Avantax’s Q1 earnings fall due to equity volatility

Volatility slashes Avantax’s earnings, despite its successful recruiting

May 5, 2022 6:16 PM

After board appointments averted Blucora’s second activist investor campaign in two years, the midsize wealth manager it owns is making “strong organic progress,” its CEO says.

Blucora’s Avantax, a wealth manager focused on CPAs and other tax professionals, reeled in a record $1 billion in net new advisory assets in the first quarter, according to the Dallas-based firm’s May 4 earnings statement and CEO Christopher Walters’ call with analysts. While macroeconomic woes due to Russia’s invasion of Ukraine and inflation pushed down Avantax’s earnings for the quarter, Blucora successfully convinced activist Engine Capital to withdraw its slate of candidates in March after the firm hired a former investment banker and a cybersecurity expert to its board. Meanwhile, Avantax also had a successful recruiting quarter, despite the continuing losses to its overall headcount of advisors.

“Volatile, declining equity markets during the period temporarily offset the benefits of strong execution and, as you would expect, negatively impacted our financial results versus prior expectations. These headwinds, however, pale in comparison to the long-term benefits of the strong organic progress we are making, which coupled with favorable interest rate outlook, has the potential to double the run-rate profits of our wealth management business by the end of this year,” Walters said in his prepared remarks, according to a transcript by Seeking Alpha.

“In summary, our strategy is working,” he said. “And we are performing well against it, including meeting or exceeding most of our critical underlying operating metrics across the businesses, which gives us confidence that we are progressing more rapidly than planned in executing our sustainable growth strategy.”

To see the key takeaways for financial advisors and wealth management professionals from the company’s first-quarter results, scroll down our slideshow. For coverage of Avantax’s earnings in the prior period, click here.

Advisor headcount

The number of financial advisors tumbled 8% year over year to 3,409 in the first quarter, with 33 of them employee advisors through the firm’s in-house RIA, Avantax Planning Partners. The net drop stemmed from the attrition of low-producing advisors, according to the firm. In keeping with Avantax’s trend in recent years of a smaller base of more productive registered representatives, quarterly advisory and commission revenue per financial professional jumped 18% to $45,400.

Recruiting

Avantax’s outreach to prospective advisors and tax professionals offset part of the losses to its headcount. No advisors generating at least $500,000 in annual revenue left the firm in the period, and the firm recruited 85 new reps with more than $500 million in combined client assets, according to Walters. In addition, the RIA completed two acquisitions spanning more than $100 million in client assets among practices previously associated with Avantax’s main independent channel. Its deal pipeline extends to more than $6 billion in assets, Walters said. “We have started to meaningfully stem the attrition of our financial professionals,” he said. “And we beat our net financial professional target for the quarter.”

Client assets

Total client assets ticked up by 2% from the year-ago period to $86.14 billion in the first quarter, with brokerage holdings falling by 6% to $45.22 billion and advisory accounts jumping by 11% to $40.92 billion. With the gains, advisory assets as a percentage of the total soared by 410 basis points to 47.5%. That hike came from net client inflows of $3.4 billion, in part as a result of the company’s efforts to convert off-platform assets held directly by fund companies to its fee-based advisory accounts, according to the firm.

Expenses

The company doesn’t break out the specific expenses of its wealth manager, though its quarterly SEC filing states that costs grew by $14.9 million in the first quarter based on higher advisory fees and commissions paid to advisors amounting to $10.8 million for the elevated level of business and $4.1 million of other personnel costs. “Increased payout ratios correlate with increased asset levels, the timing of certain quarterly billings relative to the market impacts from Russia’s invasion of Ukraine, and the exit of lower producing financial professionals who were concentrated at lower payout levels,” the filing states. “Increased personnel costs reflect our strategic investments to drive growth through enhanced service capabilities that support our financial and tax professionals.”

The bottom line

Higher costs, spending on services for advisors and equity volatility slashed Avantax’s earnings, according to the firm’s SEC filing, which notes that rising travel and conference costs amid reduced COVID-19 precautions will be a drain on returns in future quarters. On the other hand, the hiking of interest rates by the Fed will push up the firm’s earnings this year.

For the first quarter, the company earned income of $16.4 million on revenue of $166.4 million for a margin of 9.9%. Revenue climbed 8%, while profit slipped by 15% and the margin fell by 270 basis points. For the year, Blucora expects Avantax to generate operating income between $85 million and $100 million and revenue ranging from $690 million to $720 million, Chief Financial Officer Marc Mehlman said in his prepared remarks.

Remark

The slimmer profits in the first quarter came as a result of the equity volatility and “the impact of headcount investments made in the second half of 2021 in technology, growth consultants and support to enhance the experience of our financial professionals and their customers,” Mehlman said, according to the Seeking Alpha transcript.

“We believe these long-term investments were critical to our delivery of net positive flows this quarter, strong advisory asset expansion and the new store sales we continue to generate,” he said. “The incremental headcount investments in the first quarter of this year were meaningfully lower than what we saw in 2021 as we are comfortable with the current positioning of the business.”