Morningstar's "Management Behind the Moat" conference

Rajiv Bhatia: Great. So good afternoon, everyone. My name is Rajiv Bhatia. I'm the analyst at Morningstar covering the financial technology space. We would like to welcome everybody to the 2022 Morningstar Behind the Moat Conference. We're pleased to have with us again SEI Investments' CEO, Ryan Hicke. Ryan has served as SEI's CEO since June of this year. Prior to that, he was the firm's chief information officer. Also joining us is CFO Dennis McGonigle. Just so everyone knows, we have about 45 minutes, and the format will be a fireside chat. I have a series of questions that I'd like to get through, but we'll leave some time for Q&A. So with that, let's just kind of jump right into the private bank segment.

Rajiv Bhatia: Historically, margin expansion has proved kind of elusive in this segment since your investment in the SEI wealth platform. You recently announced that Sanjay Sharma will assume leadership of the private bank segment. You mentioned that you are making efforts to kind of right-size expenses. Can you speak to how those efforts are progressing? And at what point do you think you'll be able to quantify those expense reductions?

Ryan Hicke: Sure. So I think they're progressing at kind of full speed pace. Sanjay has dove right in, Rajiv, and he's been out on the road seeing our clients both domestically and globally. I think his and his team's focus has really been on exactly what you said is, rightsizing the expenses to the opportunity. The way that we describe the expenses a lot in the banking segment is if you think about it in three buckets. There's a expense bucket around production, so running the system every day. We have over a million accounts up and running every day on SWP. You have an R&D bucket. So what are we investing in, in the future? Why do we think those things are going to pay off? What things are we actually doing to differentiate? Then an implementations bucket. As we actually sign new clients, we need to bring those clients on board.

Ryan Hicke: So Sanjay's focus has really been on that R&D bucket. We're looking at that corporately to say, "What investments are we making? Could we be a little bit more surgical in making sure that the near to midterm revenue and growth opportunities are more directly aligned with the investments we're making?" So I don't know if we have a full quantification yet, because I think it'll be a dynamic, ongoing process, but I think as people monitor our expense numbers and start to look at that unit, you will start to see those expenses coming down.

Rajiv Bhatia: Got it. That's helpful. So I guess one of the reasons why expenses are kind of elevated is you're running both Trust3000 and SWP. So it kind of seems like that the retirement of Trust3000 is a long ways away. Can you talk about how much of your book is Trust3000 versus SWP at this point?

Ryan Hicke: Sure. Dennis, you want to take that one?

Dennis McGonigle: Yeah, I can take that.

Dennis McGonigle: So the closer we get to the disclosure on that is, if you look at our Q or K, the revenue footnote that's in there, about in the second quarter, for example, about 65% of our revenues related to in banking to processing services were in our full BPO offering, and 35% of our revenues were in SAS. And the SAS revenue was a hundred percent Trust3000 related, whereas the 65% on BPO was predominantly SWP. So when you put it through the blender, it's probably roughly 50/50, or a little bit higher than 50% on the SWP side versus the Trust3000 side.

Dennis McGonigle: Also, don't forget that a hundred percent of the advisor business is processed on SWP as well. So when you look at the company as a whole, a substantial portion of our revenue is related to wealth management processing or occurring on SWP. That being said, the SAS clients are predominantly the larger firms. We know that US Bank is in process of implementing on SWP, and that implementation is underway. We know the whole saga of Wells Fargo, and I won't reiterate that, but they're another one of the SAS clients that's still processing on the SAS version of Trust3000. Then there's a handful of other clients, but I'd say one of the linchpin clients is US Bank to that, the movement around Trust3000.

Rajiv Bhatia: That's helpful. How would you characterize the sales environment for SWP right now? I guess, what roadblocks are you seeing in terms of getting deals signed and implemented, and both in terms of new deals and also getting upgrades from Trust3000 to SWP?

Ryan Hicke: Yeah. I don't know if there's specific roadblocks, Rajiv. I think the challenge is and what we've been working on the last four or five months, back to the R&D comment, is making sure that we're more focused and aligned around the segment opportunity. So we've been looking at the total addressable market. So when we say banks, when you start to peel that back a little bit, we feel really positive about our opportunity to have repeatable sales success in that mid to large regional community bank segment. The global jumbo banks, a lot of that is just a timing conversation, the length of those sales processes and conversions. Then in the UK, it's really been that private client investment manager segment.

Ryan Hicke: So I think Dennis and I are encouraged by what we're seeing, but we're not satisfied yet that we see the repeatability. When you see what we have in IMS, where you can look ahead at the pipeline, you see the total universe of available prospects, that's been a very consistent sales machine. That's where we need to get banking back, but we've really been focused on trying to do that with more clarity and discipline around a couple segments that are very large segments but that we know the value proposition resonates, and we can have more repeatable sales success there. So encouraging, but nowhere near satisfied.

Rajiv Bhatia: Got it. So thinking a little bit about R&D, last month you issued a press release about SEI introducing the SEI Data Cloud. I guess in simple English, can you explain what the offering is and maybe what the use case is?

Ryan Hicke: Oh, simple English?

Rajiv Bhatia: I think a lot of people hear words like APIs or Snowflake and kind of-

Ryan Hicke: I'll take a stab at it. If you think about it, you think about it is information delivery. So there's information that we have that we host today for our clients that we deliver to the, historically, we've been doing this for years, that we deliver to the clients in different forms, whether they be APIs, as you said, overnight files, extracts. Then they consume that information, and they may use that to feed other systems on their side. So at the highest level, if you think about information delivery. The SEI Data Cloud I would say is really modernizing the actual packaging and delivery of that information in a much simpler way.

Ryan Hicke: So part of that is a partnership with Snowflake, that in some cases, the clients can go pull that data down themselves, that the burden is no longer on SEI to harmonize and scrub that information. But there are ways that we can actually package that information and data and monetize that. That's what we're actually working through. In a couple of our actual clients, Rajiv, are Snowflake clients on the other side. They're using Snowflake as their data warehouse in a cloud. So that actually simplifies the system's integration and data delivery for us.

Ryan Hicke: I think one area where we have to prove this out that we are really intrigued is, if we sign a brand new client to SWP and that client has a lot of their data already in Snowflake and SEI has that capability, does that truncate part of the conversion process and allow us to speed up the time from contract to implementation? Because, as you may or may not know, a lot of the time consumed is really cleansing the data and mapping data in these large conversions.

Ryan Hicke: But I don't know if that was simple English, but if you think about it as a more modern way for SEI to deliver information to its customers and our clients to consume data that they're trying to use for business delivery.

Rajiv Bhatia: Yeah, that's helpful. I guess it can be offered both as SWP and as non-SWP clients, right?

Ryan Hicke: Yeah, IMF clients, advisor clients. Yeah, it's not market unit agnostic.

Rajiv Bhatia: Got it. That's helpful. Maybe we can touch base on your asset management distribution business. So if you look at AUM and the private banks, it's been I think pretty range bound. What challenges are you facing there?

Ryan Hicke: Growth. I think that that's a business that we need to really think through, what is the overall growth strategy? How does that fit in with our overall corporate strategy around how we're actually delivering services to intermediaries? It's been a solid unit for us, but again I go back to your sales question. It's a unit that has been very stable and delivered, but we need to see more repeatable and sustainable new sales growth and where is that going to come from?

Dennis McGonigle: The thing I'd add to that, if you went back five years or so, you could probably make the argument we had just in that sleeve of business, some concentration risk with a very large client that was the dominant producer of assets for us and the predominant owner of the assets that were invested with us. But over the past five years, the good news is that business has gotten diversified as that one or really two larger clients kind of moderated and in one case shrunk pretty significantly in terms of assets with us. So the business is healthier today in terms of diversification across a number of clients, which gives us more avenues for cashflow to occur. So we've de-risked a little bit that business from one or two clients being the dominant providers of assets.

Rajiv Bhatia: Got it. That's helpful. Just switching to the investment advisor segment, you recently hired Gabriel Garcia to lead the company's RIA custody business and strategy. Maybe just spend a few minutes talking about that. The RIA custody business, from my point of view, is largely a scale business. It seems like E-Trade tried to make some efforts there, but that kind of failed. So maybe, what is your strategy there? Then secondly, is there any hurdle to getting SEI as a custodian on a competitor platform such as Envestnet?

Ryan Hicke: Yeah. I'll break those into two. We're really excited about the RIA segment. So historically, the majority of our advisors have been broker-dealer affiliated. We have not had a large footprint in that pure independent RIA space. Again, one of the things we've been doing the past six months is really looking at the total addressable market, what our opportunity set is, not just at the unit level, but at the corporate level. We see the growth in the RIA space overall as an absolute continuing trend. We think we can compete really well in that space.

Ryan Hicke: I think we challenged some conventional thinking and said, "Let's go out and get a hire and bring some talent in from the outside that has a lot of experience in that space." I don't think we think of it as going head to head from a custody perspective. As you look across the spectrum of RIAs, especially the larger RIAs, we think the breadth of the services that we can provide across SEI have a lot of relevance to large RIAs. So we're not going to go into that space with the tamp or the same kind of solution and value proposition as we may have had with the smaller advisors. It's just a segment, Rajiv. We think we compete, we think we can win, but we thought we needed to go at it with a different approach and bring in some external talent.

Rajiv Bhatia: That's helpful. Maybe if you can just comment on your advisor recruiting efforts. So every quarter you kind of mentioned that you recruited a certain number of advisors. So curious what maybe sub-segments or channels are you seeing traction?

Ryan Hicke: Yeah, I think exactly the same as the first question. We're starting to see more traction now in the RIA space as we put more focus and attention in that area. Then in the traditional segment as we operate, we see continued traction. Dennis can weigh in here himself. We've been pretty bullish on the advisor business for the last 18 to 24 months based on things that were done in the previous few years here. So they're at a point right now where we really believe that that unit and that business can go out and sell and service and deliver today.

Rajiv Bhatia: Got it. So moving on to maybe share of wallet, how would you characterize your share of wallet? I know there's some advisors that use SEI but don't have a lot of assets. So how do you think about penetration? What's kind of your existing advisors?

Ryan Hicke: Yeah, I don't think our share of wallet is large across the entire advisory base. It's meaningful. I think we've always believed that the change in our approach from not leading with just an asset management, kind of a more closed architecture solution. Now that we have the SWP platform in place, we have more front end technology. We have a broader investment capability set that we offer. We think the existing assets that are not on SEI's platforms are a huge opportunity for us. I think that's an ongoing conversation. We've seen that position grow over the last couple of years, but it's a real opportunity for us to be able to penetrate more deeply into our existing advisors' books of business but not have to convert that into SEI asset management.

Rajiv Bhatia: Got it.

Dennis McGonigle: The opportunity embedded within the client base just in wallet share capture is substantial. It's, frankly, significantly bigger than the existing business that we have across the book. To your point, some of our clients are predominantly with us and use our asset manager programs and have 70% plus of their assets with us. A lot of our advisors are below 20% of their total book is with us. So the open platform, the firepower we're giving advisors in the front office to help them manage client portfolios and implement client portfolios through our model modeling process, as they see fit, is really helping us capture more wallet share of existing advisors over time.

Dennis McGonigle: But also we're starting to see a little bit more conversion activity with new advisors. So rather than we sign a new advisor and the first piece of business we get from them is a new client that they've signed, we are seeing a little bit of conversion activity where they're converting clients, existing clients, to us. That's always a challenge in the advisor business because of tax issues, because you're dealing with taxable investors. You're also dealing with advisors that generally don't want to spend a lot of time on administrative activities like conversions but rather want to just sell and grow their practice. Because of our capabilities, I think we're attracting advisors who want to convert their business to our platform versus just new accounts to our platform, which is a big change.

Rajiv Bhatia: As you capture more assets, does that change the margin profile at all? Should we assume that if this platform is only assets, those are coming at lower basis points and might have a different margin profile?

Dennis McGonigle: I think for a number of years, we've always said, and I've said specifically, that to me the long term opportunity in this business is we will have a much bigger business, and the opportunity to have much bigger business is there. And while margins might be a little bit lower because of the mix of business we are capturing, dollar profits will also be much higher. So it's a good trade-off from my perspective, at least, that if we had to give up a couple points on the margin but capture much higher dollar profits, that's a better business for us.

Ryan Hicke: Absolutely.

Rajiv Bhatia: Yeah, that makes sense. Maybe you can just talk about the competitive environment. Do you see the competitive environment either as intensifying or easing?

Ryan Hicke: It's intense. We've got a couple different kind of constituents there. Obviously you get the kind of Schwab TD. So if you're looking at the kind of larger custodian side, I don't think it's any secret around the growth of the RIA space, so that's a competitive space. There's a lot of M&A activity, Rajiv, as you know, in that area. There's a lot of private equity money flowing into and has flown into that area. So I think it's competitive. It's just different. There's still advisors that are looking to solve a single problem with a single piece of technology or a single investment solution. I do think, though, more and more are looking for business solutions and platforms that can be longterm partners and providers, which sets us up well. So is it any more or less competitive than it has been? Probably not, but we feel really well positioned.

Rajiv Bhatia: Got it. That's helpful context. Maybe switching to the institutional investor segment, you have a lot of customer, I guess, sub-segments there. Maybe give us an update on your mix. How much is, say, defined benefit versus endowment foundation versus defined contribution, and maybe what the growth profile of each of those sub-segments are like.

Dennis McGonigle: The defined benefit business is probably kind of in the mid-thirties percent range of total book. The next largest segment is a foundation and endowment segment, and then follow that would probably be the hospital segment here in the US. Then you have Taft-Hartley plans, and then DC's a smaller percentage of the overall book of business. That's mainly driven by the US. The UK mix is more weighted towards defined benefit plans, because they don't have the richness of market opportunity and nonprofit in the nonprofit space. The master trust space, which is more defined contribution oriented, is growing for us. And the acquisition we did last year is additive to our existing master trust. We did that because we think that's a bigger opportunity longer term as defined contribution continues to take hold.

Dennis McGonigle: So it's another business where if you went back seven years, let's say, we were highly concentrated into five benefit pension plans, and the success of the business in diversifying across market segments, dealing with the contraction in a defined benefit space, as well as the increased competitive set in a defined benefit space, has been a healthy change for our business going forward.

Rajiv Bhatia: Got it. So you mentioned defined benefit plans. They obviously face headwinds there. How much of your client losses on the defined benefit side is from maybe losing to a competitor versus a defined benefit plan shooting to kind of annuitize their plan with a life insurer? And then do higher interest rates, do you think they affect your business and that they make it more lucrative for a defined benefit plan to engage a pension risk transfer?

Dennis McGonigle: On the former, it's a mixed bag. So I wouldn't say it's 50/50, but between plan curtailments, plan shutdowns, M&A activity, particularly in the older industries that hold defined benefit pension plans, that's where the big chunk of our losses have come from. Then the occasional plan consolidation and a selection of a new provider has hurt us on occasion as well. Now, that element of it goes both ways, so we win business as well from some of the other incumbents.

Dennis McGonigle: On the second part of the question, certainly rising interest rates helped the liability picture. So that has the potential for plan statuses to improve in terms of their funding, but in the environment we're in, that's coupled with negative markets. So what interest rates may be helping with on the liability side, the markets are taking away on the asset side. So it's not really changing the overall funded status outlook as far as I've heard. If we had bullish markets and rising interest rates, then you might have a little bit more collapsing of funded status that could lead to some additional curtailments, or at least some additional plan shutdowns, but we haven't seen that really come into play yet.

Rajiv Bhatia: Got it. If you just talk about the competitive environment, I guess, particularly on the non-DB side, to what extent do you have to give pricing concessions to retain clients?

Dennis McGonigle: There, the answer is occasionally yes. Sometimes a pricing concession on core assets comes with the addition of new asset classes in the client relationships, so particularly in the alternative space. So our alternative book, as a component of the overall client portfolios, is growing, and that has helped us offset some of the pricing concessions. But there's no doubt that in kind of industry wide, if you're losing a dollar of assets that maybe you won in the market five, seven years ago, you've got to replace that with a $1.50 of new assets to offset that revenue stream, so there's definitely price compression. But in the newer markets outside of DB, there is more use of alternative strategies or alternative components, and that has helped us keep our pricing from contracting consistent with more traditional markets.

Rajiv Bhatia: Got it. So one area of growth is, I guess, the defined contribution space. Maybe give us an update there. Then is it fair to say that your defined contribution business comes in at a lower basis point versus the other segments?

Dennis McGonigle: I would say not necessarily. I think defined contribution, that's been a challenging part of the market for us. We're an investment only firm, so we can't package investments with recordkeeping and plan administration to go with the investment side, like a Fidelity or a TROW or a Vanguard. It's a market that we thought we were starting to see some shift towards plans breaking up those different functions within a defined contribution plan. We thought there was going to be more transparency as a result, but that trend really hasn't played out. So we're not seeing as much investment only opportunities in the market than we probably would've thought we would've seen three or four years ago. The record keeper firms still have a hold on the industry, plus corporations or sponsors don't change that much. It's a very, in some sense, sleepy industry from that perspective. They may swap down an investment component, but they're not changing the entire plan.

Rajiv Bhatia: That makes sense. Can you give us an update on the ECIO initiative or your enhanced chief investment officer offering? I guess if there's any metrics you can share, and maybe what traction you've seen there would be helpful.

Dennis McGonigle: Speak to that?

Ryan Hicke: Yeah, sure. I think it's another area where we have definitely made investments. We made an acquisition last year, the company Novus, so we're in kind of the process still of integrating that, but that's out in the market. That's part of our proposition out to both existing and new clients. So we don't have a lot of metrics in terms of number of clients, but it's been an opportunity for us to attack a different segment and some of these kind of larger pools with a little bit more of a flexible proposition, more of a technology led conversation as well, Rajiv, as opposed to just investment led. So I know Paul and the team are pretty excited about what they're seeing so far, especially with the addition of Novus.

Rajiv Bhatia: Got it. Switching to your investment manager segment, I think this has been one of your strongest segments and net new asset growth has been impressive here. Would you characterize your wins as more competitive wins or firms deciding to outsource, and what sub-segments or what client groups are kind of growing the fastest here?

Ryan Hicke: You're right. The unit has been extremely strong, one that I think we should be talking about more because of the overall opportunity and the growth in the alternative space as well. Also, we're doing well in the traditional space. I think when we look at the mix of wins in business, one of the main differences, obviously, between that business and the banking business, is a lot of times when a bank makes a decision around their kind of core investment processing system, that's kind of a binary decision, it's either us or somebody else.

Ryan Hicke: In the IMS space, we're seeing a lot of growth from existing clients that are launching new funds but choosing SEI. So we may be one of a few providers, so the firm may have made the decision to outsource, but they have a couple of our competitors also running a few of their funds. But we're seeing a lot more wins as those firms are launching new funds, SEI is the choice to be the provider for the new funds. Then I think in the overall macro landscape, more firms are just, that we're insourcing, are definitely looking to outsource. So we are really well positioned in that business. On the sub-segment side, I don't know what you would say, Dennis. [inaudible 00:29:02] the growth of CITs, real estate's, main areas.

Dennis McGonigle: Because of our ability to process any type of product wrapper that sits around an investment management capability, that gives us entry points in firms that maybe other competitors don't have. So if a competitor is in it, as Ryan said, if a firm is already outsourced to someone and maybe they've outsourced partnership accounting to someone, we don't go in necessarily and try to compete to win that partnership accounting work and have it moved to us, although we do do that, but that's not necessarily in every case. But if that firm is looking to launch CITs or looking to launch some other new product within the partnership space, we'll compete to win that, and we'll work with the client to say, "Just try us. Do that fund or those two or three funds with us, let us prove ourselves," and then we'll go back and compete for it all. So we have a very solid approach at establishing relationships first and then expanding those relationships from there, versus a big bang approach of, we got to have it all on day one.

Dennis McGonigle: So every quarter, our sales results are a combination of some new clients that are new to SEI and then expansion of existing clients. Over the past few years, that's probably weighed a little bit more towards cross sell growth than new client growth, and that's, to us, a healthy place to be. Because we have very good clients who are not only good clients of ours, but they are competitors in their own markets and very successful competitors in their own markets, so their growth begets our growth as well.

Rajiv Bhatia: Sounds like a land and expand type of strategy.

Dennis McGonigle: Exactly. But we have more ways than land, I guess, is one key competitive advantage of ours.

Rajiv Bhatia: Makes sense. Maybe just touch on the competition there. So you kind of compete against a wide variety of firms. So you have custody banks, you have investment banks, and then you have kind of independent providers like SS&C and Citco. I guess, curious how you view the competition here.

Dennis McGonigle: I'll start in, Ryan.

Dennis McGonigle: I would like to think that we at SEI have a very healthy respect for our competition, and we do. They're all good companies. They're all run by really smart, talented people, and we don't take any competitor lightly. In some cases, we work with our competitors. We're clients of theirs. They're clients of ours, back to your question about investment. We have shared clients with investment, as an example. So we're in a world where one day you're competing against a firm and the next day you're walking in together to work cooperatively to help a client be successful. So we have a healthy approach to competitors. Now, we all probably have different segments of the market that our strengths shine more so than others. The large custody banks, their advantage is custody and their ability to price services with the leverage of custody.

Dennis McGonigle: There are buyers out there where that's what they're after, low price, they want the cheapest NAV they can get every day, and that's not our game. That's not the types of clients we're attracted to or who are attracted to us. Our clients are more value buyers that are interested in technology. They're interested in data and information. They're interested in working with a firm that's going to help their firm run better so they can focus on growing and knowing they have a partner they can expand with and grow with. We're also a firm that has the proven ability to reinvest and stay up to date and up to speed, if not ahead of, where our clients are going. There are firms that value that in their decision process. So competition, we respect everybody, but you compete with your strengths, you compete where you have advantages, and we certainly win our fair share of those opportunities.

Ryan Hicke: I agree with everything there. I think, Rajiv, it's almost a jump off of your earlier question, in this market and segment, it's not a zero sum game either. There's just more and more firms looking to outsource. There's tons of firms launching new funds, the growth of alternatives. I don't know what inning of the game we're in, but it's not the seventh, eighth or ninth. So I think our continued focus on investing, servicing our existing clients, and competing in the market, even if the firms you mentioned, who as Dennis said, we have a world of respect for, they'll win their share, but the overall pie is going to continue to grow, and we would expect SEI to be at the top of the table anytime somebody's looking to outsource.

Dennis McGonigle: Well, one thing about our culture is we do not like to lose, which is different than really liking to win. Everybody likes to win, but we don't like to lose. And when we lose, we want to understand why.

Ryan Hicke: That's a great point.

Dennis McGonigle: What was the decision process? What did we miss, and how do we get better the next time, because we don't like to lose.

Rajiv Bhatia: That's helpful. Can you help us understand what your sensitivity is to equity markets? First, how much of, I guess, the investment manager segment revenue is directly tied to AUA? Then secondly, I guess, how much is alternatives that might be a long, short or have strategies that don't correlate to the market?

Dennis McGonigle: That business is probably closer to 60/40, 60 alternatives, 40 traditional, maybe 55/45. Then on the traditional side, it's just kind of globally diversified in the sense it's not all equities. A lot of fixed income in there. So it's not a business that really correlates well to how the market's performing. There is some correlation.

Dennis McGonigle: The other thing about that business, which I remind people, is even on a traditional side, because of break point pricing, when the markets can track, you generally lose, you're losing the lower priced assets anyway. You're not losing the average price. You're losing the lower price point. Similarly, when the market's bullish, the assets you're gaining through market appreciation are at a lower price point because of break point pricing. So that also has a dampening effect on the downside and upside, frankly, which is why new sales activity, new client acquisition, growth of clients, is really the driver of revenue growth.

Rajiv Bhatia: But is it unsafe to say that the vast majority of the revenues are going to be tied to assets, or is there some subscription or-

Dennis McGonigle: No, it's all predominantly asset based, correct, other than the SMA business, which is account based, so number of accounts processed.

Rajiv Bhatia: Got it. Maybe switching to LSV, I think the outlook for value stocks has improved, but LSV continues to bleed assets. So on the last earnings call, you mentioned that the outlook is brightening, so what needs to happen for LSV to start seeing positive net flows again?

Dennis McGonigle: Well, I'll talk now. Ryan was just out there so he can speak to their mood, I guess, better than I can at this point. What led to those comments was they were seeing more RFP activity. They're predominantly institutional. So when you see more RFP activity, they know there's more changes in the air, more asset switching is going to occur in the institutional space. The consultants are driving more searches. So that just led them to be more optimistic that, while they had had some client losses or client rebalancing, because of value rebounding, sometimes it's the good news, bad news. The markets are better for value, but now the client's rebalance once their value gets out of a line with their allocation, but they're just seeing more market activity, which they feel, LSV I know is very confident that if they get the opportunity to compete, they have a great story. They're highly disciplined. They haven't traded in the brand to chase the market, and they'll win their share of new business.

Ryan Hicke: I think that's right, Dennis. I was out there last Monday, Richie with the LSV team. I think they are really encouraged by the increase in opportunities they're seeing. They have a lot of pitches coming up in the fourth quarter. They've been happy with the client feedback. They feel they're very well positioned, obviously, with the value orientation that they've had for years. As Dennis said, they're extremely disciplined. So I think the overall sentiment there was overly kind of positive that the amount of activity and opportunities they're seeing if they win their shares, they have historically, they'll start to trending in the right direction.

Rajiv Bhatia: Got it. So just kind of some firm wide questions, I guess. So SEI might actually be the only company in my coverage universe that only reports gap financial results. So have you ever given any thought to providing non-gap financial measures?

Dennis McGonigle: [inaudible 00:40:00] give it some thought. I'll harken back to Al West, that we're covered by very smart analysts, Rajiv, as you're proof of that, and that we believe we provide, if anybody wants to calculate a non-gap number, the information's there to do so. We don't really don't need to get into that kind of game and the disclosure required around that and what's in and what's out and why is it in and why is it out? When you look at our financials, they're pretty straightforward. Our income statement's not that hard to understand. The most important document is probably the cashflow statement. So you can look at operating cashflow, see what's in there, and people can draw their own conclusions on non-gap. This is personally, I just feel that it's a game. It's a game. It's not in our best interest to play that game. I don't sometimes understand why we allow it to be played as much as it has been played.

Rajiv Bhatia: That's an interesting perspective. I think a lot of investors are focused on risk right now. So how should investors think about concentration risk from customers, suppliers, and distributors?

Rajiv Bhatia: Earlier, Dennis, you talked about maybe some of the concentration decreasing on the asset management distribution side. Obviously you had the HSBC contract earlier this year and then kind of Retirement Planners of America rolling off. Then your investment manager segment also has some dependency on SS&C's Advent Geneva product. So how should investors think about concentration risk, not just from a revenue perspective, but also a supplier distributor perspective?

Dennis McGonigle: Sure. I guess there's two distinctions there. We don't have any specific financial concentration risk as would require disclosure, and we're not at that point with any single client or with any single vendor. But then there is the notion of operational risk, or delivery risk, which we do have vendors that we critically rely on for technology delivery. They're a key component of our overall software stack, and there it's just a question of how well are we doing managing our ERM process across our enterprise. We're very attuned to the risks. We're very much on top of our third party issues. As you know, we're highly regulated. So it's something that we have to be attentive to, because the regulators are going to make sure we're attentive to it if we're not.

Dennis McGonigle: So yes, is there potential vendor risk? There's always risk, but I would argue every single company operating today has that element to their business model and their operating model. But in terms of specific concentration risk, we really don't have that. And we're very good at, since we've been in this outsourcing game for a long time, going back 50 years, we're very seasoned at it and very skilled at it. But there's probably not a firm you cover that wouldn't have some element of vendor risk or third party risk.

Rajiv Bhatia: Right. I guess you guys have a lot of excess cash on the balance sheet, over $5 per share. How much of that cash would you say is necessary for operations, and then how do you think about the use of your excess cash? And then now that valuations have come down, how do you think about M&A opportunities?

Dennis McGonigle: So I'll cover the first part and let Ryan speak to the M&A side of things. Clearly we have more cash obviously than we need to operate. We're also a very positive cash generator, so that's really not an issue relative to our cash position or balance sheet strength. We continue to use it today in the ways we've been using it, reinvest in the business on M&A, and return to shareholders through dividend and buyback. But I'll let Ryan cover the thoughts on M&A going forward.

Ryan Hicke: Yeah. I think, Rajiv, we're really focused on growth. As Dennis said, we have a really enviable balance sheet. We've got a really strong management team. We've got a lot of talented individuals across SEI. I think what gets lost on people is maybe people don't really understand even the market opportunity we have. Even in the segments that we operate and serve today, there's still a lot of runway for us. So I think we are really focused on what we could do with M&A in our cash that would allow us to either accelerate an existing growth strategy or put SEI in a position to increase the number of engines that we have that drive growth. That's something that we are focused on right now. There are some things that we can be doing, as we have done in 2021, to really just accelerate our ability to exploit opportunities in certain segments and deliver better service to our clients. I think that's something you'll see us continue to do.

Rajiv Bhatia: Got it. So SEI is largely like an active asset manager model, but you've boosted your passive asset management capabilities. How do you think about the dynamic between active and passive, and how much of your AUM would you say is passive right now?

Dennis McGonigle: Well, passive is a small percentage of our overall assets under management. But the way we've always looked at passive, and we've had passive products for a long time, is that they're just another tool and a toolkit to use appropriately to meet clients' investment objectives. So in the institutional space, passive does have a place in client portfolios with certain clients, given their funded status or what they're trying to achieve with their invested capital. We've used passive in those client portfolios for quite some time.

Dennis McGonigle: On the advisor side, similarly, just like we have ETF models, models that you can implement through ETFs, it's to give advisors, again, more tools and more firepower to service clients as they see fit. And to the extent they want to use a passive product to stand in for an active element in a portfolio, so be it. That's their prerogative as fiduciaries. So we embrace passive as a tool versus a either/or kind of strategy, you're either passive or you're not. That's not our approach.

Rajiv Bhatia: Got it. Maybe you can just touch on your capital returns philosophy. How much of share approaches the function of SEI's share price?

Dennis McGonigle: Yeah, we really don't have a model that drives share repurchase based on share price or based on valuation. It's more I'd say an opportunistic model. So when the market's giving you opportunity, take advantage of it. If the stock's on the run on the positive side, I would say I have a tendency to get out of the way and let accumulators accumulate. So it's not a formulaic process. We try to be relatively consistent year in, year out. Some years were a little bit heavier, some years, a little bit lighter. Market circumstances certainly have an influence, the most extreme, probably '08, '09, when the stock and every stock was being just killed.

Dennis McGonigle: The one side was, "Geez, what a great opportunity to really take out a lot of stock." But the other side was, "Where is this market and economy going, and how important is it for us to strengthen our balance sheet," which is what we chose to do, rather than use capital at that time. We could serve capital. So it's not formulaic, but it's really an attempt to be consistent, and consistent buyers of our stock over time and over time get a net take down of share count to increase our clients' or our shareholders' ownership position.

Rajiv Bhatia: Got it. That's really helpful. Yeah, I think we're coming up against the clock. I definitely appreciate you guys taking the time to join our conference today.

Dennis McGonigle: All right.

Ryan Hicke: Thank you for having us, Rajiv.

Rajiv Bhatia: All right. Thank you so much.

Dennis McGonigle: Take care.