspective, we continue to see expansion and growth in the U.K. from the Fusion-Schroders migration and continued progression with the HSBC implementation. As an update on our backlog, our total signed but not infilled backlog is approximately $70.5 million in net new recurring revenue at the end of the fourth quarter. Turning to implementation activity. In the fourth quarter, we successfully converted Edward Jones Trust Company from TRUST 3000 to SWP. Edward Jones has been an SEI client since 2001. I'm happy to report that this is another client who we successfully brought live in a 100% remote environment. From an asset management standpoint, total assets under management ended the period at $25.5 billion, representing a 9% increase from the third quarter of 2020. Our AUM increase was due to market appreciation. Our cash flow for the fourth quarter of 2020 was a negative $456 million. 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.

(Operator Instructions) It looks like we do have the line of Ryan Kenney of Morgan Stanley. Your line is open.

Just on the backlog, I think I heard $70.5 million 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% to 60% of it's going to fund within the next 18 months, and the remainder will fund after that 18 months, probably the following 18 to about 24 to 26 months.

Next we have the line of Chris Shutler with William Blair. Your line is open.

On the three 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?

Yes. So, if you take all three together, we're talking probably just under $7 million in 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. We have more work to do, but we're off to a good start.

All right, great. And I know you gave the onetime revenue in the quarter? Was it $1.2 million or was it $2 million? I didn't catch that number.

Sure. It was $1.2 million in onetime for the quarter, $16.5 million for the year.

Next, we have Robert Lee, KBW.

Just curious. So I mean, two of the three that you signed subsequent to start of the year are existing clients. Can you just kind of talk a little bit about, with taking them onto the SWP platform, were those generally kind of revenue enhancing? Or is the revenue kind of flat? How do you expect those relationships to evolve?

You're a little unclear there, Rob. Of the three signings post the quarter end, actually, one of them was an existing TRUST 3000 client, two were new to SEI. The move from TRUST 3000 to SWP is a net up in revenue. The others were market-rate. From a revenue standpoint to start, they were where I thought they would be. We have aspirations to grow with these clients.

And just maybe on the asset management business programs within the segment. Cash flows were minus $456 million—can you update us on initiatives underway in that part of the business away from SMP? I know there were some new things in past years, so I'm trying to get an update.

Yes. That business primarily services our banking clients as part of a larger program. It's been under pressure as banks have moved money into cash or other parts of their programs. That shows in the negative net flows we've had. We didn't lose a client during the year, and we also added new clients that mitigated some outflows. However, because we're part of a program we don't control the entire program, so if a bank changes strategy that can impact us. We have initiatives and new programs launched this year, but outflows have weighed them down. We're hopeful the market and bank strategies will make that a larger part of the bank's programs, but if they decide strategically to do something else, that could have a negative impact.

Great. And if I could just throw one more at you.

Sure.

You've also talked about reinvigorating the U.K. business. Maybe you did some personnel changes last year. Can you update us on what you're seeing there and how you feel about that part of the business?

The U.K. was likely impacted the most by the pandemic in terms of a slowdown in sales. Pipeline remains active, but it's taken much longer. Several deals are in the pipeline and I'm encouraged by their size and the additions we're making. The caveat is it's taking a lot longer; initiatives have slowed or delayed. With severe impact from the pandemic in the U.K., I don't expect meaningful falls in this quarter; it will likely take another quarter or two before we see more activity. This is industry-wide.

Next, we have the line of Owen Lau of Oppenheimer. Your line is open.

Thank you. Good afternoon, Steve. Sorry, I lost my connection a little bit. If you have addressed that, I apologize for that. So it looks like you controlled the expense quite well given your revenue growth in the fourth quarter. And we caught—you mentioned that you will continue to make investments, but it will tail off in the second half of 2021. Is there any change in that timeline? Thank you.

No change, Owen. We're going to still make investments and feel good about how we've managed expenses. As we continue to grow, there might be more expenses we add. We're focused on scale and driving sustainable, accelerating margin growth. We'll manage expenses and reduce them where we can, but we won't manage them to the extent that it would hurt revenue coming in. If large deals happen, we'll support them with necessary people and expenses. Where we are from Q3 to Q4 is the track we can expect going forward.

And then another quick one. Could you please comment a bit on your strategic partnership with Canoe Intelligence? How big do you see the opportunity in the family office space and then the next step of this strategic partnership? Thank you.

Just one clarification: Canoe is part of a strategic partnership we formed with our family office services, formerly known as Archway, and that rolls up in our investment management unit. It's a partnership that helps expand our reporting and aggregation capabilities. Canoe is a widely used system and capability in the industry and it gives more power to our platform. It helps support growth we've seen and future growth. That's why we pursued it.

Next, we have the line of Ryan Bailey, Goldman Sachs. Your line is open.

I'm 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?

The market in the U.S. and the U.K. is still active, though smaller than some other markets like IMS. We've started to branch out to a wealth manager-based approach. The large RIA initiative could give us upwards of 1,800 new prospects. We've already started prospecting in that space and are hopeful this year it will drive sales.

And at this point, we actually have no further questions queued.

Great. So with no other questions, I'll turn to the Investment Managers segment. The 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 fourth quarter of 2020 of $129.6 million was 13% higher as compared to our revenue in the fourth quarter of 2019. Profit for the fourth quarter of the segment of $49.4 million was 17.6% higher as compared to the fourth quarter of 2019. Third-party asset balances at the end of the fourth quarter of 2020 were $760.4 billion, approximately $30 billion higher than the asset balances at the end of the third quarter of 2020. This increase was due to market appreciation of $36.3 billion, offset by net client fundings of negative $6.3 billion. The negative fundings this quarter were due to new client fundings being offset by one client shutting down a product line and liquidating their fund complex. Turning to market activity. During the fourth quarter of 2020, we had a strong sales quarter with net new business events totaling $9 million in recurring revenue as well as a record quarter recontracts of $43 million in recurring revenues. These events included the following highlights: In our alternative marketing 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 billion global alternatives manager, demonstrating our industry-leading platform and continued commitment to the growing private credit space. SEI was also selected after an extensive RFP process by a $20 billion private equity firm for our 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 fourth 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 Technologies 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 $38.6 million at the end of the fourth 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.

(Operator Instructions) Looks like first, we'll go to the line of Robert Lee of KBW. Your line is open.

Thanks Den and Steve. In a margin question, margin at 38% is probably by my records maybe even an all-time high. How should we be thinking of margins going forward? You've historically run in the mid-30s—should we expect something similar, or are you reaching a new level of scale that should be somewhat higher?

I'm going to sound like a broken record here, Rob. I feel comfortable with the business in that 35%–36% mid-range. It will bounce around. Year-over-year it is still in that 36% range. Q4 we managed expenses well; some expenses did not repeat from Q3 and some investment downtick. Part of the key for continued and sustained growth is expanding into future markets and investing in our solutions and platform. We'll continue to do that. With continued investment spend, which we expense, that will mute margins a little bit. We may tick up a little here and there, but I wouldn't expect a dramatic change. Historically it was in the low to mid-30s, so there is some progression but not as big as Q4 might suggest.

Okay. Fair enough. And can I ask you to repeat your comments around the client liquidation? I missed the earlier comment.

For the first time that I can remember, we had negative net events on the asset growth side. We did have positive client fundings this quarter, but they were wiped away by one client who had a specific target-date fund family tied to one client. That client shut that product down for strategic reasons, and those assets leaving caused the negative client fundings.

At this time, we have no further questions queued.

Great. With that, I'll turn it over to Wayne to discuss the Adviser segment. Wayne?

Thanks Steve. The world headlines for 2020 was the coronavirus. The 2020 headlines for the SEI Adviser segment were the incorporation of digital advisory recruiting in response to the pandemic, a further opening of our platform to third-party investment brands, and added flexibility in our pricing model and the way we engage advisers. 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 fourth quarter revenues rose due to positive capital markets, partially offset by negative cash flow. Expenses were down and margins were up due to onetime savings, mostly related to the pandemic. Ongoing operational expenses were pretty much even 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 million in negative net cash flow out of SEI-managed assets and a positive $160 million in assets under administration. Total platform assets stand at $87 billion. Of this total, $75 billion 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 advisers, our best quarterly performance of the year. Our pipeline of new advisers remains active. For 2021, we will concentrate on four main areas. First, 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 as a differentiator. Second, we will continue to broaden our investment platform to include non-commoditized components with examples being direct indexing and tax management overlays. Third, we will educate advisers 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 adviser needs, we have realigned our sales force to ensure adequate focus, accessibility and contact with advisers, seeking our capabilities to assist with their growth agendas. I now welcome any questions you may have.

(Operator Instructions) First, with the line of Ryan Kenny with Morgan Stanley. Your line is open.

So just hoping if you could give some more color on the adviser 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.

There may be some expense benefit, but that's not really our focus. We'll continue with the methods we're using now. In the early parts of the sales process, we can make them national in scope as opposed to geographic in scope. As we conduct recruiting events, we can better segment the clients by what they're looking for rather than by geography. That makes us more effective in recruiting advisers, and I expect that will continue because it's more effective in the way we operate, not just because of the pandemic.

Next, we have the line of Owen Lau of Oppenheimer. Your line is open.

Hi, Wayne. I just have one quick question. Your comment about the revenue was up year-over-year, but expense was down. You mentioned onetime savings due to the pandemic. Can you please quantify for us? Is it fair to say that the delta between 4Q 2019 and 4Q 2020 is the saving we should think about? Thank you.

I think that's a fair comment. Look at the fourth quarter of 2019 as more indicative of the unit's operating expenses, with the one modification being that as our assets under management increase, our direct cost line increases. But that delta largely reflects onetime savings. So yes, that difference is a useful approximation.

And then with the vaccine, would that change your view that the expense may go up in 2021? How should we think about the impact of the vaccine distribution on advisers? Thank you.

I would not expect expenses to go up just because we're back live in person. There may be costs associated with live events and travel, but we're structuring and conducting virtual events in ways that we believe are effective. We don't want to save money by not doing events; we want to spend in ways that are appropriate for virtual engagement. Any increase in expenses will be largely due to increases in the assets we manage.

Next, we have Robert Lee with KBW. Your line is open.

A couple of questions. First, adviser headcount new signings in the quarter?

The number was 78 new advisers recruited in the quarter.

And then maybe help me understand the revenue dynamics between bundled versus unbundled. Are flows to unbundled products offsetting bundled losses? How should we think of revenue between the two?

Generally, the unbundled products all-in are less expensive and a lower source of revenue than the bundled products. That's a reflection of adviser and investor needs. Bundled is simpler to explain; unbundled has more moving parts. We're seeing more growth in the unbundled pricing model, but the revenue recognition rate is a bit lower.

And maybe give an example of a popular unbundled product where you see traction and how that pricing works to help us understand better.

An easy example is an ETF wrap program. The pricing of the underlying investment implementation is embedded in the ETF, which is typically from third parties like iShares or Vanguard. We assemble that and then charge a portfolio-level fee for asset allocation, tax management, technology, operations, custody on top of that. In a mutual fund wrap program, everything is bundled into the mutual funds. The unbundled approach lets advisers pick components they value and pay for those separately.

Next, we have Chris Shutler of William Blair. Your line is open.

Wayne, on the pricing question, can you give a sense of how different the pricing is—unbundled versus bundled—roughly? Is it 5%–10%? Or materially more?

It's probably more like 20% lower on the unbundled product versus the bundled product, on average.

Thanks. And on the adoption of alternatives you see more in institutional businesses—does that benefit your business as well or is that more institutional?

That's primarily in the institutional business. In my business, about 90% of advisers are affiliated with broker-dealers, and broker-dealers oversee compliance. Alternatives complicate compliance, so adoption is more limited compared to institutional clients.

And what's the timing of the rollout for tax management overlays and direct indexing?

The direct indexing product is rolling out in two weeks. The initial direct indexing product will have tax-loss harvesting and a negative ESG option built into the core product. Active tax-loss management will be incorporated into the direct indexing product later in the year. We already have active tax-loss management in our active management SMA. Putting tax-loss management into a passive portfolio through direct indexing adds value without paying for active management.

Makes sense. And on expenses, is Q4 a good jumping-off point for 2021?

No. There were a lot of non-recurring savings in Q4 of this year, so Q4 is not the best normalized starting point. I'd look at Q4 of last year as more indicative of baseline operating expenses.

Next, we have Ryan Bailey of Goldman Sachs. Your line is open.

I was wondering if you could help me think about the flows coming into the unbundled option or the AUA. Is that from existing advisers shifting assets, or is this from completely new advisers? Do you have any sense of the mix driving that growth?

It's about 50-50 between existing advisers converting and new advisers adopting the unbundled approach. Existing advisers often convert existing books and then bring on new accounts under the new philosophy. That setup positions us for more growth with those advisers.

Do you feel flows will turn more positive into '21 on the AUM side or closer to flattish over the near term?

I feel more positive going into 2021. We've adapted to the digital world forced by COVID and now have a model that makes sense. That adoption and the digital strategy give us confidence going forward.

Next, we have Robert Lee of KBW. Again your line is open.

Thanks for taking my follow-up. The minus $245 million negative cash flows—is that bundled only or across AUM and AUA combined?

Both the AUM and the AUA numbers I gave you are totals for the unit, so the negative is across the segment's total managed assets.

And on positioning unbundled competitively—how do you differentiate it versus other programs out there, like robo services or modeled portfolios? Is it performance-driven or customization?

It allows advisers to sell the individual value propositions of each component rather than everything bundled. They can pick tax overlay, ESG overlays, or other components they value and pay for them; it's mass customization at the adviser and investor 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 fourth quarter of 2020 as well as the entire year. Fourth quarter 2020 revenue of $82.3 million increased 2% compared to the fourth quarter 2019. Full year revenue of $317.6 million decreased 1% compared to 2019. Market appreciation positively impacted revenue, while net client losses were the primary detractor. Operating profits for the fourth quarter 2020 were $45.5 million, 8% higher than the fourth quarter of 2019. 2020 full year profits were $167.7 million 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 $97.2 billion reflect a $7.1 billion increase versus the fourth quarter of 2019. Net asset events for the fourth quarter were a negative $300 million. Gross sales were $1.4 billion and client losses totaled $1.7 billion. Total new client signings for 2020 were $5.4 billion, which represents $12.8 million in revenue. This was accomplished predominantly in a virtual environment. Fourth quarter new sales were diversified across U.S. endowments and foundations, healthcare and U.K. wealth management. The client loss numbers for the quarter and the year were primarily driven by acquisition, DB terminations or curtailments and unsuccessful rebids of competitive tenders. The OCIO marketplace is extremely competitive and client re-bids 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 million. 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 at 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 inorganic opportunities to fuel future growth. Thank you very much. I'm happy to answer any questions you may have.

(Operator Instructions) First we go to the line of Ryan Kenney of Morgan Stanley. Your line is open.

So just wanted to get an update on the strategy—starting on the geographic side. I know you're mostly in the U.S., but also have a sizable book in the U.K., Ireland and Canada. So just want to get a sense of where you see growth going forward geographically and appetite to expand more broadly into other regions?

Sure. The big segments are the U.S., Canada, U.K., South Africa and a little nominal in the Far East. We have different growth strategies for each sub-market and niches like endowments and foundations in the U.S. are big plays. We see growth in the U.K. with continued evaluation of fiduciary management and consolidation of Master Trust in the DC marketplace. We also see opportunities globally with our ECIO initiative, targeted to very large sophisticated investors—about 4,100 prospects globally representing roughly $25 trillion of potential assets. ECIO is a technology and non-fiduciary service integration to help their staff be more efficient. We're evaluating larger commitments in the Far East as a company decision. Hopefully that gives you a sense of global focus.

From a product lens, are there capabilities you feel would benefit from more scale or potential add-ons?

From an OCIO perspective, we are one of the largest in the marketplace and view our capabilities as best practice. We don't see a product deficiency other than some small components of alternative launches that we might pursue. One issue is differentiation in a crowded space with many competitors; consolidation would help. We spend a lot of time getting client referrals, which are key to new business. For ECIO, we believe we have a full suite technologically, but we are evaluating external augmentations as we roll out the initiative.

And next we have Robert Lee of KBW. Your line is open.

Same question I asked Steve about margin: Q4 margin at 55% seems very high. Was anything suppressed in the quarter? How should we think about normalized margins going forward?

Outside of strong leadership, the profit margin reflects the markets. The months in our revenue recognition periods were high watermarks, so much of the revenue increase was market-related rather than new initiatives. We're starting the year with a nice pace, including January looking strong. Expenses are down due to reduced travel. Historically we've spent about $600,000 a quarter on travel, which we've paused. We expect to resume some travel eventually, but likely more measured and virtual-first. Normalized margins are probably in the low 50% area; this quarter was an extension due to market appreciation and reduced travel.

Next, we have the line of Chris Shutler William Blair. Your line is open.

I wanted to put a finer point on expenses—if we look at Q4 expense numbers, is that a good jumping-off point for 2021? Historically expenses dipped in Q1 sometimes—how to think about Q4 into Q1 excluding market changes?

For expenses, compared to last year, expenses are a bit lower, but the Q4 savings relate to reduced travel and client events. We don't expect that to be a normalized run rate. We did have a small comp reduction in Q4—about $250,000—which was not material, but overall I would not use Q4 this year as a normalized run rate; look closer to prior-year Q4.

Next we have Owen Lau of Oppenheimer. Your line is open.

I want to go back to the enhanced ECIO—it's a huge opportunity. Could you give more color on marketing traction, potential to generate revenue yet, and feedback from clients or prospects?

We have not generated revenues yet. We're actively in the market: converting suspects to prospects and getting some prospects into deeper evaluations. ECIO is different than OCIO—OCIO replaces the CIO, while ECIO helps the CIO be more efficient, coupling technology and non-fiduciary services. We expect to charge basis points: OCIO yields in the 20s to low 30s of basis points, ECIO probably in the high single-digits to low teens of basis points, but it will scale because we're targeting multi-billion-dollar organizations. We've hired dedicated people focused on marketing, increased digital marketing, and CEOs are increasingly comfortable with virtual meetings. It's now about converting prospects to clients.

Do you have an expectation when you might start generating revenue from ECIO?

I don't have specifics to share yet. We're working hard to get deals over the goal line, and we'll provide updates when we can.

At this time we have no further questions by phone.

Okay, I would like to turn the call over to Kathy Heilig, SEI's Controller.

Thanks, Paul and good evening everyone. I have some additional corporate information regarding this quarter. In fourth quarter, our cash flow from operations was $93.4 million or $0.64 a share, bringing year-to-date cash flow from operations to $488.7 million or $3.28 per share. Fourth quarter free cash flow was $76.6 million and year-to-date free cash flow was $410 million. For the fourth quarter capital expenditures excluding capitalized software were $11.3 million, which did include $2.3 million for facility expansion. Year-to-date capital expenditures excluding capitalized software were $54.4 million, with about half of it relating to the facility expansion. We project our 2021 capital expenditures, excluding capitalized software, to be about $21 million, which does include about $6 million relating to the facility. We also would like to remind you that during today's presentation and in our responses to your questions, we've 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.

(Operator Instructions) It looks like we do have a question from the line of Chris Shutler of William Blair. Your line is open.

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 because things can change quickly, but yes, I think low single-digit base expense growth is a reasonable expectation excluding variable items.

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 stock-based compensation.

And then lastly, I wanted to confirm on the One SEI spend. You said it won't be zero by the end of the year, but should we expect it to be pretty close to zero?

I hesitate to go out on a limb because technology folks often find additional valuable things to do, but I would say it will clearly be below half of what it is now—somewhere between half and more than half lower by year-end.

And at this time, we have no further questions queued by phone.

Very good, this is Al. So, ladies and gentlemen, we are fighting on two 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 able to keep our workforce healthy and productive. And on the second front, despite short-term headwinds, momentum is building throughout our business segments. So that ends our call, please be safe and remain healthy. Have a great day. Thanks for attending our call.

And ladies and gentlemen that does conclude the presentation for this afternoon. We thank you very much for all of your participation and using our teleconferencing service. You may now disconnect.