td ameritrade holding corporation third quarter fiscal...

TD Ameritrade Holding Corporation

Third Quarter Fiscal 2015 Earnings Conference Call

July 21, 2015

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TD Ameritrade Holding Corporation – Third Quarter Fiscal 2015 Earnings Conference Call, July 21, 2015

C O R P O R A T E P A R T I C I P A N T S

Fred Tomczyk, President and Chief Executive Officer Bill Gerber, Executive Vice President and Chief Financial Officer C O N F E R E N C E C A L L P A R T I C I P A N T S Rich Repetto, Sandler O’Neill Mike Carrier, Bank of America Merrill Lynch Devin Ryan, JMP Securities Dan Fannon, Jefferies & Co. Conor Fitzgerald, Goldman Sachs Ken Hill, Barclays Christian Bolu, Credit Suisse Chris Allen, Evercore Partners Chris Harris, Wells Fargo Bill Katz, Citi Joel Jeffrey, KBW Chris Shutler, William Blair Bulent Ozcan, RBC Capital Markets Mac Sykes, Gabelli



P R E S E N T A T I O N Operator: Good day, everyone, and welcome to the TD Ameritrade Holding Corporation’s June Quarter Earnings Results Conference Call. This call is being recorded. With us today from the Company is President and Chief Executive Officer, Fred Tomczyk, and Chief Financial Officer, Bill Gerber. At this time, I would like to turn the call over Bill Murray, Managing Director, Investor Relations. Please go ahead, sir. Bill Murray: Thank you, Operator. Good morning, everyone, and welcome to our June quarter earnings call. If you haven’t done so already, you can find our press release and June quarter earnings presentation on amtd.com. The earnings presentation includes our Safe Harbor statement and reconciliation of certain non-GAAP financial measures to the most comparable GAAP financial measures. A description of risk factors are included in our most recent financial reports, Forms 10-Q and 10-K. As usual, this call is intended for investors and analysts and may not be reproduced in the media, in whole or in part, without prior consent of TD Ameritrade. As is our normal custom, please limit your questions to two, so that we can cover as many of your questions as possible. With that, let me turn the call over to Fred. Fred Tomczyk: Thank you, Bill, and good morning and welcome, everyone. Well, we’re now three quarters through fiscal 2015, and with client trading and asset gathering results on pace for another strong year, there are many things to feel good about. Let’s start with the financial highlights on Slide 3. We entered the quarter with average client trades per day of 434,000, an activity rate of 6.7%. Net new client assets were $11.7 billion, a 7% annualized growth rate. Client assets ended the quarter at a record $702 billion, up 8% from last year. Average fee-based investment balances were also a record $161 billion, up 16% year-over-year. Interest sensitive assets were a record $102 billion, up 6% year-over-year, and we earned net revenues of $794 million, up 4% from last year. This resulted in our delivering $0.36 in diluted earnings per share for the quarter, which is up 6%. Let’s take a closer look at how the various elements of our growth strategy contributed to these results, starting with asset gathering on Slide 4. Net new client assets for the quarter came in at $11.7 billion, a 7% annualized growth rate. These results are down 13% from the same quarter a year ago, which was our best June quarter ever. If you look at the four-year trend, these results are on par for what we would expect at this time of the year. In fact, year to date, we have gathered $47 billion, a 10% annualized growth rate, which puts us on pace for another strong year of asset gathering.



We continue to see positive growth in both the retail and institutional channels. Net new client assets are up 17% year-over-year in each channel. On the retail side, net new client assets are up year-over-year for the eighth consecutive quarter. Marketing efforts targeting new funded accounts for mass affluent prospects are yielding good results and providing a lift to overall asset gathering efforts. Sales from investment consultants within our branches are up over last year, as are referrals from our service centers. Client service scores remain high and attrition remains low, as we continue to test new ways to engage and strengthen the investor experience and their connection to TD Ameritrade. Within the institutional channel, we saw an increase both in the number of new breakaway brokers added to our platform and in the average size of the advisor. We remain committed to building awareness in this space, creating leads and filling our sales pipeline. We don’t see any signs of the breakaway broker trend slowing down. These advisors are attracted to our open access technology model. We make it easy for them to move assets because they don’t have to worry about changing vendors and we have the flexibility to add new technology as trends evolve. This quarter, we held our sixth annual TD Ameritrade Institutional Tech Summit, which brought advisor technology firms together to help us continue to improve our solutions and deepen working relationships. Let’s move on to trading on Slide 5. We finished the June quarter with an average of 434,000 trades per day, an activity rate of 6.7%, which is good for this time of year. These are strong results given the lack of intraday volatility the equity markets experienced throughout the quarter. In fact, we have not seen a quarter with fewer days of intraday volatility eclipsing 1% since the December quarter of 2006. Net clients continued to increase their equity exposure over the quarter, with net buying activity of $7 billion during the quarter. Margin loans are also at record levels and client cash as a percentage of total client assets remains near historic lows. In light of this low volatility in the equity markets, clients are increasingly turning to trading derivatives, which were a record 44% of trades per day in the quarter and up 15% year-over-year. Mobile trades made up a record 17% of trades per day, as client engagement with the platform continues to increase. Daily mobile log-ins were up 20% from last year and nearly one in four of our clients has engaged with at least one of our mobile apps. This is a number we expect to continue growing as mobile devices increasingly become the engagement tool of choice for consumers and investors. As we look ahead to the fourth quarter, July month-to-date trades are at 443,000. Now, let’s turn to investment product fees on Slide 6. Investment product sales remain strong, driving record average balances for the quarter. At $161 billion, balances are up 16% over last year, and revenue is up 8%. Growth and interest in these products remain strong. Balances in both Amerivest and AdvisorDirect are up 22% year-over-year. Now, let’s turn to Slide 7. As we complete our third fiscal quarter and look back at the last nine months, we remain upbeat about our growth and our prospects for another strong year across all of our key metrics. Trading is sound, with year-to-date client trades per day at 456,000, up 5% year-over-year. Our asset gathering efforts are at $47 billion year to date, a 10% annualized growth rate, and investors remain interested in fee-based guidance and advice solutions, with Amerivest and AdvisorDirect balances up 22% year-over-year. Moving forward, we’ll continue to refine and enhance these offerings and the client experience. We remain focused on playing our game and executing our strategy despite an uncertain environment. Whether it be increasing market volatility, the first rate rise in interest rates in a decade or the ever-evolving geopolitical environment, we remain well positioned to take advantage of changes in the market.



In closing, as we prepare to close on another fiscal year and then start planning for the next, we consider all of the ways in which we can be better. We’ll continue on our course, enhancing our leadership and training, being a premiere asset gatherer, increasing fee-based revenue, and all the while continuing to make prudent investments in the future. Our strategy continues to work in the market and we have good momentum. We will remain focused on closing out fiscal 2015 well, while positioning ourselves for another strong year in 2016. With that, I’ll turn the call over to Bill. Bill Gerber: Thanks, Fred, and good morning, everyone. The key metrics of our business remain strong. Trading levels were relatively high in a seasonally slower quarter, reflecting the resiliency of derivatives traders and the adoption of mobile. Year to date, trades per day are at 456,000, or a 7.1% activity rate. Net new assets are at $47 billion year to date, as both retail and institutional continue to have a great year. These are translating into solid revenue growth despite the low interest rate environment. Expenses have risen a bit year to date, but we are comfortable with our investments and our plans to manage overall expense growth. With that, let’s begin with the financial overview on Slide 8. We’ll start with the June-to-June comparisons on the left side of the page. On Line 1, transaction-based revenue is $328 million, up $11 million or 3%. Trades per day were up 32,000, driving $25 million incremental revenue, but lower commission rates drove $14 million less revenue. Our commission rate per trade decreased $0.53 year-over-year, but were essentially flat sequentially, as futures remained at 10% of trades and more trades continued to be executed by active traders at lower price points. On Line 2, asset-based revenue is up $20 million or 5%, due to balance growth. These results are net of a $4 million revenue deferral in the current quarter related to an Amerivest performance-based fee rebate offer that we currently have in the market. On Line 4, overall revenue was up $31 million or 4% year-over-year. On Line 5, operating expenses, excluding advertising, came in at $415 million for the quarter, which is net of various offsetting items. This was in the middle of our $410 million to $420 million expected range we mentioned last quarter. We expect our operating expenses, excluding advertising, to stay in this range for at least the next quarter. On Line 6, advertising expenses came in at $54 million, up $6 million or 13% from the prior year. This increase is due to timing. We still expect to end the year near the midpoint of our guidance. On Line 10, we sold our remaining ownership interest in a joint venture, resulting in a gain of $7 million. This all resulted in net income of $197 million, up 4%, and earnings per share of $0.36. On Lines 17 and 18, EBITDA was $377 million or 47% of revenue. Moving to the year-to-date comparisons on the right side of the page, on Line 4, revenue was up $88 million or 4%, primarily the result of asset-based revenue. On Line 7, total operating expenses were up $69 million or 5%, primarily related to the headcount, incentive pay, and trading volumes and mix.



The result was earnings per share up $0.05 or 5%. Through the first nine months of fiscal 2015, we have earned $1.09 per share. EBITDA came in at $1.1 billion or 46% of net revenues. Our EPS guidance for this fiscal year was $1.45 to $1.70. With one quarter to go, we are on pace to be near the low end of that range. Despite this, keep in mind that this is still on track to be one of the best years in our history. Now, let’s turn to spread-based revenue on Slide 9. Spread-based revenue grew year-over-year and sequentially due to margin lending and IDA fees. On a year-over-year basis, this quarter we finished at $365 million in revenue, up 4% from last year. Additionally, balances averaged $95 billion in the quarter, up $4 billion or 4% from last year. Of note, margin lending revenue is up $7 million, due to $1.5 billion of higher average balances, partially offset by a lower rate due to the mix of clients. Margin balances for the quarter averaged a record $12.5 billion, up 14% from last year. Balances ended the month of June at $12.8 billion, which was also a record. Sequentially, revenue was up $11 million or 3%, primarily due to margin lending balances and one more interest day. Now, let’s turn to the IDA on the next slide. On a year-over-year basis, average balances are up $3 billion or 3%, driving revenue up $7 million. Sequentially, revenue is up $4 million, driven by one more interest day and a slight increase in net yield. Client participation in the markets continues to mask the impact of our net new asset growth on our IDA balances, as balances have remained flat for three consecutive quarters. Once again, our clients were net buyers in the quarter by approximately $7 billion. Year to date, our clients have been net buyers of $35 billion, up 10%. Finally, our reinvestment strategy is unchanged. Now, let’s turn to interest rate sensitive assets on Slide 11. Interest rate sensitive asset balances are up $5 billion or 6% from last year. We finished the quarter with a record $102 billion in interest rate sensitive assets, slightly up from the prior quarter. Cash as a percentage of total client assets ended at 13.7% for the quarter, as our clients remained invested in the markets. Overall consolidated duration was essentially flat at 2.2 years as of June 30. Our sensitivity model is unchanged. As we normally do, we will update our sensitivity model at our October earnings call. Now, let’s turn to the final slide. We are now into the last quarter of the year and remain focused on controllable items, with the goal of finishing the year strongly. Organic growth has been a remarkable success story for us over the last seven years and we’re optimistic that we will continue that momentum. Despite relatively low intraday volatility, we delivered strong trading levels this quarter due to the resiliency of derivative traders and the growth in our mobile trading platform. As always, we remain disciplined on managing expenses while continuing to invest for growth. We continue to return shareholder capital, as we paid out the quarterly dividend and repurchased over 100,000 shares during the quarter. We will continue to actively discuss capital return strategies with our Board to ensure we are enhancing shareholder value. Finally, planning for next fiscal year is in full swing and we will update you on those plans during our call in October. With that, I’ll turn the call back over to the Operator for Q&A.



Operator: Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Rich Repetto with Sandler O’Neill. Rich Repetto: Yes, good morning, Fred, good morning, Bill. Fred Tomczyk: Good morning, Rich. Rich Repetto: I guess the first question is just cleaning up some of the accounting for some line items. You mentioned, I guess, in the prepared remarks something about a deferral and I didn’t quite get that, and also could you talk about other expenses, they jumped, I think, or came down $7 million quarter-over-quarter, and you also mentioned this gain on investment briefly, an early gain, if you could expand on those things? Bill Gerber: Okay. Well, the first thing is Amerivest—Geoff (ph) is scribbling down these in order so I can keep them all on track, but the first thing is Amerivest. So, we have a fee rebate offer to our clients that we started last September, that if the client, if the funds that they invest in are down for two consecutive quarters, we would rebate their fees for those quarters. In the June quarter, the last three days of June quarter, with all the issues with Greece, saw the S&P drop 3% in the last three days of June and it caused 12 of the 15 funds to have negative performance in the June quarter. So, the accounting on that is we had to defer that, because if any of the 12—or if all 12 are negative in the September quarter, we would rebate those fees back to the client. So, right now, if the quarter in September is positive, then we will take in that $4 million of revenue that we’ve deferred into the quarter. So, that’s the math of what happened right there. We had a couple of things that happened in other expense. That’s part of the offsetting items that netted zero. The biggest one was collecting an insurance policy, collecting on an insurance policy that we had due to the reserve fund, so it’s several years ago, but we received notice that we are going to collect on that in the quarter. So, that was part of the things that were offsetting, that hit on that particular line item. Then, lastly, the sale, we had a joint venture NYSE Amex, we had purchased that about five years ago and had been selling pieces of that over the last few years and we sold our last piece in this quarter and realized a gain of $7 million on that last bit. So, those are the three items, I think I got them, Rich. Rich Repetto: Got it, got it, very helpful, and I guess my follow-up question would be a little bit broader or bigger picture for, I guess, Fred, but I’m just trying to judge what’s going on with the client base, because you’ve got a lot of different things. You know, you talked about the average commission coming down because of more active traders, we’ve got very low client cash balances and record margins, and you’ve also got



record derivative and mobile DARTS. So, are we seeing a shift more, at least at the moment, into like a bigger percentage of trades, obviously, done by active traders, and I guess the question is, going forward, with interest rates up, how does that impact client cash, do you see that percentage coming back over time? Fred Tomczyk: Well, first off, I think we are in an environment where I think the retail investor is pretty fully invested, and we’re having pretty low volatility in a narrow-range market, so the market really is staying inside a very tight range. So, when you have that kind of market, it’s really going to be your active traders trading certain symbols or names and using derivatives. They’re going to make up a higher and higher percentage of your trade volume. To be quite honest, I mean, we were surprised at how strong trading was given how low volatility was during the quarter, and you can see so far in July trading’s been pretty strong with some resolution with respect to the Greece items, what’s happening with Greece, and then it’s earnings season, so we’ve seen trading pick up a bit. I think, as you go forward, I mean, whenever you believe rates are going to rise, I continue to believe that when interest rates rise it’s going to cause volatility in the market, and if we see volatility, I think you’ll see the more long-term investor come in and you’ll see a greater percentage drive back to equity and a broader swath of our customer base start to trade more. So, I do think this is dynamic and it will change and it very much depends on the market environment, but right now you’ve got so much stimulus in the system—we’ve had the third longest bull market since the creation of the S&P 500, and so you’ve just got this situation where there’s nowhere for money to go, no volatility, long bull market, people are just fully invested and waiting to see what happens next. Rich Repetto: Okay, thanks, that’s helpful, Fred. We’re hoping for 100 basis points in September. Bill Gerber: Me too. Fred Tomczyk: We’re not planning on that, but we hope you’re right. Operator: Thank you. The next question comes from Mike Carrier with Bank of America Merrill Lynch. Mike Carrier: Thanks, guys. Bill, maybe just on the expenses and the margin outlook, I just wanted to get a sense—I think you mentioned that, I guess, the operating expenses, you expect to be in this range, but when I’m looking at the year-to-date margin, I think you’re around 40, and I think the guidance is that 41 to 43, so is it just when we think about the next quarter, just the decline in the advertising to kind of make that up? Then, just when we think about going into next year—I know you guys will give us an update, but you guys have been pretty good, even in this low rate environment, generating some operating leverage year-over-year, even with some of the investment that you guys are doing, so I just wanted to get an update on



that, because it looks like year-over-year, you know, the margins are flattish, maybe down a bit. I just want to get the outlook on new investment spend, if needed, versus that potential to still drive some operating leverage over time. Bill Gerber: Yes, okay. So, yes, advertising should be flattish to a little bit down in the fourth quarter and that will help in the margins. Certainly, from our guidance, the real big delta from our guidance today is the assumed increase in interest rates that we had from the Global Insights, the GI guide that we have followed in the past and helped make our guidance every year for the last several years, and that did not materialize, obviously. So, that’s the biggest piece. I think that going forward we should see margins expand a little bit, even in a flattish rate environment. We are making investments, as you noted, but those are within the range of what we have anticipated, and so as we’re looking at ’16, there’s not going to be a huge surge in investment spending. We have been spending fairly consistently during all the years of the economic downturn here, so we’ll continue that trend, but there’s not going to be a surge even if interest rates do go up and revenues starting going in. So, I think we’re—I’d say it’s a little bit like kind of more the same, but we should see overall margin rates going up a little bit going into next year. Mike Carrier: Okay, that’s helpful. Then, just to follow-up on the capital priorities, I think last quarter you raised (inaudible) debt; some of that, you guys mentioned in terms of the usage on the clearing side. Then, I just wanted to get update—you know, when you look at kind of the level of the buybacks, the dividend, and then just the cash balance that’s growing, just where are your thoughts on maybe like a steady pace of buybacks versus a higher dividend, and then, obviously, over time, you guys have been active on the acquisition front, but I just wanted to get an update on the priorities given the rising balance. Bill Gerber: Yes. So, starting with liquidity, the $750 million that we raised is still there for the exact purpose that we talked about. It is really there for operational purposes. So, that money is still at the holding company, that has not changed, that’s where it’s going to stay, unless it’s needed in the operating entity. So, that’s the first thing. The second piece, we do this every quarter when we set up the buyback plan, we set up an algorithm, and the algorithm is, you know, if prices dropped we would be buying a lot more, if prices rose we’d be buying less, and so this is probably the second or third quarter in a row, at least second quarter in a row, that when we set the algorithm that the stock immediately had a nice run, and so we started buying fewer shares based upon that plan. Once that plan’s in place, we don’t change it. We will look at it again at the end of this week, quite honestly, and set up another plan for the September quarter. So, that’s what we’re looking at there on the buyback. On the M&A front, there’s really nothing new to report right now. Yes, if there was an acquisition out there that made sense for us, we certainly would take a look at it, but we, right now, don’t have any plans on that. Mike Carrier: Okay. Thanks a lot. Bill Gerber:



Okay, Mike. Operator: Thank you. The next question comes from Devin Ryan with JMP Securities. Devin Ryan: Okay, thanks. Good morning. Bill Gerber: Good morning. Devin Ryan: A quick question on the decline in interest earning asset yield in the quarter—obviously, had a little bit of recovery rate throughout the quarter and it looked like you saw some of the benefit on the IDA yield. So, understanding there’s a lag there, should we expect some upward pressure on yields from here on the interest earning asset side, to the extent rates remain at the current levels? Bill Gerber: God, I hope so. Yes, I think it should be—what we’re seeing now is that as the ladder is rolling off—with rates where they are right now and where the ladder is rolling off with the IDA, we are investing at rates that are higher than the items that are maturing. So, yes, if rates don’t move, it’s going to be a kind of slow roll here, but rates will gradually increase, yes. Devin Ryan: Okay, got it. Then, just to follow up on the Department of Labor fiduciary role, you know, the comment period is coming to an end, and now that we’ve had more time to process the rules as currently written, do you guys have any updated thoughts around potential impacts to the business, has anything changed around your view there? Fred Tomczyk: Nothing really new to report on that. I mean, as we’ve said all along, I think the intent of the Department of Labor proposal and the best interest standard, we’re supportive of it. We do think there’s some drafting issues in terms of things that would preclude retail investors and investment firms from being able to do which we think are not in the interest of the retail investor. We’ll make our comments known. I think we’ll then go to a hearing period, and then we’ll see. I think it was promising during the quarter that there were some comments that they’re open to some suggestions in terms of drafting. We remain hopeful that we’ll wind up in the right place here, but it’s just going to take some time. Devin Ryan: Got it, yes, great. Thanks very much. Operator: Thank you. The next question comes from Dan Fannon with Jefferies.



Dan Fannon: Thanks. In terms of the net new assets in the quarter, if you could give the split of retail versus institutional; and then, thinking about the breakaway broker channel, which I think you commented is really showing no signs of slowdown, I’m just curious around the makeup of the advisors today that you’re attracting versus maybe a year ago, if that’s changed at all. Fred Tomczyk: Yes, the breakdown in the net new assets in the quarter was about 70/30 institutional retail, so it’s pretty consistent. So, there’s really been not much of a change here, on that side. Secondly, with respect to the advisors, we are seeing bigger advisors and more sophisticated advisors. The reality is our whole initiative around strategy desk and education to advisors, in terms of using options and some other investing strategies, has worked well for us, our trading levels are up nicely year-over-year in the institutional channel, but we’re picking up, as a result, bigger and more sophisticated advisors, which was part of the inherent strategy we had. Dan Fannon: Great, and then just on the activity levels with regards to futures, I think you’ve commented before about the pickup in futures as a result of lower energy prices, so as you think about, you know, if kind of oil stays or energy prices stay around where they are today, that you think futures, in terms of the adoption rates and the percentage of contributions, should stay at these levels going forward, or is this more temporary? Fred Tomczyk: I think they may stay at this level. I mean, the reality is—I think if you looked at our futures mix, yes, there’s a big percentage in equities, or in oil, but there’s also a big percentage in equity index futures, and a lot of people want to trade off ours, for a variety of reasons. So, I think it’s actually more sustainable than I would have thought maybe six months ago. I think it’s relatively sustainable. Dan Fannon: Great. Thank you. Operator: Thank you. The next question comes from Conor Fitzgerald with Goldman Sachs. Conor Fitzgerald: Yes, thanks for taking my questions. Just following up on capital return, given your buyback’s been a little less than you expected with the stock price, would you consider doing a special dividend, or look for other ways to accelerate capital return? Fred Tomczyk: We’ll look at all of our options, we’ve got all open, whether it’s buybacks, it’s increasing the recurring dividends, special dividends, and we’ll be thinking that through between now and the end of the year, and



discussing that with our Board. We wouldn’t rule it out at this point, but we’re not in a position to say one way or the other which way we’re going to go until we talk to our Board. Conor Fitzgerald: Thanks, and then have you seen any changes in kind of the advisor recruiting environment, just given the DOL proposal, or has that kind of made its way through yet? Fred Tomczyk: I don’t think it’s really made its way through at this point, from our perspective. There’s lots of lobbying going on and posturing, but in terms of what people are doing at this point, given that we’re not even through the comment period, I think it hasn’t really impacted what’s actually happening in the market at this point. Conor Fitzgerald: All right, thanks. Operator: Thank you. The next question comes from Ken Hill with Barclays. Ken Hill: Hey, good morning, guys. Bill Gerber: Hi, Ken. Ken Hill: You guys have talked in the past a lot about the Marketing Department driving some of the account adds there. I’m just wondering, in the environment right now, what type of demographics or clients you guys are targeting maybe more aggressively now than you have in the past and how that’s shifted over time. Fred Tomczyk: Well, it’s still, I would say, the people that are sort of, I don’t know, maybe say 30 to 55 would be the broad target market there, that’s where most of the money is, people who want to accumulate wealth. What we have shifted is we’re—we used to be very focused just on new accounts and now we’re much more focused on bigger accounts. So, we’ve definitely shifted some of our marketing efforts to get to a bigger average size account, and that clearly has worked for us and helped with our net new assets on the retail side. Ken Hill: Okay, and to follow up just on the fee-based investment metrics, it looked like the annualized yield for you guys dropped a little bit. I don’t know if some of the one-time items there might have impacted that for the quarter, but is that a trend we should continue to expect, or does it ever get to a level where they’re stabilized and kind of continues there, or just maybe even moves higher over time?



Bill Gerber: It is 100% related to the Amerivest rebate offer that I mentioned in my remarks, so that should rebound. Ken Hill: Okay. Thanks. Bill Gerber: You bet. Operator: Thank you. The next question comes from Christian Bolu with Credit Suisse. Christian Bolu: Good morning, Fred. Good morning, Bill. Bill Gerber: Hi, Christian. Christian Bolu: Just on the technology front, Fred, you outlined a number of tech initiatives at the start of the year, including the use of social media, data analytics, so can you just give us an update on these, how they’re playing out, if they’re showing any signs of early payoffs, be it increased new account generation or better penetration of existing clients? Fred Tomczyk: Well, I mean, there’s just really social media, there’s big data analytics and mobility. Mobile, we continue to see evidence that when people wind up adopting mobile and a desk top, the trades per day go up roughly three-quarters of a trade per month. We continue to see that when people get mobile, on top of a desk top platform, that they do in fact are more engaged and do trade more, so we see nice uptick to that, and so most of our efforts right now are making sure our mobile offerings are robust and we continue to cross-sell it into the customer base to increase the penetration. Our current sort of trends, given current course of speed, we would expect mobile log-ins to pass desk top log-ins within three to five years, so it continues to grow quite nicely. With respect to social media, we continue to see good pickup mainly in the trading side, where people are starting to share trades, trade ideas. We put out something this past quarter, what’s called Social Alerts, and interesting, where people basically tweeting about a stock, news in the market, and basically—it was on Twitter, but it was about Twitter, because they released the results accidentally before the stock exchange released it, so we saw a big lift in trading activity around the Twitter stock during that period, where our clients had access to timely information that wasn’t as well put into the market. So, again, there, we continue see it as a useful way to bring trade ideas and increased trading to clients, and so we’re seeing, we think, good results there. When it gets to data and analytics, that’s a much bigger, much longer term initiative, and all part of our personalization initiative. We’ve had some early successes, but I think we need to get more of those.



Anybody that’s been through this recognizes that getting your data right is the first step, and it’s a big one, and it takes a while. It’s not low-hanging fruit when you’ve got to get all your data into the right structures and database formats for ease of use, but we continue to be quite bullish on it. We continue to make investments in that, investments in technology resiliency and security, just as a matter of course in our business initiatives. Christian Bolu: Great, that’s helpful, and then my follow-up is just on robo-advisory. Just given some of the success of some of the competitive offerings out there, some of the lower cost competitive offerings out there, I’m just curious if you’re considering any enhancement or changes to pricing in your offering to maybe help boost growth there. Fred Tomczyk: Well, we have Amerivest today, which would call robo-light but not a robo, and we believe in the best combination of digital and the human experience. We are investing to improve the investing experience, taking some things from the robo-advisors in terms of the ease of use, the leveraging of technology and newer technologies, and so we think there’s lots of opportunity to improve the onboarding experience and the post-sale experience leveraging things that we’ve learned from the robo-advisors and, in fact, enhancing on those. When it comes to price, we continue to believe our prices are competitive in the market. We’re having no problem selling the product. Our gross sales in Amerivest are up over 20% year-over-year and our average balances are up over 20%. So, from our perspective, we’re not planning any changes to price at this point. Christian Bolu: Great. Thank you. Operator: Thank you. The next question comes from Chris Allen with Evercore. Chris Allen: Good morning, guys. Bill Gerber: Hi, Chris. Chris Allen: This is a—it’s a little bit of nitpicky question. Just looking at your—your funded account growth is up 5% year-over-year and net new assets are up 6.7% year-over-year, which best-in-class relative to eTrade and Schwab, but just the color on targeting larger accounts, account size, I’m trying to reconcile the two numbers. I would have expected asset growth to remain at a fairly healthy spread relative to the count growth. Fred Tomczyk:



Well, I think the way you’re looking at it, you then should be looking at client assets as opposed to net new assets, because net new assets is really a function of attrition of the existing customer base, and all new money, whether it be new clients or money from existing clients, and so it’s hard to correlate net new assets to growth in funded accounts. But, if you’re seeing your funded accounts grow at 5% and your client assets grow at 8%, I think you’ve got a decent delta. Now, you have to pay attention to what’s happening in the market environment, but the market’s been relatively flat here. Chris Allen: Got it, thanks for that, and just one quick question on the extension strategy for the IDA balances. What would be the trigger in terms of changing that, getting more aggressive on that? Is it the two- to three-year spread, if you could just remind us on that, in terms of where absolute Fed Fund balances would be, and how you think about that moving forward? Fred Tomczyk: I’m not sure where we are, as we run a pretty sophisticated asset liability management program, and we’ve been pretty much very clear to strategically just stick to our hedge profile, which is the amount we keep in floating versus on the ladder, which I believe is about 40% in floating balances and 60% on the ladder, and the ladder, we’re pretty strict in keeping in terms of a certain duration and maturity profile, and we don’t anticipate changing that, particularly going into a rising rate environment, which I don’t think any of us knows when that’s going to happen or how it will happen, and the pace, and so I think in the long term—we’ve always run the firm for three to five years from now, so just sticking to our profile and our duration targets, we don’t see changing that. Chris Allen: Got it. Thanks, guys. Operator: Thank you. The next question comes from Chris Harris with Wells Fargo. Chris Harris: Thanks, guy. First question on commission per trade, you highlighted in the comments there that it went down a little and it sounds like it’s a mix issue, but wondering if you guys are seeing any change in the competitive landscape for active trader. I know Schwab is out in the market right now with, I believe, a 500 free trade offering, so any color there would be great. Fred Tomczyk: Yes, that—first off, I don’t think we’re seeing anything abnormal. I think you referenced the one thing, which we wouldn’t see as a negotiation around commission rate as much as it’s much more—what we’re continuing to see is an increasing use of promotions in free trades and gifts and cash balance things to get new accounts, but other than that, I don’t—and that’s not new, from what we’ve seen in the market, that’s just a continuation of a pretty aggressive trend for people to acquire active trading accounts. Chris Harris: Okay. My one quick follow-up would be on the sort of earnings impact on higher rates. Is that guidance net of what you guys might decide to spend incrementally, assuming we get higher rates, or is that excluding any potential change in spending habits you might have if rates go higher?



Fred Tomczyk: No, the disclosures you’re seeing there are basically what we set last October when we gave you guidance. We’ll update those in October. But, basically, those are basically assuming there is no sharing or no investing. We really don’t know what’s going to happen when the market changes and we’ll respond accordingly. Our experience is that our clients are not that sensitive to the cash rate. That’s not to say that we wouldn’t make some further investments if revenue growth started to improve quite a bit, but we haven’t made any of those decisions at this point. Chris Harris: Okay, makes sense. Thank you. Operator: Thank you. The next question comes from Bill Katz with Citi. Bill Katz: Okay, thanks very much for taking my questions. Just following up on that last question, if you do look at your assumptions relative to some of your peers, it looks like you’re the only ones that are assuming that the full 100% of the first 100 basis points drops to the bottom line. Notwithstanding the fact that you made that guidance a year ago, roughly, as you look about the competitive landscape today, is—you mentioned it may be less sensitive, but is there anything that you can look back in history to say that you have a little more comfort that your client balances may be less sensitive to higher rates than prior cycles perhaps, or just versus what some of your peers are doing? Fred Tomczyk: Just to clarify first, it’s not an assumption, I think you should recognize that it’s a disclosure, because we don’t really know what’s going to happen in a rising rate environment, what various competitors are going to do. So, that’s the first point. So, we’re really not making an assumption that we’re not sharing or anything, or we are. We’ll deal with that as we go into the environment. Second, we do have historical data that does validate that basically, particularly on the retail side, our clients are just not as sensitive to interest rates on cash yield. That’s not to say they’re not sensitive to interest rates on margin loans or commission rates, but they’re less sensitive on cash rates, and that’s been—we’ve looked at it a number of times and continue to see that. We also make the assumption inherently in our planning, separate from the disclosure, that for the first 50 to 75 basis points, we do believe that most money market fund complexes will restore their margins, because they haven’t been making money here now for seven years, but then once you get beyond, I’ll say 75 to 100 basis points, then you will start to see more substitution risk. But, we have segmented our client base down quite a bit and unless you’re—on the retail side, unless you’re a larger client, basically, your cash allocation, it has to be into the IDA. We’ve segmented all the customer base down based on profitability and sensitivity, so we feel pretty comfortable with we’ve got and we’ve got lots of flexibility. We don’t have one price point; we have lots of price points in the IDA. Bill Katz: Just my follow-up—thanks for taking my questions this morning—is on retail, payment for order, it hasn’t really been a topic of discussion of late, where are you in terms of the resiliency of that revenue stream,



and I think I’ve been seeing some of your competitors starting to actually reduce the usage of that so I’m curious how you’re thinking about that revenue line these days? Fred Tomczyk: On the revenue line, I mean, it is what it is and we really don’t see it changing much. If you look at our order-routing revenue per trade, it’s pretty much right on our 13-quarter average. When we look at our best execution statistics, we’re pretty comfortable with them. So, from our point of view, it’s just business as usual at this point. Bill Katz: Okay. Thank you very much. Operator: Thank you. The next question comes from Joel Jeffrey with KBW. Joel Jeffrey: Hey, good morning, guys. Bill Gerber: Hey, Joel. Joel Jeffrey: Just a quick question on commissions. I mean, as we get into an environment where rates go up and pre-tax margins for you and your competitors all improve significantly, do you think you could see increased commissions in terms of what people are willing to charge to bring trades in, could we see the commission levels go down? Fred Tomczyk: Anything’s possible here. In this world today, I don’t think you rule anything out. We continue to believe that commission price wars are a zero-sum gain for the most part. We saw that the last time there was a change. We also believe that it’s about the whole value of package you bring. So, we bring a lot of tools, education, trade ideas and content to traders, and I think, when you talk to people that are more active in the market, that’s worth a lot of money to them, so it’s not just about price. I’m not saying price is unimportant, but I think different competitors may take different courses of action. But, we feel pretty good about the overall package we have and the increased value-added tools and information content and support we provide. Joel Jeffrey: Okay, and I apologize if I missed this earlier, but what percentage of DARTS came from options this quarter? Bill Gerber: Thirty-three—34, I’m sorry, 34%.



Joel Jeffrey: Great. Thanks for taking my questions. Bill Gerber: Okay, Joel. Operator: Thank you. The next question comes from Chris Shutler with William Blair. Chris Shutler: Thanks, good morning. Two quick questions on Amerivest. The first one is just the 22% increase that you saw in Amerivest and AdvisorDirect, can you just give us some sense of the breakout there, at least which was stronger? Fred Tomczyk: Well, given that they’re both up—each one is up 22% individually, so they’re both up. Chris Shutler: Okay, gotcha. Okay, thanks, Fred, and then just one more, Fred. I think you’ve made some comments at a recent advisor event about some enhancements that you’re making to Amerivest and maybe just talk about what exactly you’re working on and how the product’s going to look relative to some of kind of the newer automated advice companies out there, and then when do you expect to have something new to offer in the market? Thanks. Fred Tomczyk: Yes, I think this is mainly—what we’re seeing, when we look at what the robos have done—I mean, you always look at new competitors and say is there something you can learn on it. We still believe that using the combination of a person with a digital channel, which I think Vanguard is using and doing pretty well, is the right combination, and so we believe that’s the right model for the broadest part of the market, for people that have money. Second, there are things you learn in terms of how you use technology and the types of technology you use, both in terms of making it simple, making it intuitive and obvious to get through, and opening an account, but then also after you’ve opened an account, access to information, performance reporting, the way we deliver content to you, and suggestions, and all that kind of stuff, I mean, the reality is we could to a lot better in terms of how we leverage technologies and the types of technologies you could use. There’s nothing stopping you today from, for example, introducing or delivering a quarterly statement that could be a YouTube video with charts in it, you know, and I think we just need to—or interacting with clients using chat or other forms of communication than the telephone. So, I think there’s a lot you can do with the technologies available to today and we have not leveraged that as much as we would like to. It’s a bit of learning for us from looking at what the robos have done. When will have something out? We’re looking at all that, to put out some time in the March quarter of fiscal 2016. Chris Shutler:



All right, thanks a lot. Fred Tomczyk: Hopefully, we get it out for the retirement season. Chris Shutler: Yes. Operator: Thank you. The next question comes from Bulent Ozcan with RBC. Bulent Ozcan: Good morning. A quick question on your organic growth for net new assets, those seem to be coming down. If I look back to 2009 versus where we are today, and you’ve grown your asset base, so the denominator has increased, but looking forward, what kind of growth rates, organic growth rates are you assuming within your model? That would be my first question. Fred Tomczyk: Okay. Well, first, when I look back at our organic growth rate over the last seven years, it’s been 10 to 12%, so I’m not sure it’s coming down. It came down this quarter, but it’s not unusual for it to come down this quarter. This is tax payment season, and so it’s typically the hardest quarter of the year. In fact, just having positive net new assets in the month of April is a positive, and it’s just because a lot of people are making tax payments, and that’s a seasonal thing. If you look at it year-to-date, we’re still at 10%, which we’re quite happy with, and if we can do seven years at double-digit, we’d be very happy. Having said that, we’ve always said in the long run you should expect that number to come down. We can’t keep up 10% plus forever. The bigger you get the harder it gets and the numbers just get bigger and bigger and bigger. We’ve always said we would guide you to a 7 to 9% organic growth rate is probably a more reasonable assumption in the long term. Bulent Ozcan: Then, my second question would be on the RIA institutional channel. So, if you think about that, would you have an indication or (inaudible) tell us how many of your RIAs are using multiple custodians and what your wallet share is at this point and how that has changed over, I guess, the last maybe three to four years? Fred Tomczyk: I don’t have all those numbers available right now, but I would say, going back on the numbers, we would be increasing our wallet share, we’d be getting bigger advisors and more sophisticated advisors. Bulent Ozcan: Okay, I appreciate it. Thank you very much. Operator:



Thank you. Once again, please press star and then one if you would like to ask a question. We do have a question from Mac Sykes with Gabelli. Mac Sykes: Good morning. Fred Tomczyk: Hey, Mac. Bill Gerber: Hi, Mac. Mac Sykes: So, one of your competitors has seen its multiple grow pretty dramatically, I think a function perhaps of the company’s outlook of having global cross-border opportunities. When you think about sort of the long-term competitive positioning of TD Ameritrade, how important is it to have more of a global platform? Fred Tomczyk: You know, it’s interesting. I mean, we don’t think it’s as much about having a platform that allows you to trade in other markets, when we look at the evidence here. It depends on what part of the market you’re in. I’m not sure which competitor you’re talking about, but if it’s the one that has a big multi-asset class, multi-jurisdictional platform, we look at them as they compete with us for the active traders, a much different firm than us, has a much bigger footprint in what we could call quasi, you know, small part of the prime brokerage market and hedge funds, which we really don’t compete in, and if you want to compete in the prime brokerage hedge fund market, I do believe that’s an important part of your offering, but for the retail client and the traditional RIA, we don’t think it’s that big of a deal. They use different products. They’re really not into some of those products. We do think there’s an appetite in other parts of the world for access to the US market, and so we do think there are some opportunities there, they’re harder to get at and we’re currently thinking about that, but we see a much more foreigners want to trade on the US market than vice versa, but we’re talking mainly about the retail investor. If I was in the prime brokerage space, I’d have a different view. Mac Sykes: Great, and thank you. Best wishes for September’s potential rate hike. Fred Tomczyk: Okay, well, thanks, Mac. Bill Gerber: We’re hopeful. Fred Tomczyk:



We’re all hopeful. Okay, with that, I think we’re done for this morning. Thanks for your time and attention this morning, and we’ll see you all again in October. Operator: Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

td ameritrade holding corporation third quarter fiscal...

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