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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, everyone. And welcome to the AssetMark's Fourth 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 Fourth Quarter 2019 Earnings Conference Call. With me today are AssetMark's Chief Executive Officer, Charles Goldman; and Chief Financial Officer, Gary Zyla. Today, they'll discuss the results for the fourth quarter and full year of 2019. They will also provide an update on our 2020 outlook. Following our introductory remarks, we'll open up the call for questions.
We also have an earnings presentation that Charles and Gary will reference during their prepared remarks. It can be accessed on our IR website at ir.assetmark.com.
Before we get started, I'd like to note that certain statements made during this conference call are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as the date of this call. Actual results could differ materially. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether 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. Additional information will also be set forth in our annual report on Form 10-K for the year ended December 31, 2019, which we expect to file in mid-March.
Additionally, during today's conference call, we'll be discussing net revenue, adjusted EBITDA, adjusted EBITDA margin and adjusted net income, all of which are non-GAAP financial metrics. These non-GAAP metrics are not calculated in accordance with GAAP and may be calculated differently than similarly titled metrics presented by other companies. A discussion of why we use non-GAAP financial metrics and quantitative reconciliations of adjusted EBITDA, adjusted EBITDA margin and adjusted net income to the most directly comparable GAAP measures will be available in our press release and our annual report on Form 10-K for the year ended December 31, 2019, both of which will be available on our Investor Relations website.
And with that, I'll turn the call over to my colleagues. Charles, take it away.
Thank you, Taylor, for that excellent information. Really appreciate it, and thank you all for joining the conference call for our fourth quarter earnings. And it was a great quarter for AssetMark, and we're glad to tell you all about it. Gary and I are here to share our operational and financial results.
Starting on Slide 3, we're going to focus on 5 key messages today. I'll discuss messages 1 and 2, while Gary will cover messages 3 through 5.
First, I'd like to spend some time discussing the year as a whole. 2019 was a noteworthy year for AssetMark, highlighted by new product launches, 2 acquisitions, listing on the New York Stock Exchange and tremendous growth.
Second, I want to provide some color on the future opportunities that we see across channels. Third, Gary will discuss our platform asset growth in the fourth quarter, where we realized our 11th consecutive quarter of net flows over $1 billion and our 28th consecutive quarter with positive net flows, a true testament to our strong organic growth story.
Next, Gary will discuss our growing cash balances, which bolstered spread-based revenue despite declining interest rates. Lastly, Gary will focus on the rest of our fourth quarter results, highlighted by double-digit year-over-year growth in revenue, adjusted EBITDA and adjusted net income.
Turning to Slide 4. 2019 was indeed a busy and momentous year for AssetMark. As I think you all know, our mission is to make a difference in the lives of advisers and their clients. If we do that well and better than our competitors, the operational and financial results will follow. 2019 was a great example of that. We added several new products to our platform to enhance our advisers' capabilities and to help their clients reach their long-term goals.
In January, we added high-yield cash. Our FDIC-insured enhanced solution for larger cash balances. In February, we launched guided income solutions, designed to provide a consistent source of income for those moving into retirement. And in September, we launched Savos Personal Portfolios, targeted toward emerging high net worth investors.
We also enhanced our technology stack this year, focusing on innovation and development of new tools and services. In 2019, we invested $47 million in the development of technology and on our dedicated technology team. We expanded our sales and service team this year while driving scale into this important area of our business. We continue to build strong relationships with our advisers, hosting live events, webinars and creating thought leadership materials.
In 2019, we hosted over 100 adviser events, including our Inaugural Women's Summit, designed to encourage, inspire and connect communities of women in this industry. The event was attended by over 50 female advisers. These platform enhancements and adviser interactions helped us add almost $16.8 billion in platform assets and attract 894 new producing advisers, 393 engaged advisers and over 28,000 households in 2019.
Financially, we continue to realize strong results and had continued success driving scale in the business, evidenced by our growth in our adjusted EBITDA margin of 180 basis points in 2019. We also advanced our M&A strategy this past year. In April, we closed the GFPC acquisition, bringing $3.8 billion in assets, over 200 new advisers and $5.2 million in annualized post synergy adjusted EBITDA to our platform.
In August, we announced the acquisition of OBS. OBS will bring over $2 billion in assets, approximately 300 new advisers and an estimated $3.5 million to $4 million in annualized post synergy adjusted EBITDA to the platform. We have received all regulatory approvals and are on track to close the OBS transaction next week. While 2019 shaped up as the best year in the company's history, we believe we are just beginning to scratch the surface of this immense opportunity that's right in front of us.
Turning to Slide 5. I want to spend some time discussing our current position in the market, our future opportunity and how we plan to capitalize on it. We operate across 4 major channels, which comprise $15.3 trillion, trillion with a T, in assets, of which $4.9 trillion is addressable by us. With platform assets of $61.6 billion, we have only penetrated a little over 1% of the market. Simply put, we have a long runway of growth and a clear strategy in each channel to continue to gain market share.
Let me spend a moment walking through our channel opportunities and how we think about each of them. First, the independent broker dealer channel, which includes independent broker-dealers as well as insurance broker-dealers, which makes up the greatest portion of our platform assets. Our target adviser in this channel are those with the propensity to outsource to really [ size ] the market for advisers under $250 million, however, we do have advisers meaningfully over that size. We use that $250 million as data to help guide our strategy.
There is a lot of opportunity in the IBD channel as we have current -- as we currently have less than 3% market share. I've spent a lot of time in the past talking about our strategy. So I won't go into great detail here. In short, our focus in this segment is to execute on our strategic pillars so that we bring on new advisers and grow share with existing advisers in this very important channel.
While the IBD channel makes up the greatest percentage of assets on our platform, we have focused on introducing new products and enhancing services and capabilities to expand into the RIA, Bank Trust and retirement channels as well. Expansion into these adjacent segments will help us extend our mission of making a difference in the lives of advisers and their clients. We view channel expansion as a long-term investment where growth comes across multiple years.
In the RIA channel, we are targeting RIAs who are suffering from all the same problems as broker dealer advisers. RIAs manage all the money themselves, do all the due diligence, combine different technologies and conduct all the middle-office functions.
If you're a larger RIA, you typically have your own CIO or investment analysts and are better able to support these operations in-house. Smaller RIAs do not have the same scale and can't hire these positions in-house. So they are the ones that are most likely to see value in outsourcing to AssetMark.
We expect that our launch of adviser managed portfolios, planned for later this year, will allow us to better serve RIAs and help grow our market share in this area.
Next is the bank trust channel, which is fairly new to AssetMark. The total addressable market in bank trust is approximately $500 million -- $500 billion, excuse me, and is made up of regional and community bank trust assets. The announced agreement to acquire OBS provides us what we believe to be a low-risk entry point into this channel. We have the opportunity to analyze OBS's client base to understand the specifics of how those advisers manage portfolios, how they use technology and how -- what that technology suite looks like. It gives us a chance to really study and understand the Bank Trust opportunity and then bring our set of capabilities to those advisers and their investor clients.
Lastly, let's discuss the retirement channel, which complements all of our other offers. By offering a retirement solution, we provide our advisers a more complete outsourcing model, which allows us the opportunity to gain additional share of wallet. We help advisers who're not experts in this space, working with entrepreneurs that are already their clients to build small 401(k) and 403(b) plans. We launched our revamped retirement services in 2017. Since then, we have improved our investment offering to include a broader investment lineup, improved prospecting and reporting for advisers and investors and have built a dedicated, experienced team to support adviser training and to provide plan sponsor support.
We plan to enhance our marketing strategies and data analytics to educate advisers on how to prospect, win and service retirement plans. As you can see, we have a lot of runway in front of us.
Now let's move on to our next topic. As I plan to do every quarter, I wanted to discuss at a high level, the thoughts we have on the macro environment and the general industry. The markets in the fourth quarter provided a nice tailwind to our business as the S&P 500 ended the fourth quarter, up 8.5%.
For 2019, the S&P 500 soared 29%, the strongest annual return since 2013. Using trade tensions, fed cuts and a durable economic data supported this rally. However, the strong calendar year returns must be viewed in the context of the low starting point following the almost 20% sell-off in the fourth quarter of 2018. Starting from the 2018 high on September 20, the S&P 500 has returned a more modest 10%.
Gary will provide greater detail on how the markets affected our financial performance in 2019 and the impact of fourth quarter market appreciation on our first quarter 2020 financials. While we have experienced increased volatility over the last few days and we certainly have done exactly that, we believe that markets will grow over the long term. That is critical in terms of how we manage the business.
The bond market was also a big story in the fourth quarter of 2019. In October, the FOMC cut rates, again, reducing the Fed funds target by another 25 basis points. This marked the third and final cut of 2019. While we have not modeled any further rate cuts into our 2020 outlook, we are actively following updates from the FOMC and analyzing the dot plots.
As a quick reminder, as I said a minute ago, we do not run the business on the ups and downs of the market. Rather, we pay close attention to market movements as we manage our financial results and continue to invest in our clients and the business generally.
Lastly, I want to provide some additional color on the recent press release we issued earlier this month, announcing the transition of third-party mutual fund strategies on our platform to institutional share classes. AssetMark currently offers several third-party mutual fund investment strategies that use a retail share class. And beginning in May, advisers will have access to the same strategies using institutional share classes, which have lower operating expense ratios.
This change impacts 15 mutual fund strategies, which are invested across approximately 200 different mutual fund positions. Assets, and the impacted strategies now represent less than 9% of our total platform assets.
We estimate the revenue impact in 2020 will be approximately $7 million, which is less than 2% of expected revenue for this year. Before we discuss the rationale for this decision, it is important to note that this decision will not, I repeat, not affect our previously communicated revenue growth expectations in 2020.
So we have long been a proponent of greater pricing transparency and lowering the total cost of investments for end investors. This change will result in a lower overall cost of investment for the vast majority of client assets held in the impacted strategies, helping investors reach their financial goals.
Our long-term pricing strategy is to make the decisions necessary to remain competitive and to grow our AUM, which drives scale into our platform. While these decisions may result in incremental yield compression beyond the normal compression we see from mix shift, we believe they are in the best interest of our advisers, their clients and, therefore, our company.
Okay. So given that, let me now hand it over to Gary to go over our fourth quarter and full year results. Gary?
Thank you, Charles, and good afternoon to all those on the call. Today, I will follow a similar outline as I gave during our previous earnings calls. 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 an update on our 2020 expectations.
I would like to begin on Slide 6 of our earnings presentation. We have experienced robust growth in our platform assets over the past 5 years, realizing a 21.4% CAGR over that time. In the fourth quarter of 2019, we grew platform assets, again, increasing 37% year-over-year and 6.4% quarter-over-quarter to $61.6 billion, marking an all-time high for AssetMark.
As you can see from the graph, we realized the majority of this growth from our engaged advisers, of those with over $5 million of assets on our platform. As we have discussed previously, the growth of engaged advisers on our platform is a key indicator for the overall growth of the business. To provide further context, platform assets from engaged advisers were 89% of our total assets in the fourth quarter. Five years ago, platform assets from engaged advisers were only 79% of our total assets.
Turning to Slide 7. During the fourth quarter, we had net flows of $1.1 billion and realized $2.6 billion of market gain net of fees. As disclosed in our 2019 annual summary of net flows, in the fourth quarter, we experienced approximately $600 million of outflows due to 2 blocks of GFPC adviser managed business leaving the platform. The adviser managed block was not core to the economic thesis of the GFPC acquisition and yields nominal revenue in AssetMark. As of December 31, 2019, only $613 million of GFPC adviser managed business remains, of which over half is with advisers who are actively engaged with AssetMark. That said, net flows, excluding GFPC's adviser managed business, were positive $1.7 billion in the fourth quarter.
The fourth quarter marked the 11th consecutive quarter with net flows over $1 billion and the 28th consecutive quarter with positive net flows. Put that in perspective, we have been organically growing our platform assets for 7 consecutive years. As a reminder, organic growth excludes acquisitions and market impact.
For the full year, our net flows were 12% of our beginning of year platform assets, well ahead of our long-term target of 10%. The strong momentum for 2019 has carried into 2020. For our AMK Report, January net flows were $472 million. In addition to our focused engaged advisers, another key indicator for our growth, our new producing advisers on our platform or NPAs. When we think about our $1.7 billion of net flows in the fourth quarter, about 2/3 came from engaged advisers, while 1/3 came from NPAs.
In the fourth quarter, we added 213 NPAs, and ended the year adding 894 NPAs. As we think about total adviser base as of December 31, we had over 7,900 advisers on our platform, of which 2,230 were defined as engaged advisers. Our engaged advisers constituted 28% of our total advisers, up from 24.3% in the fourth quarter of 2018. Charles mentioned when discussing our strategy across multiple channels, adding new advisers to our platform and expanding share of wallet from existing advisers are 2 key tenets in our organic growth story.
Now let's turn to Slide 8 to discuss the quarter's earnings. Entering the fourth quarter, our assets were at $57.9 billion, leading to a reported revenue of $111 million, up 14% year-over-year or 10.6% when excluding the impact of the GFPC acquisition. As discussed, we focus our revenue net of related variable expenses. For the fourth quarter of 2019, our net revenue of $76.9 million was up 17.8% year-over-year or 14.1% when excluding the impact of GFPC. For the full year, our net revenue was $286.9 million, up 17% from the full year 2018.
Our net revenue yield on total platform assets in the fourth quarter was 53 basis points, in line with our expectations and down 1 basis point quarter-over-quarter and 2 basis points from this time last year. The 2 basis point year-over-year decline was solely driven by the addition of lower-yielding GFPC assets, as the yield from our core business remained flat year-over-year.
As a reminder, the yield in 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, a portion 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 variable expenses, is shown on Slide 11 in the appendix of our earnings presentation.
Let's turn to 2 main components of our revenue, asset base and spread-based net revenue. In the fourth quarter, asset-based net revenue was up 19% year-over-year to $68.4 million, driven primarily by the growth in platform assets. Our net yield for asset-based net revenue was 47 basis points in fourth quarter 2019 versus 48 basis points in fourth quarter 2018. The decline driven by the addition of GFPC 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 fourth quarter of 2019, we realized $7.2 million of spread-based net revenue, up 18.6% year-over-year. The increase in spread-based net revenue was driven by higher cash balances, offset by declining yields.
Our average client cash in the fourth quarter was $1.73 billion, on which we received a blended annualized yield of 1.65%. Spread-based net yield contributed 5 basis points to our overall yield. The end of year cash at ATC was $1.88 billion, of which $218 million was in high-yield cash.
Before we turn to earnings, let me run through our adjustments to expenses in the fourth quarter. We added back a total of $23.4 million pretax, which is comprised of 4 items: first, $14.1 million of noncash share-based compensation; second, $5.1 million of amortization-related expenses related to our 2016 sale; third, $3 million in expenses associated with our acquisition and integration of GFPC; and lastly, $1.2 million of add-backs related to our IPO readiness and reorganization costs.
As a reminder, we believe the expenses associated with the acquisition of GFPC should cease at the end of 2020, stepping down in the back half of the year. The expenses associated with our IPO should end this quarter.
For additional color on adjusted expense reconciliation table per income statement line item can be found on Slide 12 in the appendix of our earnings presentation.
Now let's discuss the earnings for the quarter. Our adjusted net income for the quarter was $19.7 million or $0.27 per share, an increase of 22.7% year-over-year. This is based on a fourth quarter diluted share count of 72.4 million. This year-over-year increase in adjusted net income was driven by higher adjusted EBITDA of $7.3 million and lower taxes of $380,000, both partially offset by higher amortization of $1.5 million and interest-related items of $700,000.
Our marginal tax rate for 2019 was 25.3%. 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 $29.3 million in the fourth quarter of 2019, up 33.1% year-over-year, reflecting strong year-over-year growth in our top line and improved margins.
For the full year, adjusted EBITDA was $109.9 million, up 23.5% year-over-year. Adjusted EBITDA margin for the quarter was 26.4%, up from 22.6% margin in the fourth quarter of 2018. This 380 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 reduced our asset-based expenses.
We ended the year with an adjusted EBITDA margin of 26.3%, up 180 basis points compared to the full year 2018.
Now let's look at the reported fourth quarter balance sheet. I would highlight 3 items. First, cash continues to serve as a position of strength. We ended the fourth quarter with $96.3 million in cash. Our cash position grew $13.1 million quarter-over-quarter, driven by our operating activities.
Second, capital expenditures primarily reflect our long-term investments in technology to create new capabilities, increased scale and improved service. For the fourth quarter, our capital spend was $6.2 million or 5.6% of total revenue. For the full year 2019, our capital spend was $22.5 million or 5.4% of total revenue.
Lastly, 2 balance sheet items; available for sale investments at fair value and other long-term liabilities increased this quarter by $6.9 million due to the inclusion of the asset and liability associated with AssetMark's deferred compensation plan.
Now I would like to provide an update on our 2020 outlook, which we announced during our third quarter earnings call and refined in our winter 2019 investor presentation.
Turning to Slide 9. Our platform assets experienced a robust $2.6 billion lift in the market in the fourth quarter, helping us enter the year with higher platform assets -- asset levels than originally forecasted. As we have previously stated, we do not believe in short-term guidance as there are too many variables that are out of our control, and we manage the business for the long term. Nonetheless, due to the higher asset levels as a result of strong market performance and our transition from third-party mutual funds that use retail share class to an institutional share class, feel will be helpful to discuss our 2020 expectations again.
For clarity, our previous comments on our 2020 outlook included the revenue impact due to the transition to the lower-cost mutual funds, therefore, this will not have an effect on our revised 2020 expectations. However, the fourth quarter market impact will. Assuming moderate growth in the markets, impacting us 3.5% net of fees and no changes to the Fed funds rate in 2020, we expect our full year net revenue to grow in the low teens year-over-year. We are slightly increasing our expense growth target to 9% to 10% from the previously communicated 8% to 9%.
On the adjusted EBITDA front, we are revising our expectations upward, now targeting growth in the 15% to 20% range versus the previously announced 15%. While we are expecting year-over-year growth in adjusted EBITDA in the first quarter, a greater portion of our EBITDA growth for the year is expected in quarters 2 through 4. The reason is that the first quarter includes additional expense due to Gold Forum, our annual multi-day event for our gold and platinum advisers.
For the year, we are targeting 100 basis points of adjusted EBITDA margin expansion, which is above our long-term target of 50 to 70 basis points, calculated on our reported revenue. Regardless of the short-term market impacts, we firmly believe that the measure of success for AssetMark is the continued organic growth in the business, and we will continue to focus on that, targeting our net flows to be above 10% of beginning-of-year assets. These 2020 expectations do not include the impact of OBS in our financials, which we expect to be accretive. As Charles mentioned, we are expecting $3.5 million to $4 million in annualized post synergy EBITDA.
Additionally, we signal that 2020 will be a year of investment, and we are targeting a capital spend of about 7% of our expected revenue. The vast majority of the spend is on continued investment in enhancing our compelling technology offerings as well as a onetime investment to replace our recordkeeping system in AssetMark Trust company. Also included in the capital spend is an investment of approximately $4 million to support infrastructure growth across all of our offices.
We look forward to providing business updates in the future. And now I'll hand it over to Charles to provide some concluding remarks.
Well done, Gary. Thank you, and thank you to all who are listening to our call today. We're really pleased with our fourth quarter and full year results, and we're excited about the opportunity in front of us. We look forward to continuing the dialogue with our investors and with those who are interested in learning more about the AssetMark story.
So with that, let me turn it back to the operator, and we'll open up the lines for questions.
[Operator Instructions]
And your first question is from the line of Alex Blostein with Goldman Sachs.
A couple of questions. So I guess, first, a couple of cleanups just around the institutional share class which -- sorry if I missed it, but how much in asset did that actually impact? And the $7 million number that you said -- said there is an impact on revenue. Is that an annual number? And again, I'm assuming this is largely going to impact, like, the net asset-based fees, not the growth? So just maybe some clarification there.
Sure, Alex, and thank you for calling in. This is Gary. The block of business is about $5.5 billion are currently in retail share classes that will be converted to institutional. The $7 million impact is for the current year, as we announced in this transition we made around in June. And so you can effectively imply is about a half a year impact and -- yes, it's a half-year impact for the shift.
Got it. And are there any other either share classes or just kind of -- if I think about the assets that are on the platform that you can put in the sort of "less shareholder or investor-friendly wrappers" that could switch to your other kind of clean shares over time that could put incremental pressure on the revenue yield for AssetMark. So let's kind of keep them moving from active to passive aside from this. So obviously, the switch from mutual fund TTFs will put some pressure on it, but just within the mutual fund complex. Or do you think this is basically a cleanup?
Yes, Alex, this is Charles. At the risk of correcting what you just said, they're less shareholder-friendly. I think the way we think about it is we're trying to put together a platform that's very shareholder-friendly and makes a lot of sense for investors.
The big change that we're seeing in the industry is a move away from implicitly priced product to explicitly priced product. And all the companies I know you cover, there's many that have a lot of NTF, non-transaction fee share classes that sit out there. And I think there's a pretty good debate in the industry about whether or not those are in the investors' best interest or not, whether transaction fees or not.
In our platform, what this does is, it shifts the pricing to an explicit price versus inside the product. And because we see opportunity to continue to drive scale and growth in our platform as we normally do, we'll look at competitive situations and trying to -- try to lower price to drive growth. So I just -- I hate to correct on that. But I think it's important.
We still maintain about $3 billion of products that are in retail share classes on the platform and those are related to -- are proprietary products that don't have a corresponding institutional share class. And so my suspicion is, over time, that will change. Today, we don't have an institutional share class to do it with. So it's about $3 billion.
Great. And then switching gears a little bit to the expense guidance and the current environment. Obviously, the backdrop on the macro side has changed quite a bit relative to the fourth quarter. So I guess the first question is the 9% to 10% expense guidance for the year does not take into account any additional rate cuts. I think the curve is now implying about 2 cuts for the rest of 2020 and kind of who knows what markets will do. So can you give us a sense of how low that expense growth could be for 2020 if you had to readjust your expectations for the macro backdrop?
I think the prior guidance was a little bit below, but give us maybe some sort of range in terms of how far back you'd be willing and able to pull back this year in a tougher revenue backdrop?
Sure, Alex. So this is Gary. Let me start and kind of frame up how we think about this, right? So I know you just talked about rates, the first looking at the market, right? The market has had some pretty big moves over the past week or so. So year-to-date, I think the S&P market is actually down about 3%. I mean it was up on February and now down. And if you remember, we've talked about we are kind of -- our portfolio, which is a 60-40 portfolio, so it has about a 50 beta to the S&P. And so we expect that our assets are down about 1.5% right now year-to-date.
Generally, we mentioned that we expect -- we plan from a gradual market growth of about 3.5% a year. And so if the markets kind of stay where they are or this kind of trend -- this level maintains itself through the end of the quarter, we might be off about 2% of what we expected to be at.
For the quarter.
For the quarter. And so that means going into the quarterly billing in the first quarter, you'd have that impact. The benefit of our business, we bill in advance, so we've already collected in our first quarter revenue already. And by billing quarterly, we can adjust to the market shifts later in the year, et cetera.
We -- whether or not is shifting to the view on interest rates. There's a lot of thought -- thinking about where -- I think the market generally thinks the rates are -- might be going down. The general feedback from the Fed is sort of a different tune, actually that is likely -- and we are following that guidance or that assumption in our outlook. And so that's where we're coming from.
Let me give it to Charles maybe to answer a little more about macro, how we view the investments in the company.
Yes. So Alex, and I think it's important. As we said on the roadshow, as we've said in every one of these calls, we're not going to have a knee-jerk reaction to markets. We're long in the market. We're long investors. We believe you take share in down market cycles that others make the mistake of stop investing to try to hit some kind of crazy number, that is not our goal at all.
We also believe that we have great visibility into our revenue because of the billing in advance. So we're not going to sit here and speculate and then cut cost or do one thing or another because of that. We will, however, be sensible and thoughtful and manage the expense base, which we can do over time as we see things that we think are more sustainable, but we're just sort of 3 days into the coronavirus market. I don't know if there's some name for what's going on. To try to knee-jerk react to that, it doesn't make sense.
I do hear your question, though, which is what could you do? And I'll let Gary answer that a little bit, but I want to be careful that we don't want to guide you into thinking that we will do that.
And my only comment to that -- to add, Alex is you know, if you think about the 9% increase in spend in 2020, and I know this is very, very rough, but figure somewhere a little -- somewhere around half of that is the volume increase that we're planning. The other half of that increase is going to be the investments in the business, right? And so to echo Charles' point, we are investing in growth and we don't plan to not invest in growth. But if you are thinking of what are the levers to pull that's how -- that should help you give you a little guidance.
And you next question is from the line of Chris Shutler with William Blair.
Charles, I want to get your thoughts on the competitive landscape. Some of your competitors in the TAMP space aren't growing their businesses nearly as fast as you guys are. So wondering if you're seeing any of those competitors make any changes to their solutions or the way that they're going to market that could impact you?
Thanks, Chris. Great question. So it's interesting. What we're seeing is most of the other traditional TAMPs, so whether they're product-based TAMPs or more platforming, like we are, the growth rates have been vastly different than our own. We do see, however, the broker-dealers that are building internal TAMPs. We go through all of their ADVs and really study their model marketplaces and what they're doing. While they're not growing nearly as fast as we are, they're growing sort of maybe I think about probably about 60% or so, as fast as we are. We do see that activity increasing. And so let me kind of split the world into 2 pieces.
The smaller players that don't have the ability to invest in sales force, and not just people, but an optimization of the sales force and making that sales force truly better in marketing that supports that in -- compelling or any technology, frankly, they're just wiring things together when they're basically offering, which most of them do more of a proprietary investment architecture. And it's slower and more difficult to kind of bring new things to market. We're seeing that those are models that are suffering.
And I think it's quite hard to make changes in those things quickly. We are paranoid people. We worry about our competitors every day. But those folks are structurally in a different place. And one of the reasons we think scale matters so much in the business.
The broker-dealers on the other hand, which are our -- both our partners and sometimes our competitors. What we see is sort of 2 groups there. One group that we partner with that really understand open architecture, that are really focused on how do we bring choice to independent advisers. Independent advisers are independent for a reason. They want choice, they want independence. And they want to -- the broker-dealers want to compete, but they also want to have third-party choices. And we work really well with them and we see nice growth there, even though they're investing.
And then there are others that are starting to build more closed marketplaces and are being more predatory in their approach. And I would say, we still see very good growth in those networks. The real opportunity for us is to keep investing, to keep getting better. We know advisers want service. We know they want technology. We know they want better investments. So we keep doing those things and then deliver practice management with that. We think we can win and maintain the growth rate. And we think we can help, frankly, the broker-dealers get better at what they do. So I don't know if that answers your question, Chris, that was sort of long, but that's a little bit of how we see the marketplace.
Okay. That's helpful, Charles. In a different direction here, can you maybe walk us through how you think about -- so on the topic of M&A, there's been a lot of different things in the press. But maybe just think -- help us think through your framework, if you were to do any larger scale M&A in particular, what are the criteria that you look at?
Great question. So our M&A strategy for those who aren't familiar with it, is 2 basic ideas. One is consolidation. It's the deals that we've done. They're basically consolidating economics -- consolidating acquisitions where the economics are basically bring the platforms together, take a lot of cost out.
What we've also seen, though, in all of the ones that we've done that are now vintaged, that have been around a little bit is we see that those advisers grow much faster on our platform and faster than the platform -- our platform average when they join as they get all the capabilities that we have. So we like that kind of model. The second is capabilities. We haven't done a capabilities acquisition. They've tended to be quite expensive. They tended not to fit strategically and it's hard to go into that too much here on this call, but we could talk about that if it's of interest.
The larger scale that you're talking about today, we all know that there's a lot of rumors around the industry. We remain quite interested in growth. And we think that scale and growth matters. Our framework going into a larger deal if we were to do one, we understand that it's not going to be single -- high single digit kind of EBITDA multiples, they're going to be higher. But we will look at them and make sure that we feel like they enhance our growth trajectory that they bring some level of capabilities and that they're very accretive to shareholders and that they're financed well. And so that's the general framework that we think about.
All right. Great. And then last one, just a cleanup question on the OBS deal. I just want to confirm that, I think you said the post synergy adjusted EBITDA will be about $3.5 million. So I guess first, is that correct?
And then second of all, how much of that would you actually expect to hit the P&L in 2020?
So you have the number right, Chris. The number we said was $3.5 million to $4 million of adjusted EBITDA on an annualized basis. And as Charles mentioned, we have cleared all the regulatory hurdles. We hope to close the deal soon. And so I would prorate that number to the kind of 10, 9.5, 10 months that we would have.
And your next question is from the line of Ken Worthington with JPMorgan.
The production lift from existing advisers, it keeps growing. It's at the highest level we've seen. Is it possible to kind of dig into that a bit deeper and figure out what's really being driven by the market and what is being driven by more organic or other drivers?
Let me -- Ken, this is Charles, glad to have you on the call. Let me start, and then I'll let Gary jump in. There's no market in that, right? So remember, we exclude market from all calculations, except for when we say there's a market in it, right. So what we're trying to always make sure you see is the actual lift coming from the advisers. And so what's happening there at a high level is we continue to see the value of outsourcing driving adviser growth. So what we're able to do is help advisers get better at what they do. And when more advisers become engaged advisers and do more with us, they're able to then increase the time they spend with existing clients, bringing in that next dollar from their existing client and then, of course, growing with new clients.
If you look on our public website, I believe, Taylor is the study of outsourcing that we published that was done by a third party that can help a little bit with how advisers are thinking about growth rates and some facts behind that. But at the end of the day, for us, making advisers better at what they do and getting them out of managing money and figuring out what portfolio accounting system to use and all those kinds of things, it's really the key.
The other thing I would just point out is, that particular ratio, you also have to take into account that it's the beginning period assets, right? And so we did start last year at kind of a low level. And so if you start at a higher level, that number is just going to move around a little bit because of that, just something to think about in your model.
Yes. And I assume that, that's a number that really should just continue to increase over time? And if that's correct, is there a natural ceiling where you would expect that to not cross?
Yes. So I wouldn't expect it to increase over time in some sort of linear way. I think there's 2 factors to think about. One is the one I just mentioned, it does matter what the denominator is. And so if the denominator is a phenomenally high number, you'd expect that in the next year, it's going to be -- it may be slightly lower. Our experience is that, that number has fluctuated because of that in sort of the 20 to mid-20s. And I think it's probably a reasonable way to model it kind of in that low 20s. It's -- the other factor that I think you might think about is the engaged advisers. The more engaged advisers as a percentage of the total, you'd expect it to go up a little bit, but it's not the kind of thing that's going to grow at 10% per year that kind of idea.
Chris -- I mean Ken, I can just add another data point or 2, right? So to Charles' point, right, the denominator resets every year as our assets grow. And so even if you just maintain the same percent lift year-over-year, your gross number will be growing at the same rate as your assets, right?
One of our basic strategies is to broaden our platform in a smart way to attract more share of wallet, which drives up this percent. And so it may pop up or grow a little bit, but it is -- this mid-20s rate is actually we feel great rate. If you think about how we talk about our net flows number of 12%, this number is more of a -- what's that gross number coming in from your existing book. And that minus what goes out, gets you to that sort of 12% number.
And we have a follow-up question from the line of Alex Blostein with Goldman Sachs.
Charles, I was hoping to get a little bit of a better understanding of the opportunity you see for AssetMark in the RIA channel. So you talked a little bit about the new offering you're rolling out, I think, later this year. What do you find most differentiated about this offering versus what RIAs could get from their custodians or maybe some of the smaller custodians who are -- that they are doing business with us right now. Do you expect this business to come with the custody business and some cash maybe as well? Just trying to better understand kind of how this could ultimately change the business model for us in [ market ]?
Yes. Thanks, Alex. Great question. So let's start with what the core problem, the core adviser problem is. So if you're an IBD rep, you are overwhelmed with managing money, putting together technology, all of the stuff, you're choosing to outsource. Outsourcing has been something that's happened in the IBD world, in the insurance broker-dealer world for a long time, and it's really where all the TAMPs came from.
While about 15% or so of our assets are with either hybrids or full RIAs, the traditional RIA tended not to outsource. The term, I think you know -- everybody on the call probably knows Rep as PM. When you look at what an IBD rep is doing when they're managing their own money, we call it Rep as PM. When you look at an RIA and say what's the equivalent, it's just RIA.
Most R -- I would say all RIAs, 99% plus are managing their own portfolios. They're doing their own research, due diligence, if they're doing any of that. They're constructing models. They're trading models, either through spreadsheets or through some technology. They're going direct to their custodian. They've got a litany of tech partners and all the rest of it.
Our belief and it's -- there's good research and good experience, a lot of it's come from that channel is that the RIAs that are really under $250 million or under $300 million or $400 million, those RIAs are drowning in the same problems. And when we talk to those RIAs, when we go to conferences, when we engage with them, when we talk to the RIAs that are already on our platform, we understand that this model actually fits. The big problem is that they are managing money, and they're not going to lock, stock and barrel change everything that they're doing. Somebody with $50 million book is not going to come over here and change everything, have all the tax impact, give up their value proposition. There has to be some kind of way to get them here. And that is what we're sort of code name, what we haven't -- I don't think branded yet, but AssetMark Institutional. It's that feeling of a different kind of experience here for that RIA that wants to manage some of the money themselves, but it's going to be willing and has a mindset or a persona to outsource.
And so your key question is, well, why is that different than what a custodian will offer. A custodian can offer all the access to mutual funds and trading and whatever they want. They can do all of that, but they can't do the other part. And no one really can deliver the value outsourcing proposition that we have. And so it's really that. We need advisers that are willing mentally and have the style that says, "Geez, I want to move to outsourcing. I want to manage some my own, but I want to move to outsourcing." So we're not trying to compete directly with the custodial platform on straight trading, brokerage account features. That's not what we're going to do. That's not where we're going to win.
The second part of your question on custody, we will be open on custody. So I suspect and we believe a significant part will come to our custodian. About 80% or so of our growth today is going to our custodian. Why? Although we try to manage the service model across all custodians, and we do that work for everybody. The service experience is just outstanding at our custodian. And so advisers tend to choose that choice. We suspect we'll see a lot of that in the AMP offer, but it will also allow other custodians as well because we want choice. We're all about open architecture and choice. My belief, though, is we will see quite a bit of that growth in our custodian.
And we have a question from the line of Patrick O'Shaughnessy with Raymond James.
So you guys added more engaged advisers during 2019 than you added total advisers, which implies that you lost a handful of non-engaged advisers during the year. I think some of that was GFPC related, but what should we make of that dynamic and to what extent does AssetMark try to add advisers on a lower asset levels in order to increase that over time?
So Patrick, nice to hear from you, and great questions. This is Gary. So we ended at 894 new advisers in the year. Why we talk about the engaged adviser number and that list of 393, is that -- that's where economics really comes from. And so now while we have 7,900 advisers on our platform, you can understandably -- it's understandable that there is a good number of the 894 new advisers that come on, they will turn on and off, right? Our hit ratio on that, if we convert 20% to 30% of those into engaged advisers, has a great economic outcome for AssetMark, and that's what we strive for. But you can understand that other 60% to 70% is going to turn off over time in a year or 2 or something that effect. And so that's what you're seeing at the bottom of that, which is why we certainly do report the number of total advisers as 7,900, but we focus on making sure we are growing and looking at the engaged advisers.
Patrick, it's Charles. I think I would add that when we think about the way we conduct the business today versus how we used to conduct it and how, frankly, many others conduct the businesses, used to be a product sale. So people would come to AssetMark to access a product or access a strategist or something. That's not a good outcome for us. That's why this engaged statistic really matters. We're looking for somebody who's adopting a business system. And so when somebody comes for a product, as you know, when you look at other platforms and you look at redemption rates from those that are reporting them on bigger platforms, the churn is in the high 20s percent range. So if you buy a product, you should expect that the product's going to come in and out of favor.
In our business, with an engaged adviser, we expect those advisers not to turn off or leave, we expect them to transfer to a different strategy. And that's why being a platform matters much, much more than being a product shop. It's just a really key concept. And so when you think about the bottom part of our -- the smallest product picker adviser that comes on board, whether they come on now, which we hope they don't or they came on 5 years ago, that's an adviser we don't mind losing because we can't serve that adviser really well. We're really trying to serve advisers that are committing to us so we can commit to them. It works out much better for everyone.
Got it. And then if I heard correctly, you mentioned that you expect capital expenditures to be around 7% of revenue in 2020. And I think you gave a lot of detail underlying that. Is that kind of a good run rate to think about going forward, so in 2021 and beyond? Or are you kind of looking at 2020 as being a period of elevated CapEx?
So we -- our percent in 2019 was about 5.6%. Thank you, John, 5.6%. And I would expect both 2020 and 2021, Patrick, to be in that 7% level. There is a lot in front of us. We have the resources to really make some really enormous strides, both in the technology facing our advisers and the technology in the back office that will help us scale better. I think long term, we think more of this 5% level. But in the next couple of years, it should be at 7%.
And Patrick, maybe a little clarity on the what part of that. So as you know, in businesses like these, you often have to -- not often, occasionally have to invest in larger systems that scale for the future. And those investments are 10- to 15-year life cycles or more. And we're just in that cycle now. We have had a set of core systems in the backpack part of our office, things that are not exposed to advisers. These are things that advisers will never know or care about. It doesn't do anything for them. But for us, in terms of scalability of our operations, in terms of security, safety and so on, these are things that have to change, and we're in that process now, and it's a 2-year process.
And we have no further questions at this time.
Great. Once again, we love this time, a chance to chat with you. Thank you very much for taking your time. We know it's a lot of effort. I'm always amazed. I read a lot of your research reports, and I'm starting to listen to a lot more of these calls just to see how other companies do them and boy, what a lot of work, those of you who write about these things do. So thank you for that work.
For other investors on the call, thank you for your trust in us. We will continue to do our best to deliver client value that returns shareholder value. We'll talk to you soon.
And this concludes today's conference call. You may now disconnect.