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TD Ameritrade (NYSE:AMTD)

F4Q08 Earnings Call

October 23, 2008 8:30 pm ET

Executives

Bill Murray - Managing Director, Investor Relations, Communications and Public Affairs

Joseph H. Moglia - Chairman of the Board

Fredric J. Tomczyk - President, Chief Executive Officer, Director

William J. Gerber - Chief Financial Officer, Senior Vice President

Analysts

Prashant Bhatia - Citigroup Global Markets

Richard Repetto - Sandler O'Neill & Partners

Howard Chen - Credit Suisse

William Tanona - Goldman Sachs

Roger Freeman - Barclays Capital

Michael Vinciquerra - BMO Capital Markets

Michael Carrier - UBS

Patrick O'Shaughnessy - Raymond James

Michael Goldberg - Desjardins Securities

Brian Bedell - Merrill Lynch

Operator

Good day, everyone, and welcome to the TD Ameritrade Holding Corporation fourth quarter and fiscal year-end 2008 earnings results conference call. Today’s conference is being recorded. With us today from the company is Chairman of the Board, Joe Moglia; and President and Chief Financial Officer, Fred Tomczyk; and Chief Financial Officer, Bill Gerber. At this time, I would like to turn the conference over to Mr. Bill Murray, Managing Director of Investor Relations, Communications, and Public Affairs. Please go ahead, sir.

Bill Murray

Thank you. Good morning, everyone and welcome to the TD Ameritrade fiscal year ’08 and September quarter earnings call. We have released our earnings earlier this morning. Hopefully you have had a chance to look at it. A copy of our press release in today’s presentation is on our website, if you need to go grab it.

Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the federal securities laws. These statements involve risks, uncertainties, and assumptions that may cause actual results to differ materially from those anticipated. You are advised to review the risk factors contained in our most recent annual and quarterly report Forms 10-K and 10-Q for a description of risks, uncertainties and assumptions related to the forward-looking statements.

Management will be discussing some non-GAAP financial measures, such as EBITDA and liquid assets. You can find a reconciliation of these financial measures to the most comparable GAAP financial measures in the slide presentation.

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. This morning we will be covering fiscal year ’08 results and fiscal year ’09 guidance. Our Chairman, Joe Moglia, will review fiscal year ’08 and Bill Gerber, our CFO, will comment on the September quarter results. Then we will focus on fiscal year ’09 -- Fred Tomczyk, our CEO, will frame our guidance and approach to ’09 and Bill Gerber will comment on the detailed assumptions supporting the outlook statement.

At this time, I would like to turn the call over to Joe.

Joseph H. Moglia

Thanks very much, Bill. Good morning, everybody. My name is Joe Moglia. I can’t tell you how proud I am of our sixth record year. Earnings were compounded at 33%. We’ve told you that every decision that we made in 2006 and 2007 was geared so we’d be able to deliver in 2008. I believe we have delivered on that promise.

There are three reasons for why we had a record 2008 -- first, the active trader has been engaged the entire year. Secondly, we are finding that we have legitimate traction in the asset gathering space, and thirdly, we’ve managed our balance sheet in a way where it’s been a benefit to our shareholders. We had record earnings at $1.33. That’s up 25% of where we were a year ago, when the vast majority of financial services are significantly down, and this includes a one-time charge to keep our clients whole when the reserve fund broke the dollar.

We’ve got record net revenues at $2.5 billion -- 59% of those revenues were driven by our assets. We’ve got record pretax income of $1.3 billion and we’ve got 50% pretax margins. We’ve got record net income of $804 million and record EBITDA of $1.4 billion, and our ROE came in at 31% for the year.

When you take a look at the operating metrics for ’08, we had trades per day that were also a record of 312,000 and by the way, so far October to date, our number is 433,000. Our average spread-based balances were also a record at $25.5 billion. Our average fee-based balances were also a record at over $70 billion. Client assets came in at $279 million and our cash and money market funds also at a record of $52 billion. Net new assets -- guess what? Also a record, $23 billion, and that almost doubled the number that we had for 2007, which by the way was also a record year.

Now with regard to just some general corporate matters, I want to focus specifically on the reserve fund. When they broke the buck, and even at that time the government said they wouldn’t help them out, TD Ameritrade was there. We’ve said again and again that we will always do what we believe is the right thing for our clients and our shareholders and this was just the right thing to do.

With regard to the overall transition, the transition from me to Fred has been seamless and that’s taken place while we are going through the greatest debacle the financial industry has seen since the Great Depression. We’ve made some incredible risk reward decisions. We’ve protected our shareholders. We’ve stepped up for our clients. We are number one in the transaction business. We’ve gained real traction as asset gatherers and we had a record ’08 because we made the right choices in ’06 and ’07.

And while it’s a tough environment today, we are also part of the most resilient economy in the world. The federal reserve, the Treasury of the United States, and the FDIC are working hard to minimize any systemic risk that has plagued the marketplace. Now, while there will still be tough markets ahead, great firms distinguish themselves in those times, and I firmly believe that TD Ameritrade is positioned to come out much stronger when the markets and economy returns to stability.

I am proud to entrust our firm to Fred and our great management team. It has been an honor for me and I thank all of you who have supported us over the years. With that, let me turn it over to Bill.

William J. Gerber

Thanks, Joe. As you all know, we are experiencing unprecedented market conditions and the American consumer continues to exhibit signs of considerable stress. However, despite those things, TD Ameritrade has again delivered strong financial results. A record year and a strong fourth quarter are quite a feat for any company these days, especially if you are in the financial services industry.

In the September quarter, we earned nearly $650 million of revenue, a 13% increase over the same period last year, and our EPS was $0.29. However, it was $0.32 if you exclude the $36 million one-time charge for the reserve fund issue. This amount is comprised of $27 million for our client commitments plus $9 million from the effect on our corporate funds. This $0.32 is down a penny from last year, primarily due to investments for growth and other one-time costs, which I will explain in a couple of minutes.

As we have said many times, we have to run our business in good times and in bad. The prudent, strategic decisions that we have made and will continue to make regarding the growth of our company has served our shareholders quite well.

Now before we get into the details of the quarter, let me spend a minute looking at our continued NNA traction, net new action traction, on slide 8. The investments we have made in our business over the course of the last 18 months continue to pay off, as is demonstrated by our growth in generating assets. In the September quarter, we generated $2.8 billion of net new assets, flat year over year. However, you need to analyze net new assets a bit deeper to understand what is truly going on.

As you may recall, we closed on the Fiserv integration earlier in the quarter. The legacy TD Ameritrade in the green bar ex Fiserv generated $5.7 billion in net new assets for the quarter, up 104% versus $2.8 billion from last year. During our Fiserv integration planning, we were aware of certain accounts which had planned on leaving. The $2.9 billion in the silver bar at the bottom of the graph represents such planned attrition. The net of the green and silver bars is the $2.8 billion for the quarter.

Over the entire year, firm-wide NNA totaled $23 billion. This is up 84% versus the $12 billion brought in last year. We are obviously very pleased with these results, which show the traction we are gaining through our asset gathering strategy.

Now let’s discuss the September quarter details on slide nine. As you can see on line seven, our net revenue was $649 million, up 13%, or $74 million from the same quarter last year. These results were driven equally by changes in transaction-based and asset-based revenue.

On line one, our transaction-based revenue of $263 million increased $38 million, or 17% year over year as client engagement continued through the period. Average trades per day came in at 316,000, or 4.6% activity rate, up 38,000 trades per day from last year.

Our average commission rate was up $0.13 to $13.13, driven by continued strength in our options business, which now accounts for 12% of our overall trades, stronger fixed income activity, and solid payment for order flow.

On line five, our asset-based revenue came in at $378 million, up 11% year over year. Approximately 58% of our total revenues are asset-based, reinforcing the stability of the overall revenue stream.

On line two we saw a $24 million or 39% increase in fee-based revenue, 80% of which was due to organic growth and the remainder of which was due to the Fiserv acquisition. On line three, the $13 million increase in spread-based revenues is primarily due to MMDA balance growth and favorable spreads from the MMDA program.

Lastly, the conduit business is a high-balanced, low spread business. Given the current market conditions and issues surrounding some of the large broker dealers, we have proactively reduced our exposure, resulting in the balance decrease year over year of $1.3 billion, or 23%.

Now for expenses on lines eight through 10 -- expenses ex advertising are up $93 million year over year, with the principal change being the $36 million on the reserve fund issue. Other significant changes were: employment is up $28 million, due to more sales and service associates, as we have discussed in the past; increased incentive compensation related to our record year; and severance and benefit related items. Occupancy and equipment, depreciation and amortization, and professional services are up in aggregate $25 million due to the investments for growth and Fiserv.

Other expense is up $17 million, primarily due to bad debt of $5 million, trade errors of $4 million, arbitration of $3 million, and writing off of assets no longer in use of $4 million.

Additionally, we are pleased with the results we are seeing from our advertising spend. During the quarter, we spent approximately $44 million on advertising, resulting in 137,000 new accounts with a cost per account of $321. This spend was about $9 million above our outlook range, primarily due to opportunities we have seen from the dislocation in today’s market and higher success rates from some of our promotional campaigns.

Lastly, as you can see, our effective tax rate for the quarter was 38.3%. Last year’s rate was lower than usual, primarily as a result of a reversal of reserves for uncertain tax positions, which benefited the fourth quarter of ’07 by about $0.015.

Now let’s turn to liquid assets for the quarter on slide 10. We continue to excel as a cash generator, which allows us to be flexible in making decisions that best impact the firm. This is especially important in managing a company such as ours through a difficult market environment when the new opportunities tend to change and move quickly.

We started the quarter at $660 million in liquid assets. We earned $172 million in net income and had $26 million in depreciation and amortization. We used $26 million in regulatory capital and other expenditures. We also used $22 million for capital expenditures. We made a mandatory debt payment of $9 million and used $9 million to buy back approximately 475,000 shares of our stock. That leaves us with $792 million in liquid assets.

As you know, there are only five ways in which we can use our cash -- debt repayment, stock buy-back, acquisitions, funding additional organic growth, or paying a dividend. We continue to review our capital structure and the opportunities available to us with our board of directors to determine the optimal uses of our free cash flow. Cash is very much king in this environment and we believe our approach is quite prudent.

Now let me turn it over to Fred for a discussion of the future.

Fredric J. Tomczyk

Thank you, Bill and Joe, and good morning, everyone. Now before I begin discussing the coming year, I would like to take a moment to highlight what Joe has accomplished since he joined the TD Ameritrade team. The numbers speak for themselves and I am sure you are familiar with most of them. But Joe built TD Ameritrade to be the number one firm in terms of trades per day in our industry, almost tripling that number from 113,000 trades a day in 2001 to 312,000 trades per day in 2008. And growing client assets more than ten-fold from $24 billion back in 2001 to $278 billion.

In terms of financial performance, he turned the company from being marginally profitable in 2001 to earn over $800 million, or $1.33 in earnings per share this past year, with pretax margins of 50% and a market cap that has grown to $10 billion from $700 million.

He has been an aggressive consolidator of the industry, completing nine acquisitions in seven years, including TD Waterhouse, which was the biggest in the history of our industry and transformational for TD Ameritrade, bringing the company to number one in trades and over night putting it in the asset gathering side of our business.

His track record is unrivaled, in my opinion, and I am glad he is staying on as our Chairman. He has been and will continue to be a great coach for me and our management team.

Now let’s turn to 2009 and look at managing through this current cycle and the challenges and the opportunities that lie in front of us. Clearly we are in unprecedented times. The S&P has dropped 19% since September 30th and is down close to 40% from its high point one year ago. On October 16th, the [vics] hit close to 80%, an extraordinary level of volatility in the market. And credit markets and money markets have been seized up, resulting in historic actions by governments and federal reserve bankers worldwide.

With all this uncertainty, there are I am sure two questions on everyone’s mind -- first, how do we plan to manage through this environment? And second, what are we going to give for 2009 guidance?

Let me start by saying that I am glad to be taking over a company that has been aggressive in the market but conservative in managing its financial position. We have a strong balance sheet with no U.S. real estate credit risk on it, healthy cash flow, and strong liquidity. In short, we don’t have the same issues many other financial institutions are wrestling with right now. We are well-positioned to take advantage of this dislocation in the market to grow organically and take market share in both the trading and the asset gathering side of our business, and to continue to pursue acquisition opportunities that make sense for our company.

Second, we’ll continue to build our cash reserves, keeping our powder dry so that we can take advantage of any opportunities we see in the market. It is times like these that the stronger companies are in a position to become even stronger and better position themselves for the future.

Third, we are going to continue to invest in areas that take share and drive incremental trades and net new assets into our company, such that we are in a better place relative to the competition coming out of this cycle. I think we’ve been smart in our investments to date. They clearly work for us and we’ll continue with that same philosophy in 2009.

Now our country has been through many cycles before and as Joe said, we have always come through them and this one will be no different. So for us, being well-positioned, it makes strategic sense to manage for when we come out of this cycle as opposed to trying to maximize quarterly earnings per share in the next quarter.

Just to be clear, we will prioritize certain initiatives that focus on efficiencies and we will pare back on discretionary expenses, but we will also continue to invest in our business for growth.

Now turning to slide 12, in 2008 we continued to be a leader in trades and in fact, we increased our leadership position over our next closest competitor. As you can see on the slide, our trades per day are up 23% year over year to 312,000 trades per day. We had a record month in September and we expect to exceed that in October. We are off to a good start in 2009 but the uncertainty in the economy and the market make it difficult to forecast trades for the year.

Now having said that, research studies continue to show good long-term growth in the trading business and we will continue to focus management time and attention on realizing on that growth and improving our leadership position. A number of things worked for us last year and we plan to continue to focus on those same things and more as we move forward.

Our analysis proves that our investments in client education and improved risk management tools and techniques have worked for us and work for our clients, and they are the key elements to growing a trading business. We will continue to focus on these areas. Our clients are hungry for it and we will be delivering a more diverse menu of classes, seminars, and one-on-one interaction to help them, from the novice to the advanced, become more confident traders.

In any environment, but particularly this one, having a clear trading strategy and being disciplined about that strategy is essential. We are seeing increased client adoption rates for tools like strategy desk, where strategies can be back-tested and then activated for live trading or clients placing conditional orders like trading stops and trade triggers to help lock in trading profits and minimize losses.

We will also continue to make enhancements to our options offering. This business continues to grow as option trade volumes were up 46% year over year. And as more and more investors discover options for the first time, we will be there to provide them with the tool and the services they need to get started and be successful.

And execution, something we excel at, is increasingly becoming more important to traders. We get better pricing in seven out of every 10 client trades. In the last quarter, execution quality was the number one reason for trader asset inflows into TD Ameritrade. We believe that all of these items will continue to attract new clients and help facilitate retail engagement.

Now turning to slide 13, growth in trades is only one-half of the battle. This past year was the first where we truly started focusing on asset gathering. A number of moves and initiatives worked for us in 2008 and we’ll continue to build on those going forward.

Now as we began 2008, we were not satisfied with our asset retention. We analyzed the reasons and we put in place a number of initiatives to improve our asset retention and to bring more assets into our firm. First, following the conversion, we invested to improve our service capabilities. Next, we made investments in our sales and service model by adding more sales people and putting in place strategies to improve their productivity. We shifted our call center focus from purely service to service and sales, increasing referrals to the branches from 20 per day to over 500 a day. We assigned all clients with over $100,000 in assets to a specific investment consultant, paying not just on sales but also on retention. And finally, we implemented a multi-channel strategy focused on providing a consistent experience across all channels and increasing the referrals from one channel to another.

Now after 12 months of focusing on asset gathering and improving our service, we are seeing the benefits of our initiatives and we are building momentum. Our asset retention has improved significantly and we are bringing more assets in the front door. The most obvious sign is our net new assets for 2008 of $23 billion, nearly double the amount we generated in fiscal 2007. And looking at net new assets as a percentage of our asset base, we are generating net new assets at an annualized rate of 8%. That’s up from 5% last year and it puts our rate of growth on par with companies seen as today’s premiere asset gatherers.

Now looking forward, we see a lot of dislocation in the marketplace today. We believe this dislocation presents opportunities for both sides of our business. We are currently seeing increased interest from shaken retail investors looking to take control themselves, and on the institutional side, we are also seeing displaced brokers having a heightened sense of awareness and interest in the RAA model. And so far in October, our results in both trading and asset gathering are at a very healthy pace.

Now let me touch on a few areas of focus for 2009 -- our teams in the field are another year wiser in our asset gathering strategy. We expect to build on our successes, focusing on a broader array of investment solutions for our clients and increasing our share of wallet. We continue to have a focus in a number of referrals from the call centers and we are now focused on increasing the quality of those referrals.

We also plan to further increase the size of our sales force to further improve our clients per investment consultant ratio and drive a greater focus on asset gathering throughout the organization.

We will also take this opportunity to improve our cash management platform, making a strategic move to enhance yields for our high value clients while educating them that there is no safer place to put their money than in an FDIC insured deposit account.

We also believe that investors do not have a good understanding of the government guarantee program for money market mutual funds and once they do, and they will, there will be a trend to FDIC insured deposit account products. We plan to increase the competitiveness of our FDIC insured deposit offerings to take advantage of this one-time market opportunity.

We will also focus on adding more advice and better products, such as those with a mutual fund base and discretionary managed products. But we will also enhance existing products, like Amerivest, to better serve a wider variety of client needs. All of these initiatives will focus on retention of our clients and encourage the flow of new assets into our organization, further fueling our asset gathering strategy.

With that being said, I would like to touch on guidance for 2009 on slide 14. Given the uncertainty in the market right now, and given the wide range of estimates you have for us, we will be making some adjustments to how we give guidance, and I would like to share them with you.

We will move to giving an annual view of our guidance and speak to an earnings range, not a midpoint, which has been our policy. We will provide you with key assumptions and sensitivities to the key metric swings so you can properly calibrate your models. As we move through the year, we will comment on our quarterly earnings and our performance against our key success factors, being careful to point out one-time events or anomalies so you have a good feel for our run-rate and gain greater insight into how we are performing on the key business drivers that drive our underlying profitability. We will also provide some additional metrics that we believe are relevant to understanding our business, such as net new assets, and our industry-leading return on client assets, which reflects both our strategy and our mix of business.

We also feel it’s prudent to approach this year’s outlook with caution. As we look out today, we see a higher-than-normal level of uncertainty and volatility in the market. This creates a wider range of possibilities around the key metrics that drive our business. Therefore, our guidance range for 2009 is $1.10 to $1.42. Bill will discuss this range and the key drivers of financial results in a moment.

Now in closing, while we are in uncertain times and it will be a challenge for all of us in financial services until we get to the other side of this cycle, at TD Ameritrade we have a strong balance sheet, a solid capital base, good liquidity, and a healthy cash flow. It is at times like this when companies such as ours need to capitalize on the opportunity in front of them to improve their competitive position and take advantage of opportunities they see in the market.

And with that, I will turn it over to Bill Gerber.

William J. Gerber

Thanks, Fred. Now let me give you some color around the major drivers built into our 2009 EPS range on slide 15. But before I do that, I want to give you some information around the October activity, considering the extreme volatility we’ve had in the past few weeks. Trades per day, as we said, is averaging 433,000. Net new assets are in excess of $2 billion. Margin debt has dropped by about $2 billion as clients are lowering their risk profiles. Bad debt has been excellent and is about 0. And we have opened 75,000 new accounts.

As you can tell, this is quite a strong start on virtually all of our key metrics in the first three weeks of 2009. Let’s hope the next 49 weeks can follow suit.

So on to slide 15, here you can see the significant variables of our income statement and as you know, these have not changed. For 2009, we are assuming a trade per day range of 266,000 to 316,000. While October has been red hot in trading, with the headwinds facing the retail clients, we don’t expect this trend to continue indefinitely, thus we have a lower range for the year.

Our average commission rate of $13.38 to $13.88 is slightly up over our September quarter 2008 as we expect our options business will continue to increase in 2009. On spread-based balances, despite the downturn in margin balances in early October, we expect growth in the two primary drivers here of MMDA and margin debt. We expect clients will increase $700 million to $3.7 billion in aggregate average spread balances in 2009 from the end of 2008 levels.

The three key elements to the NIM compression we are seeing are as follows: one, we expect the mix of margin loans, our highest yielding asset, to decrease as a percentage of total spread-based balances, causing NIM rate pressure; two, we expect a continued decline in the earn rate on our MMDA portfolio as we are reinvesting in today’s lower rate environment, thus causing a reduction in our average NIM; and three, we do not have much room to move on the client credit rate side, thus classic rate compression.

As a result, we expect our NIM to decrease to a range of 3.97% to 4.07% from the 4.5% we earned in 2008.

As you know, we don’t forecast interest rate changes in our outlook. Instead, we look at the environment that exists today and utilize that for the next fiscal year.

Fee-based balances are primarily made up of money market funds, mutual funds, and other investment product fees. We expect growth in these areas in 2009 for an aggregate 7% to 13% growth rate. We are also expecting a one to three basis point decrease in our fee-based rate, mostly due to mix.

And we are essentially assuming flat expenses for 2009. As always, we will manage our expenses to make sure we are effectively balancing risk reward in this environment. As Fred commented, we will look to manage for the end of the cycle but will not hesitate to adjust our thinking if the situation continues to deteriorate.

Lastly, net new assets -- we are looking for a range of $20 billion to $30 billion for 2009. We believe this growth will continue our 2008 trajectory and fuel the growth in balances I just described.

As you all know, we hope these ranges are conservative but as we’ve already mentioned, our ranges need to reflect these uncertain times. We will update you every quarter on what progress we are making toward our goals.

On slide 16, we are showing our earnings from 2005 to 2009. The 2008 earnings of $1.33 need to be put in context as we look forward to 2009. If you recast 2008 to reflect the rates we expect to earn in 2009 due to the current rate environment, our NIM compression drops our EPS to $1.21, so these rate changes and the mix of interest earning assets has eliminated $0.12 a share. Given this context, now you can evaluate our $1.10 to $1.42 range in your models.

We are once again providing our sensitivity information on slide 17. It is our hope that providing this information will give you as transparent a window as possible into the impact that additional changes could have on our earnings. As the market environment continues to evolve, this will be useful in adjusting models.

The sensitivities to trades per day, fee-based assets, spread-based assets, and new accounts remain virtually unchanged. But let me comment on the prospect of new fed moves on the last bullet on the slide. We have reviewed our models reflecting the last 50 basis point fed move and are comfortable that a new movement now of 25 basis points either up or down could impact earnings plus or minus $0.02.

So in summary, despite the difficult market, we just delivered our sixth consecutive record year. We are a positive outlayer not only in the financial services industry but the entire market. We and the rest of our associates are very proud of that accomplishment. We will work to maintain our number one market share in trades per day and continue our momentum and our asset gathering strategy.

Again, all of these results are a credit to our strong conservative balance sheet. We believe in prudent fiscal management and transparency at every level, with a focus on long-term growth. Staying this course has allowed us to continue fine-tuning our asset gathering efforts and delivering improved products and services to our clients. And we will continue on that track. It’s been the difference maker in what has been a catastrophic 12 months for many firms.

We will manage our firm through this credit cycle, focusing on our growth strategy, added investments in our future, conservative fiscal management, and continuing to build cash, carefully weighing the risks and rewards of those decisions. And when all is said and done, at the end of the day we believe we will come out at the other end of this cycle stronger than where we stand today. We have a strong business model. It’s focused and not over-extended. We have three priorities -- our clients, our shareholders, and our associates. This has not and will not change.

At TD Ameritrade, we have continued to show resilience in up markets. We have been through this before and each time we come out stronger and better positioned to handle the next phase. We have a great team and together we are focused on delivering growth. We look forward to the remainder of 2009 and what lies beyond for the future of TD Ameritrade with great confidence.

And with that, Operator, I will turn the call over for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Prashant Bhatia with Citigroup.

Prashant Bhatia - Citigroup Global Markets

On the client trades, the 433,000 so far in October, do you have a feel for how many are buy trades versus sell trades, and maybe how that ratio relates to say the past year or so?

William J. Gerber

You know, I don’t off the top of my head. I have teasingly said we’ve had 12 buy trades and 432,988 sell trades but I don’t have that specific number.

Prashant Bhatia - Citigroup Global Markets

Okay. Also on the organic growth side, you are really seeing a lot of traction there. Has there been any change in terms of transfers of accounts from full service firms? Are you seeing any change in the composition of what is driving the net new assets?

Fredric J. Tomczyk

What we have seen in the last probably six to eight weeks has been -- you know, we typically get net new assets from a number of places and typically we are a winner from the full service brokerage firms and we definitely have seen a pick-up in that in the last four or five weeks.

Prashant Bhatia - Citigroup Global Markets

Okay. And then I guess no better time to be cash rich with a clean balance sheet. I guess one, will you accelerate any kind of investment initiatives as a result of the environment? And two, on the acquisition side, we are seeing fed assisted and FDIC assisted deals -- is that something that would interest you or are you having any discussions around that?

Fredric J. Tomczyk

First off, I think the capital markets are very strange, so building cash right now is exactly the right thing to do. We are investing. The three areas where we will focus our investments for the most part looking forward beyond what we have already done but well within our current expense levels will be in increasing the size of our sales force, in our education and risk management tools and techniques for the traders, and increasingly in our technology operations to position us for the kind of volumes we are seeing and expect to see. Clearly we are seeing very high volumes and we are going to continue to invest there.

Prashant Bhatia - Citigroup Global Markets

Okay.

Fredric J. Tomczyk

With respect to acquisitions, we will always do what we think is right for our organization and any opportunity that comes along that makes sense for our shareholders, we will work very hard to do that.

Prashant Bhatia - Citigroup Global Markets

Okay.

Joseph H. Moglia

And I can tell you on a dollar basis on the trades, we are all through the month, so far we are net $30 million of net sellers, so it’s -- on a dollar basis, obviously it’s pretty flat. I can’t tell you on a buy and sell on a per trade basis but that will give you some indication of what’s going on.

Prashant Bhatia - Citigroup Global Markets

Okay, that’s interesting. And then just finally on the [inaudible] lending revenue on the non-conduit side, the balances don’t move around much but the revenue does. What is driving the volatility in that revenue?

William J. Gerber

On the spread-based side?

Prashant Bhatia - Citigroup Global Markets

Yeah.

William J. Gerber

It’s really -- you get between the -- it’s more mix between the MMDA and margin loans, and that’s really what causes -- I mean, MMDA -- margin loans is our highest yielding asset. MMDA is a good one too but that’s what really causes it to jump around.

Prashant Bhatia - Citigroup Global Markets

Well, I guess I’m talking about the [SEC] lending, the non-conduit side of the [SEC] lending revenue, where we see in some quarters negative $68 million and in others we see gains of $10 million, that line specifically.

William J. Gerber

I’m sorry, on the stock borrow, stock loan business?

Prashant Bhatia - Citigroup Global Markets

Yeah.

William J. Gerber

Okay. What happens in certain quarters is you get what’s called negative spreads when some of your stocks are so valuable that people not only give you their cash, they pay you for it because they need the securities, and so those anomalies really do -- they are obviously very profitable, we love those, but that’s what really causes the biggest difference, where you sometimes get a negative, it’s a profit center and sometimes where it is a slight expense.

Prashant Bhatia - Citigroup Global Markets

Okay. Thank you.

Operator

Our next question comes from Rich Repetto with Sandler O'Neill.

Richard Repetto - Sandler O'Neill & Partners

I guess the first question is on the margin loans. You mentioned that it was down $2 billion in October, and I guess the question, you know, Joe has always said in the past the margin loans are a lagging indicator and we always take what Joe says as gospel, but it appears different this time. And I guess the question is one, what percent -- like, I don’t know the exact ending balance of September, so what percentage of decline is that in margin loan balances? And then it obviously looks like it is different, so is it something about the make-up of who has been driving the trading going in that now the leveraging of the retail is a leading indicator of trade?

Fredric J. Tomczyk

The margin loans are down about a third since September 30th. We analyzed this because we did look at it, given the decline. We are actually not seeing a change in behavior or people not using buying power [or any of that]. All we are seeing is the fall in the market and the value of securities is reducing our absolute buying power, but the percentage of people using margin and the percentage of their buying power they are using continues to be at a similar rate to what it was through 2008.

Richard Repetto - Sandler O'Neill & Partners

Okay, so it’s more market impact --

Fredric J. Tomczyk

Market driven.

Richard Repetto - Sandler O'Neill & Partners

Okay. I guess we can talk about it more after. I guess the next question is normally in the calendar third quarter, you know, your fiscal fourth, you pull back in marketing and [you increased] it and I didn’t -- you know, the accounts were up slightly but the acquisition costs, and you are seeing a whole -- you are running at a double your new account rate, I think, in October. So what is going on? Did you see opportunities here? And why the up-tick in marketing in what is normally a seasonally slow period?

Fredric J. Tomczyk

We were spending our marketing dollars roughly in line with what we would have normally done in our fourth quarter. You are talking about the third quarter for you, in your mind. As we came out of August and into September, we saw opportunity. We were having a very good, healthy new accounts and everything and we saw what we happening in financial services, so we upped our marketing spend intentionally to give us, to allow us to finish off the year strong and set ourselves up for a very good start in October, and I think you are seeing the benefits of some of that as you look at October right now, our net new assets month to date are over $2 billion and our new accounts are over 75,000 and that was an intentional strategy as we saw the dislocation in the market late August, early September.

Richard Repetto - Sandler O'Neill & Partners

Okay, that’s interesting. And I guess last question, just to keep Bill straight here, the liquid assets from last quarter, the last quarter’s presentation showed it at 687 ending last quarter at 687. And this presentation we’re starting at 660, so I was wondering -- did you take this $27 million here?

William J. Gerber

No, it was actually something when we had the final focus report, we had -- we used an estimate at the end of last quarter and when we had the final one, we had a $27 million swing.

Richard Repetto - Sandler O'Neill & Partners

Okay. All right, thanks, guys.

Operator

Our next question comes from Howard Chen with Credit Suisse.

Howard Chen - Credit Suisse

First, you continue to see this incredible retail engagement. Can you give us a sense of behavior by the different customer segments? If DARTS were up 14% year over year, how did that vary among the more active trader customers compared to say a more classic, [mass affluent] customer?

Fredric J. Tomczyk

I’ll comment on that probably over the year but more recently as well. We continue to see the active trader very engaged and as long as there is volatility in the market and you look at a day like yesterday, where the market was down at 700 points or close to 700 points at one time and then came back, anytime you have that level of volatility, active traders will trade. And we are seeing them increasingly use our tools like strategy desk, their increasing use of options, increasing use of trade triggers and trailing stops and so we are seeing them using all those tools at a much higher rate than we’ve seen in the past.

So they have continued to be very engaged and continue to be very engaged so far in October. When you come to the less active or as you call it, the long-term investor, those people are trading a little bit more in more recent times as the market has moved. Whether they are reevaluating their risk tolerance and moving some of their money into more conservative investments or adjusting their asset allocation, the long-term investor right now anyway is trading a little bit more than normal.

Howard Chen - Credit Suisse

Okay, great. Thanks, Fred. And as you migrate to more of an asset gathering business model, I think market appreciation/depreciation factors more in the equation for TD Ameritrade than it used to. So for the outlook and as you build the budget, what are you assuming in terms of market appreciation for fiscal ’09? And does that include the October to date downturn?

Fredric J. Tomczyk

We are assuming about a 5% appreciation over the year.

Howard Chen - Credit Suisse

Okay, so that would be inclusive of what we felt October to date, Fred?

Fredric J. Tomczyk

That’s right.

Howard Chen - Credit Suisse

Great, thanks. And then finally, Bill, on the new outlook statement, it looks to me like you are assuming debt interest costs are stable in fiscal ’09 but -- I’m sorry, can you refresh me on the terms of the debt? I thought it was variable so shouldn’t you receive some benefit from lower rates?

William J. Gerber

There will be some benefit from lower rates, yes, but we think that we are not going to be paying off much of the principal. The principal payments are going to be just the minimums because we have a great term here on our debt, but there will be a slight decrease, yeah.

Howard Chen - Credit Suisse

Okay, so less principal payments but then you get the benefit of the lower variable rate, and all that should shake out to kind of like flattish interest expense?

William J. Gerber

Correct.

Howard Chen - Credit Suisse

Okay, great. Thanks so much.

Operator

Our next question comes from William Tanona with Goldman Sachs.

William Tanona - Goldman Sachs

In terms of the guidance, just so I can understand a little bit, the fed funds forecast, what are you guys assuming for that, or where fed funds will be ultimately? And then in terms of just doing the math, it looks like you guys are assuming either significantly lower tax rate or some share buy-back, or a combination of.

William J. Gerber

We just are using the 150 as the fed funds rate, so we don’t forecast fed funds rate changes, so that’s where the current model is. And the tax rate should be about the 38%, so I’ll have to look at the -- I mean, the buy-back from 2008, of course, and -- hang on a second. And we did have the benefit in 2008 of the tax rate, we did have the $0.03 in the first quarter last year, so that’s one of the effects.

William Tanona - Goldman Sachs

Okay.

William J. Gerber

Does that make sense?

William Tanona - Goldman Sachs

It does. It was just when I was doing kind of the math, it looked like to get to the lower end of the guidance, you’d have to assume a 34% tax rate if the share count stayed the same, so I was just wondering whether or not you guys were building in some type of a share repurchase in the guidance.

In terms of the record net new assets that you guys talked about, is that going back to kind of ’99, 2000 with the combination of both Ameritrade and TD Waterhouse?

Fredric J. Tomczyk

In terms of being a record?

William Tanona - Goldman Sachs

Yes.

Fredric J. Tomczyk

Yes.

William Tanona - Goldman Sachs

And then just lastly in terms of the customer behavior, obviously if you look at cash as a percentage of assets, it looks like it is about 19%. Certainly the investor seems to be getting a little bit more conservative but I guess the one area that you didn’t talk about for October was where customer assets ultimately are now. I think you gave all the other metrics but not customer assets.

William J. Gerber

They are about $240 billion right now, I believe. That’s very close to where they are right now.

William Tanona - Goldman Sachs

Okay, thanks.

Operator

Our next question comes from Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

I just want to come back to the -- sort of the activity levels again. I know it’s hard to forecast but we’ve certainly seen a sharp slowdown in trading activity among institutional investors over the past week or so and historically retail lags two to four weeks on market developments, et cetera. I mean, is there any reason to think that we wouldn’t see a freezing up in retail space like we’ve seen among professional institutional investors over the past couple of weeks?

Fredric J. Tomczyk

Well obviously, Roger, I mean, I think we are being fairly cautious in calling trades for the year, as I do think there’s an unprecedented level of uncertainty in the markets right now. And I think we will come down from the 433,000 trades per day. We did have four of our top 10 trading days have happened since the end of September. However, having said that, I would say while it’s come off from that level, it’s still at a very healthy level so far and so far this -- even including this week. We’re not seeing it come off significantly from what you would have seen through 2008.

Roger Freeman - Barclays Capital

And actually just to follow-up I think on Howard’s question earlier, I mean, if you look at that, you said both your traditional active trader volumes are up. Has the mix changed? I.E., has the active trader become significantly more active? Has there been a shift up towards that customer?

Fredric J. Tomczyk

No, I think if you are looking for a shift right now, you would see the long-term investor trading more than normal, compared to more stable markets. But the active trader has continued at the same lip. I think some of the blip up here has been more in the long-term investor.

Roger Freeman - Barclays Capital

Got it, okay. And then on the -- I think you made a comment in the prepared remarks around needing more or better FDIC products. Can you just maybe go into that a little bit more? I mean, it looks like you are holding on to cash balances [to the extent] that there are -- you know, that customers are selling stocks and actually, you could argue that money markets maybe become more attractive now that there’s essentially backing for those and any commercial paper that would be purchased in those money markets. So what are your thoughts around the FDIC products and what you actually need to do there?

Fredric J. Tomczyk

Well today, what we have is the money market deposit account, which is a FDIC insured product and it is our cash, one of our cash [sweep] options. And we think we have some room to improve there. We have segmented our customer base down and we are looking to increase the competitiveness of our cash earn rates for our more valuable clients in our higher value segments, so we will start to move down that path, which allows us to be much more scientific in our pricing and increase the competitiveness of our offering.

On top of that, we are looking at things like a high interest savings account and other products where people want to park cash for a while. That has an FDIC insurance guarantee on it.

When you look at the money market mutual funds, why I made the comments I did about that guarantee program, I think it’s important to keep in mind that that’s not a long-term guarantee. It’s a three-month guarantee that can be renewed for up to a period of one year, and I think most people don’t realize yet that as well that basically not all funds are eligible, not all companies have applied, even if they are eligible, and number three, it only covers the money you had in that account on September the 19th in that fund. So if you put new money into that money market mutual fund, it is not covered for the federal government guarantee.

Roger Freeman - Barclays Capital

Okay, that’s helpful. And then I guess lastly, around options, so you are forecasting a higher mix there next year in terms of your average commission rate. Is it more a function of declining equity trades or is that actually a higher options trades? And what actually is the mix and what are you forecasting for volatility next year, because obviously that’s got to be a key factor in your thinking there?

Fredric J. Tomczyk

We continue to see increased use of options by our clients, so it’s not a decline in equity trades -- it’s an increase in option trades. Our option trades are up 45% year over year. The market option volumes have been up 35% year over year. Our education and risk management continue to show people how to prudently use options appropriately, whether you are earning cash income or you are protecting positions and hedging positions. And so we do see an increase in the volume of option trades for us.

Roger Freeman - Barclays Capital

But you probably expect still high levels of volatility going into next year in the equity markets that would support --

Fredric J. Tomczyk

I would think so.

Roger Freeman - Barclays Capital

Okay, thanks.

Operator

Our next question comes from Michael Vinciquerra with BMO Capital Markets.

Michael Vinciquerra - BMO Capital Markets

You mentioned the high yield savings account -- can we assume that that is still going to be parked over at TD Bank U.S.A, or is something else in the works?

Fredric J. Tomczyk

Well first, it’s a high interest savings account, not a high yield account. But anyway, it will be at TD Bank. They are -- our arrangement with TD Bank actually works quite well for us, that we get the economics and the profits of banking without the risks and the capital requirements of banking, so why we would do it anywhere else, I don’t know.

Michael Vinciquerra - BMO Capital Markets

Do you have any risk at all of cannibalizing the sweep account that you offer right now? I think your margins there are very attractive and I would guess on a high yield savings account that you would actually have a -- you know, you were offering 2%, 3%, versus I guess you are yielding today probably what, 1%, 1.5%?

Fredric J. Tomczyk

Well, it depends on what chair you are in on the MMDA but yes, there are risks of some cannibalization, but I’d make two points on that. First off, we have to go where the market goes and we have to do what is in the best interests of our clients and right now for people that do want to park cash for a period of time, that is a good solution and we need to make that available for our clients.

Number two, as I think you deal with the cannibalization risk through the product design and the pricing of the product, through minimums and tiering of interest rates, and so I do think there are ways to minimize that capitalization but there will be some. But again, you have to do what is right for your clients and for your business in the long-term.

Michael Vinciquerra - BMO Capital Markets

I understand. Okay, and then one final thing -- have you guys done an analysis to look at the correlation of your client asset balances versus the broader market indices, kind of net of new flows? It kind of follows up on a question earlier. I guess I am getting to the point of you obviously have cash balances that don’t fluctuate with the market but have you looked at it over the long haul and seen for our modeling purposes what we might expect from your clients’ asset levels?

William J. Gerber

I’m not sure we’ve done anything as in-depth as you are suggesting, Mike. I mean -- so probably just the easy answer is no.

Michael Vinciquerra - BMO Capital Markets

Fair enough. Okay, thank you, guys.

Fredric J. Tomczyk

But Mike, just to follow-up on that, I do think you need to look at our sources of our revenue stream. While 60% is asset based, a fair chunk of that asset based revenue is actually net interest income.

Michael Vinciquerra - BMO Capital Markets

Absolutely. Okay, thank you.

Operator

Our next question comes from Michael Carrier with UBS.

Michael Carrier - UBS

Bill, just a couple of questions on the outlook -- just on the options, mixer, I guess the growth in options. We’ve been at an extreme level and if volatility does decline and hopefully it does, you know, you’d expect the volumes to start to moderate. So I’m just -- you know, when I look at the commission rate next year going up, is it more taking options market share or is it more your clients actually trading more options and volumes going up from already elevated levels?

William J. Gerber

It’s actually our clients are trading more and we do believe we are gaining market share as well. We are looking at ultimately going from like 12% -- we’re 12% now and if you think about it, last year we were around 9%, to going up to 14%. So that’s really the shift.

Fredric J. Tomczyk

And the volatility will come in from where it is right now. I think options, there are lots of reasons to use options and the revenue on an option trade is over double what it is on an equity trade.

Michael Carrier - UBS

Okay. Just on the relationship with TD Bank, I mean, I understand in terms of the MMDA product, they kind of bear the credit exposure. I’m just wondering in terms of the rate that you get, given that even safe assets have been at risk, just in terms of their portfolio that they are investing, you know, the cash in, are there any concerns or risks that even the safe assets could come under pressure and the fee that you would be getting from them could be lower?

Fredric J. Tomczyk

Well, the fee that we get from TD Bank actually doesn’t intrinsically tie to the assets they invest in any longer. We changed that deal and we talked about that at the last quarter end. We now get LIBOR minus 25 basis points, regardless of where and how they invest those assets. Having said that, we do sit on their [ALCO] committee to make sure that where they are investing that money is within a defined and agreed-to risk policy.

Michael Carrier - UBS

Okay, and then just finally on the cash level -- obviously having cash is good and building it is prudent in this environment. I’m just wondering, at a certain price in terms of the stock, does it make sense to start increasing buy-backs? It doesn’t mean that you have to take a big chunk of the cash but just incrementally, just given where the level of the stock is and what the return is?

Fredric J. Tomczyk

I think we are in the market every day. We do have a program to buy back stock and certainly at these prices, the way that is designed, we are buying increased levels of shares every day in the market at these prices.

Having said all that, I do think there is an opportunity, whether it be share buy-backs or dividends or whatever, once the market returns to normalcy. But right now it is anything but normal and to raise capital in today’s environment is not an easy feat and it’s not cheap and until the market returns to a normal state, we will continue to build cash.

Michael Carrier - UBS

Okay, and then Bill, I didn’t see the Michigan colors on the slides. I didn’t know if that was a read through for anything.

William J. Gerber

I’m taking my bruises. It’s more black-and-blue than maize-and-blue, so --

Michael Carrier - UBS

All right, thanks, guys.

Operator

Our next question comes from Patrick O'Shaughnessy with Raymond James.

Patrick O'Shaughnessy - Raymond James

I was wondering if you could contrast what you are seeing from the retail investor today as compared to the last bear market that we saw in the 2001/2002 timeframe, because I think the online brokerage industry is still relatively young, people only have one reference to look at a bear market so I was hoping you could kind of contrast the differences in their behavior now versus what we saw the last time things looked pretty bleak.

Fredric J. Tomczyk

Well, I wasn’t here back in the tech bubble but I do think the tech bubble, from what I’ve analyzed here, it was a very different situation. It was a bubble on a sector of the economy and a lot of the trading was tied to that. Our trading today is much more broad-based, and this is a very different cycle of a -- it’s a very different market today. This is not about one sector of the economy. The whole economy is down right now. It is certainly led by the credit cycle but what we are seeing in the money markets and the credit markets seizing up the way they are is where we are seeing -- I’ve never seen that before.

With respect to their trading though, they continue to trade in a number of sectors. They do like, what we are seeing right now, technology and increasingly health care is where people are buying shares right now.

Patrick O'Shaughnessy - Raymond James

Got it. And then my last question would be your yield on your investment product balances rose a little bit from the previous quarter and I’m just curious, is that some sort of a mix issue or what sort of products are you seeing growth in that that’s driving the increase in yield?

William J. Gerber

It is mix issue, Patrick, and basically it’s -- you know, we are getting -- sometimes you get timing on 12B1 fees that come in at certain periods, so that’s really the major driver there.

Patrick O'Shaughnessy - Raymond James

Got it. Thanks.

Operator

Our next question comes from Michael Goldberg with Desjardins Securities.

Michael Goldberg - Desjardins Securities

Next week the green shields at TD Bank in the mid-Atlantic begin rolling out. Do you want to talk about what you are doing and what you will be doing to increase revenue and expense synergies with them?

Fredric J. Tomczyk

Thanks, Michael. I think there’s a couple of things we are doing with TD. They are very early in the stages. The first obviously is our MMDA program and we’ll do the high interest savings account with them. We are also -- we are working right now, very early stages, of trying to originate accounts and assets out of their branch network and out of their customer base. We are working diligently with them on that. We don’t have that right yet and it’s only in I think about 16 branches, and we will just keep working on it until we get it right, because I think as you are aware, Michael, it’s a very big source of accounts and assets in Canada. But the U.S. market is different, but I think this is the first time you will see a leading bank and a leading online broker actually try to do this, so we are going to work very, very hard at that.

We are also working with TD Waterhouse in the U.K. for something that we might be able to do there where we give them access to the U.S. market for their clients in Europe and some of our tools if they want to trade in the U.S. but again, that’s very early stages of discussions right now.

Michael Goldberg - Desjardins Securities

Okay. What are the key criteria that you would look at before making an acquisition, given market turbulence?

Fredric J. Tomczyk

Well, the first thing we want to avoid is buying someone else’s problems, unless we can understand those problems and we can quantify those problems and those risks, and so that we know what we are getting into. And very much we’ll look at A, if it’s a trading business, we see those are actually very economically attractive from a financial point of view. The scale benefits are significant. We’ll also look at one’s add-to capabilities that give us something we are trying to do or we see attractive for our customer base or for the market in general.

Michael Goldberg - Desjardins Securities

Thanks a lot.

Operator

Our next question comes from Brian Bedell with Merrill Lynch.

Brian Bedell - Merrill Lynch

Just on that last question on acquisitions, just remind us, if you can, on your sort of view about taking on any credit risk in an acquisition from lending businesses.

Fredric J. Tomczyk

Well, we have I would say -- we’ve been very diligent in avoiding the U.S. real estate credit risk. We don’t have what I’ll call capabilities or competencies to manage out a problem book of assets, so that’s not something we at TD Ameritrade would be interested in. If TD Bank was interested in that and could quantify it, they have those capabilities, we do not.

If we could understand the risk, we could quantify it, and we are comfortable with it, that would weigh in to any equation but right now, we are not looking at anybody that’s got big credit risk on their bank unless we can isolate that and not take it in any transaction.

Brian Bedell - Merrill Lynch

Right, so if there were an acquisition that had that profile, you would -- and if it were attractive, you would structure it in more of a lift out of the brokerage business and any of the credit risk would have to be sort of partnered -- you know, you’d have to seek a partner to take on the credit risk?

Fredric J. Tomczyk

There are some things attractive on the deposit gathering side of banking and if you take some assets with that, but we are really not interested in acquiring somebody’s toxic assets. There are situations where they think -- you know, Prashant hinted at about FDIC help and all of that. We would only do those types of things in conjunction with TD, who has a much better capability in those areas than we do.

Brian Bedell - Merrill Lynch

Okay, I just wanted to make sure you reaffirmed that. Okay, and then just on the -- a couple of questions ago about the TD arrangement in terms of getting LIBOR less 20 basis points, on the asset side of that, my understanding is that you do assume the credit risk but you sit on the [ALCO] committee and obviously I think they are still investing in Canadian mortgage backed securities -- if I’m correct on that, you can tell me but can you just remind us of your view of the risk level of Canadian mortgage-backed securities?

William J. Gerber

Canadian mortgage-backed securities are fully backed by the Canadian Government and so the risk level on that we see is very, very low. And the credit risk -- we are not taking credit risk. That was the change that Fred referred to earlier. We don’t take credit risk on the portfolio anymore. We went to a funds transfer pricing mechanism and we get the LIBOR less 25 basis points.

Brian Bedell - Merrill Lynch

Right, okay. That’s great. And then just if you could talk about the expense initiatives in 2009, it looks like obviously you have generally flat expenses but some increases in advertising. How do you feel about system capacity? Obviously it has been moving up significantly. I think in the past you said you have made some investments there that you feel comfortable but going into 2009, should we see some of this expense base be invested in improvements in capacity or is there risk to more expenditures in that area in ’09?

Fredric J. Tomczyk

Well, we have made significant investments in our technology infrastructure through 2008. All were either around security capacity or resiliency in our systems, and we have increased our capacity of our trading systems and back office systems significantly, and thank God we did that now, given the volumes we’ve been seeing.

As we go into 2009, I look at that from a technology side in terms of the depreciation and amortization line. We will open a new data center. We are well down that path to actually house our infrastructure. You will see a bit of a hump year in 2009 in terms of technology infrastructure costs but then it should start to come out, and whenever you move data centers, you are going to carry duplicate costs for a period of time. But we will get to the other side of that as we come out of 2009.

Brian Bedell - Merrill Lynch

And that’s in your expense budget and your outlook statement already, right?

Fredric J. Tomczyk

It is.

Brian Bedell - Merrill Lynch

Okay, and then just in terms of the operating margin on the expenses, I see the range is 46% to 51%. I know you like to target that sort of 50%-plus zone. Can you just give us a sense of what you might try to do to be towards the upper end of that range, even if your revenue outlook is sort of in the middle of the range?

Fredric J. Tomczyk

Well, first off, we’ve been consistent in saying that once we stay at 50% or higher, we will continue to invest to try -- at that point, it’s all about growth, in our mind, and we will try to manage at that 50% or higher but we will stay within a range of 45 to 55. I don’t think -- we’re not trying to run the company to drive the margins to 60% to 70%. We are trying to get -- 50% to 55% is excellent and as long as we are growing, we think that’s the right strategy for us.

If it comes off a bit, you know, we’ll do what we have to do. We are -- we will in this environment, I think it would be imprudent of us as management not to re-prioritize some of our initiatives towards the efficiency side from the revenue generating side. We will also pare back on some discretionary expenses, and we also have a fair bit of movement in our variable pay and incentive comp and variable costs that will move up and down if revenues and earnings do not come to fruition.

So we’ll look at all those and if we see the environment turn such that it is longer and deeper than we think, and if all of a sudden our investments in growth, our growth initiatives are not working the way we would like, we will make adjustments accordingly.

Brian Bedell - Merrill Lynch

Okay, great, that’s helpful. And then just lastly on your [wallet share], that’s still about 12%?

William J. Gerber

Say that again, sorry?

Brian Bedell - Merrill Lynch

[Do you still view your wallet share] as being about 12% currently?

Fredric J. Tomczyk

Yeah, we would say it is currently in around that range. It’s not a -- that’s an indicative measure, not what I’ll call a definitive, accurate measure that you measure every month. It’s something you do every once in a while that just -- I would use that number as indicative of where we see opportunity, as opposed to a key success metric that we can track every month or every quarter.

Brian Bedell - Merrill Lynch

Right, so just -- I know you look at Schwab as well, that they have a 50% plus wallet share and obviously this portends great opportunity for you guys if you can emulate that strategy. Is there any sense of where you would like to be in say three years from that 12%, in sort of a broad range?

Fredric J. Tomczyk

I think moving that share of wallet up to the 50% range would be lovely. I don’t think that’s necessarily realistic in three years but we have said if we can get that up to about 20% over a three- or four-year period, I think that would be doing quite well, because that would be basically a doubling of our asset base.

Brian Bedell - Merrill Lynch

Right, yeah, and that would portend good things for organic growth. Great, thanks so much.

Operator

It appears our final question in the queue is a follow-up from Rich Repetto with Sandler O'Neill.

Richard Repetto - Sandler O'Neill & Partners

I’m good, guys, my question has been asked and answered. Thank you.

Joseph H. Moglia

Okay, thanks, everyone and --

Fredric J. Tomczyk

Thanks, everyone and we look forward to talking to you as we move through 2009. Have a good day.

Operator

That does conclude today’s conference call. You may now disconnect.

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Source: TD Ameritrade F4Q08 (Qtr End 9/30/08) Earnings Call Transcript
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