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Good day, everyone, and welcome to AssetMark's Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Today's call is being recorded. Now I'd like to turn the call over to Taylor Hamilton, Head of Investor Relations. Please go ahead, Mr. Hamilton.
Thank you. Good afternoon, everyone, and welcome to AssetMark's Third Quarter 2019 Earnings Conference Call. With me today are AssetMark's Chief Executive Officer, Charles Goldman; and Chief Financial Officer, Gary Zyla. Today, they will discuss the results for the third quarter and provide an outlook for AssetMark's business for the remainder of 2019. Following our introductory remarks, we will open up the call for questions. We also have an earnings presentation that Charles and Gary will reference during their prepared remarks. It can be accessed on our IR website at ir.assetmark.com. Before we get started, I'd like to note that certain statements made during this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. Actual results could differ materially. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. Further information on these and other factors that could affect our financial results is included in filings we make with the SEC from time to time, including the section titled Risk Factors in our quarterly report on Form 10-Q for the quarter ended September 30, 2019, which can be found on our website. Additionally, during today's conference call, we will be discussing net revenue, adjusted EBITDA, adjusted EBITDA margin and adjusted net income, all of which are non-GAAP financial metrics. These non-GAAP metrics are not calculated in accordance with GAAP and may be calculated differently than similarly titled metrics presented by other companies. A discussion of why we use non-GAAP financial metrics and quantitative reconciliations of adjusted EBITDA, adjusted EBITDA margin and adjusted net income to the most directly comparable GAAP measures are available in our press release and our quarterly report on Form 10-Q for the quarter ended September 30, 2019, both of which can be found on our Investor Relations website at ir.assetmark.com. With that, I'll turn the call over to my colleagues. Charles, take it away.
Thank you, Taylor, and good afternoon to everyone, and thank you for joining our third quarterly earnings call today. It's been a busy quarter at AssetMark, and Gary and I are excited to share with you our operational and financial results. Starting on Slide 3, we're going to focus on 5 key messages during our earnings call today. I'll discuss messages 1 and 2, while Gary will cover messages 3 through 5.
First, I'll spend some time discussing our planned acquisition of OBS Financial. Second, I want to provide some color on our 2020 strategic priorities. Third, Gary will discuss our platform asset growth in the third quarter, where we realized our 10th consecutive quarter of net flows over $1 billion. Next, Gary will discuss our growing client cash balances, which bolstered spread income despite declining interest rates. And lastly, he will focus on the rest of our third quarter highlights, including strong top and bottom line growth and margin expansion. Turning to Slide 4. I want to spend some time providing background on OBS Financial, the strategic rationale to acquire it and how it fits into AssetMark's business. Before I begin, though, I want to take a moment to remind you of how we think about acquisitions. When analyzing potential acquisitions, we generally aim for 6 to 8x adjusted EBITDA multiples after cost synergies. And for consolidating acquisitions, we do not model revenue synergies. We structure the purchase price to help protect us from advisers or asset attrition between signing and close. In late September, we signed an agreement to acquire OBS Financial, a $2-plus billion TAMP, focused on providing financial advisers and Bank Trust officers access to structured portfolios. Like AssetMark, OBS is a mission-driven company, focused on helping its clients grow. OBS currently serves about 300 independent financial advisers, 21 banks and approximately 6,500 end clients. Through the transition, we're excited to provide OBS clients with access to our fully integrated platform, personalized service, curated investment solutions, all to help them build their businesses. Over the coming months, we'll be working to close the transaction and bring the OBS and AssetMark platforms together. Until the close and subsequent transition, OBS will continue to operate as they do today, with OBS employees joining AssetMark after the transaction closes, which we expect to happen in early 2020. We expect to realize 5 to 6x multiple on post synergy EBITDA. Similarly to the GFPC acquisition, we don't expect the revenue yield on the OBS assets to be accretive to our yield since these assets are not custodied at AssetMark Trust Company. We look forward to updating you on the progress toward the close of the deal as well as the integration onto the AssetMark platform later in the year and early next year. Now let's move onto our next topic. As I plan to do every quarter, I want to discuss high-level thoughts on the macro environment and the general industry. I think as most of you know, the S&P ended the third quarter up 1.7%, but underperformed bonds as investors sought the safety of treasuries as changes in expected and realized volatility were generally above their 3-year averages.
Despite market volatility in the third quarter, we realized another strong quarter of net flows, a testament to more and more advisers looking to outsource their investment management needs and leverage our carefully vetted investment solutions. Even though uncertainty persists in the equity markets and none of us know what will happen in the short term, we believe that markets will grow over the long term. The bond market was the big story for the quarter, with the FOMC cutting interest rates to 1.75% to 2% in September. Last week, the FOMC cut rates again at their October meeting, reducing rates another 25 basis points. This marks the third rate cut in 2019. While we don't expect another rate cut in 2019, we are actively following updates from the FOMC and analyzing the dot plots. Gary will provide additional color in his remarks on the impact of rate cuts on our financials going forward. As a quick reminder, we do not run the business on the ups and downs of the market, but we do pay close attention to the market moves as we manage our financials and invest in the business. Lastly, I want to provide some perspectives on the recent industry news of many brokerage firms reducing their trading commission to 0. Similar to the movement from high-cost to lower-cost mutual funds that I discussed last quarter, we believe this news is a net positive for AssetMark and the industry because lowering the cost of investing helps investors reach their goals. The recent news on commission underscores the overall trend to lower investment costs. As I've said before, our strategy is to make the pricing decisions necessary to remain competitive to grow our AUM and to drive scale onto our platform. These decisions may erode our asset-based yield from 1 or 2 basis points per year over time and, as we've said, we do not expect this decline to be linear in nature. While the macro environment and industry news provides us with a lot to think about, we remain focused on what we can control, and will manage the business for the long term. Let's now turn our attention to Slide 5. With less than 2 months until 2019 ends, I want to spend some time discussing our key strategic priorities for 2020. First, we're focused on enhancing our platform. We continually assess our technology, service and investment offerings against peers and are in constant dialogue with our advisers to ensure that our platform evolves to meet their ever-changing needs. We look to incorporate technological innovations and new digital capabilities onto our platform, which will help advisers become more efficient while also providing a high level of service to their clients. Continuing to digitize our platform and products is critical to our competitive position and key to adding additional advisers and assets to our platform. As the next step in our commitment to this effort, we recently hired industry veteran, Michael Raneri as Chief Digital Innovation Officer. Michael previously led the FinTech Strategy & Advisory Group at PwC, and prior to that was CEO at Venovate Holdings and was also CEO before that at ZECCO Holdings. Earlier in his career, he was the Senior Vice President at Charles Schwab, where he led the Integrated Client Experience Group and managed the electronic brokerage platform at schwab.com. In his new role at AssetMark, Michael will be responsible for continuing to enhance our technology offer for our clients. Second, we look to expand into adjacent channels such as the RIA market, the OSJ market and the Bank Trust channel. We believe that this expansion will help us extend our mission of making a difference in the lives of our advisers and their clients. We recently appointed Matt Matrisian as Chief Channel Officer, who will be spearheading these efforts. Matt has been with AssetMark since 2010 and previously served as SVP, Business Consulting and Strategic Initiatives. We view channel expansion as a long-term investment, where growth comes across multiple years. I look forward to providing progress on our channel expansion when we have meaningful news to share with you. Lastly, we will continue to focus on scaling our business, which we believe will help expand EBITDA margins. We have already had success driving scale as evidenced by our third quarter adjusted EBITDA margin of 26.6%, which grew 100 basis points year-over-year. We also believe, though, that we have a lot of opportunity to incrementally scale. With such a relentless focus on scaling our business, we will need to make investments in our infrastructure and technology in 2020. For example, we will be investing in core technology in our operations as well as at AssetMark Trust Company in 2020 and 2021. We believe these investments will help us increase our scale and help us digitize our platforms. With that, I'd like to hand it over to Gary to go over our third quarter results. Gary?
Thank you, Charles, and good afternoon to all those on the call. Today, I will follow a similar outline as I did in the second quarter. I will start with a discussion of our platform assets, then talk about our revenue, expense adjustments and then our earnings. From there, I will discuss our balance sheet and other key financial highlights. At the end of my remarks, I will also provide some color on our expectations for the fourth quarter and next year.
I would like to begin on Slide 6 of our earnings presentation. We've experienced robust growth in our platform assets over the past 5 years, realizing a 20.6% CAGR over that time. In the third quarter of 2019, we grew platform assets, again, increasing 21% year-over-year and 3.3% quarter-over-quarter to $57.9 billion, marking an all-time high for AssetMark.
As you can see from the graph, we've realized the majority of this growth from our engaged advisers or those with over $5 million in assets in our platform. As we have discussed previously, the growth of engaged advisers on our platform is a key indicator of the overall growth of our business. To provide further context, platform assets from engaged advisers were 88% of our total assets in the third quarter. Turning to Slide 7. During the third quarter, we had net flows of $1.4 billion and realized $494 million of market gain net of fees. This marks the 10th consecutive quarter with net flows over $1 billion. Through the first 3 quarters of 2019, our net flows were an annualized 12.7% of our beginning-of-year platform assets, well ahead of our long-term target of 10%. For our AssetMark AMK report, September flows were $312 million due to the timing of some flows. While I don't want to steal thunder from our monthly report due out on the 15th, early indications point to our October net flows being at an all-time high. In addition to our focus on engaged advisers, another key indicator for our growth, our new producing advisers on our platform or NPAs. When we think about our $1.4 billion in net flows for the third quarter, about 2/3 came from engaged advisers, while 1/3 came from NPAs.
In the third quarter, we added 203 NPAs, and year-to-date, we have added 681. As we think about our total adviser base as of September 30, we had over 7,900 advisers in our platform, of which 2,159 were defined as engaged advisers. Our engaged advisers constitute 27.3% of our total advisers, up 25 -- up from 25.4% in the third quarter of 2018. Adding new advisers to our platform and expanding the share of wallet from existing advisers are 2 key tenets to our organic growth strategy. As the numbers indicate, we are making great progress in both of these areas. Now let's turn to Slide 8 to discuss the quarter's earnings. Entering the third quarter, our assets were at $56.1 billion, leading to reported revenue of $110 million, up 18.5% year-over-year or 14.8% when excluding the impact of the GFPC acquisition. As discussed, we focus on our revenue net of related variable expenses. For the third quarter of 2019, our net revenue was $75 million, was up 19.2% year-over-year or 15.2% when excluding the impact of GFPC.
Our net revenue yield on total platform assets for the third quarter was 54 basis points, in line with our expectations and down 2 basis points from this time last year. The 2 basis point decline was solely driven by the addition of the lower-yielding GFPC assets, as the yield from our core business remained flat year-over-year. As a reminder, the yield on GFPC assets is lower than AssetMark's core business, primarily due to 2 reasons: first, the GFPC business is custodied at a third-party and not at AssetMark; and second, $1.2 billion of GFPC's platform assets are adviser-managed, which yield nominal revenue to AssetMark. For clarity and transparency, the calculation of our annualized revenue yield, net of expenses, is shown on Slide 11 in the appendix of our earnings presentation. Let's turn to the 2 main components of our revenue, asset base and spread-based net revenue. Asset-based net revenue was up 15.3% year-over-year to $65.7 million, driven primarily by the growth in platform assets. Our net yield for asset-based revenue was 47 basis points in the third quarter 2019 versus 50 basis points in the third quarter 2018, the decline driven by the addition of GFPC as mentioned above and product mix shift. Spread-based net revenue is the interest that we earn on client cash held at the AssetMark Trust Company. In the third quarter of 2019, we realized $8.1 million of spread-based net revenue, up 62% year-over-year. The increase in spread-based net revenue was driven by higher cash balances, which contributed approximately 1/3 to the increase and increased interest rates, which contributed approximately 2/3. Our average client cash over the third quarter was $1.6 billion, on which we received an annualized net yield of 2.04%. Spread-based net yield contributed 6 basis points to our overall yield, up from 4 basis points in third quarter 2018. Before we turn to earnings, let me run through our adjustments to expenses in our third quarter. We added back a total of $24.1 million pretax, which are comprised of 5 items: first, $11.6 million of noncash share-based compensation expense; second, $5.1 million of amortization expense related to our 2016 sale; third, $3.4 million in expenses associated with our acquisition and integration of GFPC; fourth, a $2.3 million noncash debt modification charge incurred as a result of paying down half of our outstanding debt this quarter; lastly, $1.7 million of add-backs related to IPO readiness and reorganization costs. For additional color and as requested by a good number of our analysts and investors last quarter, an adjusted expense reconciliation table for income statement line item can be found on Slide 10 in the appendix in our earnings presentation. Now let's discuss our earnings for the quarter. Our adjusted net income for the quarter was $17.1 million or $0.25 per share, an increase of 4.8% year-over-year. This is based on a third quarter share count of 69.3 million, which is the weighted average number of shares outstanding prior to the IPO and after the IPO. At the beginning of the fourth quarter, the total number of shares outstanding was 72.4 million. The year-over-year increase in adjusted net income was driven by higher adjusted EBITDA of $5.5 million, mostly offset by interest expense in 2019 of $2.5 million, higher amortization of $1 million and higher taxes of $1.4 million. Our marginal tax rate was 25.7% in the third quarter and 25.6% year-to-date.
In addition to adjusted net income, we view adjusted EBITDA as an equally important measure of our company's health. For adjusted EBITDA, we add back the same expense items except the amortization-related item. Our adjusted EBITDA was $29.2 million in the third quarter of 2019, up 23% year-over-year, reflecting strong year-over-year growth in our top line and improved margins.
Adjusted EBITDA margin for the quarter was 26.6%, up from the 25.6% margin in the third quarter of 2018. A 100 basis point year-over-year margin increase was driven by 3 items: first, our core business continues to scale; second, the acquisition of GFPC; and third, the continued shift to less expensive investment vehicles, which reduces our asset-based expenses. For further context, our year-to-date adjusted EBITDA margin was 26.2%, up 110 basis points through the same period in 2018. Now let's look at the reported third quarter balance sheet. I would highlight 3 items. First, cash continues to serve as a position of strength. We ended the third quarter with $83.2 million in cash. Our cash position grew $18.2 million quarter-over-quarter driven by the cash generated by our operating activities. Second, capital expenditures, primarily -- second, capital expenditures. These primarily reflect our long-term investments in technology to create new capabilities, increase scale and improve service. In the third quarter, our capital spend was $5.7 million. Year-to-date, our capital spend is 5.3% of our revenue, in line with our expectations. As Charles noted earlier, in 2020, we may increase our capital spend to somewhere between 6% and 7% of revenue to accelerate our investments in scale. Third, we paid down half of our long-term debt in the quarter. This leaves our outstanding term loan at $123.7 million. For context, our coverage ratio is now 1.2x our trailing 12-month adjusted EBITDA. Before I hand the call back over to Charles, I would like to provide some color on our near-term business outlook. We believe our 2020 results will be based on the strong growth we experienced in 2019, where we realized double-digit platform asset growth, net flows as a percentage of beginning-of-year platform assets greater than 10%, strong revenue growth and continued margin expansion.
While we won't be providing specific earnings guidance as there are multiple variables that impact our adjusted EBITDA and adjusted EPS, I do want to set expectations for the rest of 2019 and 2020. As of today, we have already collected approximately 95% of our revenue for 2019, giving us great visibility into full year results. We have set to end the year with an adjusted EBITDA between $109 million and $110 million. This represents 23% growth rate in 2018 and is in line with our expectations. Our fourth quarter adjusted EBITDA will be relatively flat quarter-over-quarter, which we have anticipated given the rate compression we are seeing in our spread income. Looking out to 2020, we expect our net revenue growth to be about 10% to 11%, which we feel is outstanding given our expectation for a more difficult environment next year. Our expectations for 2020 exclude the impact of OBS due to the uncertainty of when it will close. More specifically, for our asset-based revenue, we expect low double-digit growth year-over-year as a result of our strong platform asset growth, offset by some yield compression. We expect our spread income to be flat year-over-year, given our expectations of where interest rates will be next year. To go one level deeper, we expect our rising cash volumes will offset the lower yield we will earn in 2020. Regardless of the short-term market impacts, we firmly believe that the measure of success for AssetMark is the continued organic growth of the business, and we will continue to focus on that, targeting our net flows to be above 10% of our beginning-of-year assets. As always, we anticipate realizing improved margin on our revenue, so we expect our adjusted EBITDA to be up 10% to 15% year-over-year. That said, we want to make sure we continue to invest in the growth of our platform. For our business, and as you heard Charles during -- as you heard during Charles' remarks on our 2020 strategic priorities, the path to success lies in expanding our platform offerings and attracting more advisers and assets to our platform. We look forward to providing business updates in the future. Now I'll hand it over to Charles to provide some concluding remarks.
Thanks, Gary, and thanks to all of you for listening to the call today. We are very pleased with our third quarter results and look forward to executing on our 2020 strategic priorities.
But before I close today, I wanted to share some thoughts, some personal thoughts on the passing of Jud Bergman and his wife Mary Miller-Bergman. I think all of you know that Jud and Mary were killed in a horrendous car crash some weeks ago here actually in the Bay Area. It was a shocking experience, I think, for all of us who knew Jud well.
Jud was a pioneer in our industry. He was a visionary. He inspired a lot of people around the industry. He inspired us at AssetMark. He inspired me. I've known him for quite a long time. I was trying to think about a personal story to share about Jud and there were so many stories. I was at his funeral a few weeks ago, which was a moving experience to see his son and Bill Crager, Stuart DePina speak and meet so many of his colleagues and see so many friends there. And I was just thinking about the kind of man Jud was. For those of you who knew him, entrepreneur, visionary, all those things, but he was quite a renaissance man. You could get a call from him, and he'd be congratulating about something that happened for our company or some industry issue or I'd call him and we'd be talking, and out of his mouth, he'd say, "Hey, Charles, you know what my favorite book of all time was?" and I'd be like, "No, Jud, I don't." He'd say, "American Pastoral." And I'm like, hmm, now what do I say, I've never heard of it. And so I went in and I bought the book and realized that it was too long for me to read, so I rented the movie and watched the movie. And for those of you who have read the book or seen the movie or haven't, please do it, it's a great story of Jud's sort of upbringing during the tumultuous times of growing up in the '60s, and it's just a great example of the kind of man he was.
And so I just wanted to take a minute. I know it's unusual on a call like this to talk about somebody like Jud, but I needed to do it. He was a great man, and we will miss him. And from all of us at AssetMark, our Board of Directors, management team, we want to extend our thoughts and prayers to Jud and Mary, the family, friends and colleagues. So with that, I'll conclude our prepared remarks and hand it back for questions and answer.
[Operator Instructions] We do have a question from the line of Ken Worthington.
Maybe first, on the net flows, you mentioned in September there was a timing issue. I was hoping you could flesh this out a little bit more. The way I think about your business, you have a large number of household, a large number of advisers. It's hard to think that maybe they would all delay at the same time if market conditions aren't terrible. So might there be seasonality here at work or it would suggest that the delay was by one large or small group of large decision-makers. So can you give us more color on how that would work? I would have expected sort of less abrupt changes from quarter to quarter and definitely not any sort of delays.
Ken, thank you for calling in. This is Gary. A great question. When we think about the quarter-to-quarter, the quarter-to-quarter mutes sort of the monthly variability you might have, right? So for the quarter, we did $1.4 billion, last quarter $1.5 billion. We did have a couple of large actually redemptions in September that brought down the net flows number. But I view that as a timing issue because in the way our business works, and you're right, with so many advisers, you have money coming in and coming out, it just happened in September we had a couple of large ones coming out and a couple -- in October, we're going to see a couple of larger dollar amounts come in, making the net flows much larger in October. That's why I refer to it as a timing item. Nothing in particular regarding any trend or whatnot. And normally, when you look at quarter-to-quarter, you see the numbers are relatively flat.
Okay. Great. And then maybe on OBS, your -- they've got a presence in the Bank Trust channel. Maybe talk about how you can use OBS as sort of a jumping off point to kind of increase your focus on that Bank Trust area.
Ken, it's Charles. Great question. So as you know, our business is all about helping financial advisers make a difference for their clients by empowering the financial adviser with curated portfolios, technology, practice management.
The Bank Trust channel operates similarly, where you have advisers sitting in bank branches doing pretty much the same work. Traditionally, that market has been one where there's been sort of a corporate decision-maker, portfolio is managed at the adviser level and pretty old scale technology. And we've been looking at that channel for some time. And when you dig a little bit further into the community bank part, which is $300-ish billion-or-so opportunity, that particular area for us is where we want to target. That is where OBS has participated. It's going to give us a chance through their client base to really get in and understand the specifics of how those advisers manage portfolios, how they use technology, what the technology suite looks like. And it's going to give us a chance to really study that and understand that and then bring our set of capabilities to those clients.
So as is always the case in our business financial services, the time to penetrate these channels is a multiyear opportunity. And as you penetrate, these are very sticky channels. We're excited about that opportunity. We're excited to serve those clients well. We think we're going to bring a whole lot more capability to them. And we're excited about our ability to leverage that learning into additional Bank Trust clients.
And we do have a question from the line of Alex Blostein from Goldman Sachs.
So maybe just a follow-up to Ken's question around OBS. I know you've provided kind of a targeted, fully synergized [ EBITDA ] multiple. But maybe you can walk us through some of the financials and how that's supposed to sort of impact your guidance P&L over the next several quarters as the deal closes?
Sure, Alex. This is Gary, again. So the way we went about it, as we announced, it's that a little bit over $2 billion of assets at OBS. On the blended rate though, the yield on those assets is about 25 basis points. Similar to GFPC, that's lower than the AssetMark yield due -- similar reasons for the custodial -- the lack of the custodial revenue.
So we don't know when it's going to close. We hope it's going to close in the first quarter of next year. So we didn't build it into our outlook yet for the next year. But that gives you a sense of where the revenue is or the revenue level. And for acquisitions, we should be realizing about a 50% margin and so you can kind of infer what the EBITDA would be on that.
Great. That's helpful. And second question, Charles, for you. I know you mentioned some of the pricing changes by the online brokers. I think the investors generally understand the difference between your guidance model. I was curious if you could talk a little bit about what's been going on at UBS and kind of the function of sort of pricing adjustments to separate managed accounts. And I know the details are sort of vague, but just curious to kind of how you are -- what you're hearing from your channels, whether or not the pricing pressures are accelerating or staying stable because that feels a little bit more kind of in your wheelhouse relative to the online brokers?
Alex, we took a bet if anyone would ask the UBS question, and...
Bingo.
I thought you would, but others said you wouldn't. Anyway, so bingo. There you go. First of all, let me talk about pricing generally and sort of what we're hearing from advisers and then come more specifically to UBS.
So yesterday, I was in Denver and we had a group of what we call producer groups or OSJ groups meeting a key segment expansion opportunity for us as we look to help these business owners who are working with dozens and sometimes hundreds of advisers as a scaled way to reach those advisers. And during my prepared remarks, I did ask the question, "Has anyone been focused on the Schwab and the online brokerage pricing changes?" And not a single adviser raised their hand. So I pushed a little bit further and asked, "Are these issues your investors are asking about?" And again, no one raised their hand. The general feedback from that event, and we've had quite a number of events over the last month or so, is that clients, investors continue to be focused on their own needs, their own portfolios. And because we're in the -- we're not in the transaction-based pricing approach, we don't charge transaction fees, it just really isn't an issue for fee-based advisers. The UBS question, and for those on the phone who don't know what's going on at UBS, UBS, I guess, announced or there was a set of articles about what they're doing in separately managed accounts and how they're going to change the fee structure in a little bit more detail than I'd care to get into on a call like this, but as Alex alluded to, it's quite opaque actually what's happening there. What I do know is, I haven't heard from -- and in every conversation I've had with other industry participants about pricing and what's going on, are the changes at UBS impacting anybody's thinking? The answer is no, that nobody is really hearing much about it. They don't really know what it means yet, not sure it means anything at all.
So Alex, I wish I could tell you more and have better insight, but I don't see that as being a driver of change. Having said that, the continual pressure on pricing and what I termed in my prepared remarks about investor value, that's the key. There is no doubt that our industry is repricing at kind of, I guess, a linear pace towards lower-cost investing choices. And those lower-cost investing choices, the further you are from the investors, so the further back you are in the value chain, the more it's impacting you. The closer you are to the investor, the less it's impacting you. And showing value is becoming more and more important. Including for advisers, while they don't appear to be experiencing any pricing compression, the value proposition of advisers is changing dramatically, moving away from money management much more towards wealth management, financial planning and all the value-added services that we know make a difference for investors in their retirement.
And so the industry is changing a lot, and we believe that's going to continue to change. We, as you know, offer quite a variety of low-cost investing solutions. We will continue to add those to gain share of wallet. We will not focus on yield per se, but we will focus on bringing the right solutions to advisers and then managing our cost structure to drive both asset gathering and exceptional results.
So I know that's not the perfectly clear answer to the UBS question, but in the broader construct, I hope that's helpful.
Yes. No, helpful, nonetheless. And just a quick cleanup modeling question for Gary. In the past, you guys talked about targeting about 100 basis points of adjusted EBITDA margin expansion on an annual basis. Given your sort of outlook for 2020, should we still be expecting about 100 basis points of EBITDA margin expansion or some of these investment initiatives that you've highlighted will put some pressure on that?
No. Given -- let's say, assuming stable markets next year, we will still be targeting that 100 basis point margin expansion. We are very committed to making sure our expense growth doesn't get ahead of our revenue growth, and that's a realistic expectation. I think when we talked about the investments we talked about a little bit earlier, that would be more on the capital side rather than your operating expenses. And so we see an opportunity and a need for -- and the right time for capital spend, but I don't believe it would -- I believe 100 basis points is still a good thing to model.
And we do have another question from the line of Chris Shutler from William Blair.
On the early outlook for next year, would you say -- I think you said 10% to 11% net revenue growth. Feel free to correct me if that's wrong. But if that's the case, what are you assuming for markets and for fee compression?
Sure. So our regular market assumption is about 3.5% market impact to our platform. We assume that every year and, again, I think we've discussed with you previously, you could assume whatever you want, but we think that's a good, logical assumption.
We assume interest rates are going to have one more step down, probably in the first half of 2020, and that will make our spread-based revenue really relatively flat year-over-year from '19 to '20. And so we do expect our asset-based revenue to grow in the low double digits, a little bit more than the 10% to 11%, and that captures a couple of basis points decline, off the top of my head, Chris, I can't tell you the exact number, but a couple of basis points decline in the yield on that block.
Chris, it's Charles. I just would add on the market assumption. We've talked about this, and I think it's worth repeating. We're not going to try to guess what the market is going to be next year. We're going to have some capital market assumptions, particularly around interest rates to the best of our ability to try to forecast that. But we're not in the business of prognosticating and guessing markets. We're long-term investors. We do 3.5%. Our average across the entire book is 60-40 global portfolio, 60% equities -- global equities, 40% mostly domestic fixed income. So net of fees 3.5%. It won't be that. But we've been able to manage well our earnings and P&L relative to that forecast. If there's a big swing in the market at 30% down or 30% up, 30% down, we'll be clear with you and everyone else how we're planning to manage the P&L. If it's 30% up, we'll deliver more value in terms of earnings. So that's a little bit about the way we think about markets.
Okay. That's helpful. I also want to ask just about kind of the way that you bundle your investment management, technology and support services all together for your advisers. I guess just curious, would you be willing to unbundle some of your offerings? Is that something that's on the table at all?
Well, today, we, as you said, bundle -- just for everybody's benefit, we are very explicit about pricing. We show everything, how it works so it's all quite clear. But prices are bundled. So if you buy an investment solution, that investment solution comes with everything else, all the technology, all the service, all the capabilities.
We do segment our service significantly. So if you have a bigger commitment to AssetMark, we segment our service and the experience is, hopefully, much better as you make a larger commitment to us. But it is a bundled offering.
For 2020, for sure, it will be a bundled offering. Whether or not we consider unbundling in any way is really a future question about segment and channel. If you think about what we do today, whether it's in the independent broker dealer, RIA, Bank Trust, any of those segments, we're offering the full bundled TAMP solution. And we're really doing it to support the adviser and their capabilities so they can serve investors better. So it's really about the investor experience at the end of the day.
If we were to do something different and unbundle and, say, sell technology, that's really a different sale to a different buyer and a different way. And we aren't at a place where we're ready to do that or think we need to do that. And if it is an area that we would go into -- and never say never in any business, but if it is an area we want to go into, that will be something we'll talk about with you as we develop the strategy around it.
Okay. Got it. Just one last one higher-level question. But when you talk to your adviser, clients or adviser prospects, how big of a differentiator do you think the open architecture approach to investment management is that you guys take? I ask because I know some other TAMPs are DFA-only or they require a healthy allocation to proprietary fund-to-fund vehicles. So just wondering if that is a very important point of attraction to your model or if I'm kind of overstating the importance.
I think, Chris, it's a huge, huge and important part of our value proposition. Independent advisers like choice. They like to be able to make the choice themselves. They like to be able to change their mind, hire and fire. And so choice, both in terms of proprietary, nonproprietary investment style, custody, we think all those things have made a difference. When you look at our growth trajectory relative to everyone else's, we think that's part of the magic in it. It's not the only magic. Service is a big part of it, relationship, and how we deliver that service experience, the quality of our technology and that experience of an integrated technology platform is a big part of it. But we think open architecture is absolutely critical in this space and allows you to capture more share of wallet. The other point I would add is, the TAMP business started for many TAMP providers as an access point to an investment style. And so you see a lot of competitors out there that have their structure as an access point. And that works, and they can grow using that, but it's an access point where then the adviser has to combine and look for other things to fill their needs, other investment choices, other -- whatever it is to fill their needs. And so they're not capturing the full opportunity because of that choice. And we think it is quite differentiating for us in how we approach the market.
We do have another question from the line of Kevin McVeigh from Crédit Suisse.
Charles or Gary, what are you seeing in the business that's driving the decision to accelerate some investments in 2020? And just anywhere -- any particular areas of focus where those investment dollars will be?
Yes, Kevin, it's -- I'll start. It's Charles. It's really around the scale of our platform. And as you know, businesses like ours, particularly the custodial side and the operating side, require regular investment to drive scale to lower unit cost, and we do that, I think, quite well and well within -- when we're talking about capital here, which is what we're talking about, within that sort of 5% to 6% range that we've committed to. And we've done, I think, a nice job of investing, both in unit cost lowering initiatives as well as revenue enhancements and just what we call client experience enhancements. The other piece of it, though, is the other use of the word scale. As we have more transactions, more dollars, more people coming in, you have to add servers and capabilities. You have to add underlying systems around books and records and trading systems and these kinds of things. Those types of investments are not linear in nature. They come. You have to do the work, you have to put them in, then you amortize over time those costs. And so we look at 2020, '21, where our cash position is incredibly strong, our growth has been fantastic, and we think it's a great time to invest in room, I guess, I would say, that kind of scale, room on the platform.
In addition, by doing that, it also allows you to simplify other parts of your processes and then create the other kind of scale, the lowering of the unit cost. And so that's really where the focus of it is, if that was clear, for '20 and early '21.
And we have no other questions at this time.
Okay. Great. Thank you very much. We very much appreciate the time today -- your spending time with us during this busy earnings season. We know you all are writing a bunch of reports. So thank you for joining. Hopefully, the information was helpful, and we look forward to continuing the dialogue. Have a great rest of your day.