Avantax reaps higher profit, advisors receive bigger payouts

The long-term evolution of a midsize wealth manager is turning off certain departing financial advisors but pushing up pay for the several thousands of them choosing to stay with the firm.

Avantax, the tax-focused wealth management arm of Dallas-based Blucora, has navigated as much change as any firm after significant acquisitions in each of the past two years, an activist shareholder challenge defeated by its parent in April and, in recent years, the exits of many low-producing advisors as well as some of its practices generating higher levels of revenue. The wealth manager’s revenue and key metrics are rising, although it sustained an outflow of client assets in the third quarter and the loss of more than double the production of a year ago.

In a call with analysts after disclosing its third-quarter earnings on Nov. 4, CEO Chris Walters said the firm is “seeing real traction” among advisors with efforts to enhance its products and technology but has “work to do” in that regard, along with the ongoing processes of integrating the acquisitions and a shift reducing payouts for direct-to-fund (DTF) assets.

“It was certainly the right thing for the business long-term and consistent with the approach that we want to take, which is to have more advisory relationships where it makes sense for the end client,” Walters said, according to a transcript by Motley Fool. “Ultimately, that shift led some advisors who were more focused on DTF business to be less inclined or less happy with us in the near-term. And so there's a variety of things that have happened, but we think that the actions that we're taking will ultimately turn that tide over the course of the next year.”

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Mixed recruiting news: Avantax’s headcount continued its downward slide, with the fourth straight quarter of a net sequential reduction. The number slipped by 11% year-over-year, or 446 registered representatives, to 3,529 in the third quarter. Over 70% of the reps leaving the firm in the quarter, though, had annual production below $50,000. The firm’s newly recruited client assets among incoming advisors more than doubled from the year-ago period to $192.7 million by the end of the quarter. Despite the falling headcount, revenue driven by financial professionals surged by 23% due to higher equity values and a more productive base of advisors. Every other kind of revenue for the wealth manager increased as well. At the same time, the trailing 12-month production of departing advisors soared 127% to $12.2 million. The firm anticipates the outflows of client assets from those leaving as a result of the different policy on DTF assets held off Avantax’s platforms will end sometime next year.

Client assets: Despite an in-flow of $621 million in advisory assets under management, the DTF policy resulted in an outflow of $433 million from total client assets compared to the second quarter, Chief Financial Officer Marc Mehlman noted in his prepared remarks. Client assets still rose 14% year-over-year to $86.6 billion in the quarter. At $39.8 billion in AUM, the share of client assets in advisory accounts reached a record at 46% and surged by 23% from the year-ago period. In addition, the firm’s employee-based RIA, a firm it acquired in 2020 for an upfront purchase price of $100 million and rebranded as Avantax Planning Partners, tacked on its second M&A deal with a longtime rep’s practice to add a total $1.6 billion in acquired assets. Avantax’s RIA has an estimated pipeline of $6 billion more in AUM, according to the firm.

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Payouts: In his own prepared comments, Walters noted that Avantax is launching a new advisor compensation system in the first half of next year. Later, Mehlman provided a few details on the way the firm’s compensation grid has boosted advisors’ pay this year. Higher payouts due to the rising equity values, the exits of low producers and the combination of the firm’s system with that of its 2019 acquisition, 1st Global, trimmed Avantax’s margin by about 100 basis points from the year-ago period to 12% of the wealth manager’s revenue, Mehlman said. “Over the last nine months, we have also seen an increase in our payout ratio to financial professionals, which when combined with the investments we are making into the business, has resulted in near-term margin compression,” Mehlman said. “We have also invested in the business in the areas of product management, software engineering, support and sales and marketing and believe we have a more appropriate level of staffing to support our growth initiatives going forward, which we expect to result in margin expansion in the future.” Representatives for the firm declined a request for further comment on the new pay plan.

Bottom line: Avantax earned operating net income of $19.6 million on revenue of $169.1 million for the quarter. Revenue grew by 24% year-over-year while profit was up 12%. After the fourth quarter, the company projects it will earn income between $81 million and $83 million on revenue ranging from $645 million to $650 million. Last year, Blucora generated income of $72.2 million on revenue of $546.2 million.