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Ameritrade Holdings Corporation (NYSE:AMTD)

F1Q13 Earnings Call

January 22, 2013 8:30 AM ET

Executives

Bill Murray – Managing Director, IR

Fred Tomczyk – President and CEO

Bill Gerber – EVP and CFO

Analysts

Rich Repetto – Sandler O’Neill

Howard Chen – Credit Suisse

Patrick O’Shaughnessy – Raymond James

Roger Freeman – Barclays

Keith Murray – Nomura

Bill Katz – Citi

Alex Kramm – UBS

Chris Harris – Wells Fargo

Brian Bedell – ISI Group

Joel Jeffrey – KBW

Alex Blostein – Goldman Sachs

Chris Shutler – William Blair

Mac Sykes – Gabelli & Company

Operator

Good day, everyone, and welcome to the TD Ameritrade Holding Corporation’s December 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 to Bill Murray, Managing Director of Investor Relations. Please go ahead, sir.

Bill Murray

Thank you, operator. Good morning, everyone, and welcome to the TD Ameritrade December Quarter Earnings Call. In a minute, we’ll be hearing from Fred and Bill, but first, hopefully you’ve seen our press release and located today’s slide presentation, which is found on amtd.com.

I also like to refer you to our Safe Harbor statement, which is on slide two of the presentation, as we will be referring to forward-looking statements. We will also be discussing some non-GAAP financial measures, such as EBITDA. Reconciliations of these financial measures to the most comparable GAAP financial measures are in the slide presentation. We also like you to review our description of risk factors contained in our most recent financial reports, Form 10-K and 10-Q.

As usual, the 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. We have a large number of covering analysts, as we normally do. Please limit your questions to two, so we can cover as many analysts as possible within the allotted time.

Thanks your cooperation and with that, I’ll turn the call over to Fred.

Fred Tomczyk

Thank you, Bill, and good morning, everyone, and welcome to our first quarterly earnings call of 2013. I’m pleased to report that we had a strong start to our fiscal year, despite a weak trading environment brought about by a prolonged state of industrial uncertainty. The events like November’s Presidential Election and concerns over the fiscal cliff kept trading volumes low throughout the industry during the quarter, but strengthened nearly every other aspect of our business from asset gathering, to developing a third revenue stream, to expense management helped us deliver a strong and in some areas, a record December quarter.

Let’s take a look at the quarter in more detail on slide three. Earnings per share for the quarter came in at $0.27, strong in the – strong results in the face of the trading environment and a $0.01 impact from losing two trading days from Superstorm Sandy. While we were able to get past these two events in the quarter, the election and the fiscal cliff uncertainty still remains high with new debates in Washington around the country’s debt ceiling and deficit looming ahead.

Trades for the December quarter averaged 334,000 per day, and while trading is improving in January, it remains sluggish compared to what we would normally expect this time of year. January month-to-date, we are averaging 370,000 trades per day. A major highlight for the quarter was our record net new client assets of almost $16 billion, a 13% annualized growth rate and up 53% from the same quarter a year ago.

Additionally, our market fee base revenue is up 28% year-over-year driven by record guidance in advice product sales. We maintained good expense discipline, ending quarter with operating expenses down 4% from the same quarter last year.

Ongoing efforts in our Lean initiative and other internal expense management initiatives are allowing us to continue investing in growth while keeping expenses in check. And we remain good stewards of shareholder capital. In the quarter, we used approximately $300 million to pay down a maturing tranche of debt and issue our quarterly dividend of $0.09 per share.

We also used our strong financial position to finance a special dividend of $0.50 per share, which we financed with our revolving credit facility. Following that deployment, we stand today with liquid assets of $774 million. Our balance sheet remained strong, and we preserved our ability to deal with unexpected issues or to take advantage of opportunities as they arise.

Let’s take a deeper look at how our growth strategy is performing starting with trading on slide four. Our activity rate for the December quarter was 5.8%, up slightly from the September quarter and a combination of low volatility and high uncertainty created an unusual environment for investors, and as a result, exchange volumes were at multiyear lows. The VIX was low averaging about 16.7 in the quarter and – actual intraday volatility was also low as there were only three days during the quarter where the market moved more than 2% during the day.

Derivatives trading continues to grow and was nearly 40% of our clients’ trades over the quarter. This quarter, we launched a new learning center for our thinkorswim platform, and we also launched the Strategy Roller, which allows both retail clients and RIAs to automatically roll their covered call positions. We’ll expand this to also include other option strategies over time.

Mobile is now our fastest-growing platform, with approximately 2,400 new users each day adopting one of our mobile apps during the quarter. More than 1 million clients have now downloaded our apps to-date and through our partnership with Microsoft, we became the first in our industry to launch a Windows 8 app.

As leaders in the trading space, we have a great deal of insight into retail investor sentiment, both stated sentiment and actual sentiment. This quarter, we put that data to good use by launching the Investor Movement Index. When viewed over time, the index can tell you if retail investors are acting more bullish or more bearish, based on how they position their portfolios. We plan to release new index scores on a monthly basis and are looking at ways to expand this content over time for our clients.

Let’s now turn to asset gathering on slide five. We started 2013 by gathering a record $16 billion in net new client assets, a 13% annualized growth rate and a great start to the year. These assets gathering results are a reflection of the continued success of our sales efforts in both our retail and our institutional channels.

Now, let me start by answering the obvious question. What was the impact of the number of companies that are showing special dividends or accelerating the timing of their dividends in advance of the fiscal cliff? These moves only affected our asset growth slightly, adding less than $400 million to our totals for the quarter.

In our retail channel, solid growth from our referral efforts continues. Branch assets from call center referrals were up 21% year-over-year even as call volumes were down 10% year-over-year. And inflows from our TD Bank cross-selling initiative were up 23% from the same quarter a year ago. And we had a record quarter in our institutional channel, as we brought in a 110 new breakaway brokers over the quarter, up 10% year-over-year. And existing RIAs continue to grow their business, which also contributed significantly to our results.

In technology, our Open Access Initiative continues to be well received by current and prospective RIA clients. It also received top marks and advisor satisfaction from Financial Planning Magazine. We continue to update our platforms like think pipes with new functionality and educational resources to help advisors learn and use new capabilities. But it’s our marketing and sales efforts in both of these channels that are driving our record results – and in order to keep up with our strong asset gathering momentum and keep it going, we’ll be adding an additional 100 sales people over the balance of the year.

Let’s talk more about these sales efforts and how they affect our market fee-based revenue on slide six. An uncertain market environment, while not ideal for trading, does present growth opportunities for other areas of our business. For one thing, it creates an increased appetite for guidance and advice, and sales in this area were strong in the quarter.

Our teams drove record results in both Amerivest and AdvisorDirect. As a result, market fee-based balances were up 32% year-over-year at $95 billion and up 7% sequentially. Our offerings span a broad section of today’s investors needs and with an effective referral and sales processes in place within both our retail and institutional channels, we were ready to bring these products to our clients. Market fee-based revenues are up 28% year-over-year and 8% sequentially, and we have strong momentum and expect that growth to continue.

Turning to slide seven, our growth strategy is performing quite well, but what we do with those assets we gather to earn incremental revenue is just as important. We recently sized – signed a revised IDA sweep agreement with TD that takes us out to 2018. This new agreement better addresses today’s operating environment, which is very different from what we had when the original agreement was signed in 2006. More specifically, it addresses changes in the regulatory environment brought about by Dodd-Frank and Basel III. There is a slight change in the economics of the relationship, which provides us with more protection on the downside in the current late environment.

TD will lighten its management fee when the Fed funds rates is below a certain threshold and this fee will be adjusted upwards in return as rates raise. TDs fee of 25 basis points on floating balances will be variable when the Fed funds rate less the FDIC fee is less than 50 basis points.

In the current environment, the revised arrangement effectively reduces the fee to 7.5 basis points from 25 basis points on floating balances. Once the Fed fund rate hits 75 basis points and the five-year swap rate hits 150 basis points, TD servicing fee will effectively increase up to an additional 10 basis points from 25 to 35 basis points on new extensions. This increase will phase in over a number of years as a synthetic bond ladder over – rolls over and new extensions come on.

Based on current economist projections, we expect that these thresholds will not be hit until 2016 and that increasing fees will phase in gradually over time after that. What this means is that we now have more flexibility in managing our investment profile and net interest margin as rates eventually begin to rise. It’s good for TD Ameritrade, it’s good for TD and it remains beneficial to our clients. We are pleased to have this agreement – have to come to an agreement on these revisions, which will take place – become effective January 1. Bill will have more details in a few moments.

Now let’s turn to slide eight. In January, the challenging environment continues. Whether it’s the fiscal cliff, the debt ceiling or unemployment, there are still many unknowns leaving many investors in wait and see mode. But as we tell our clients every day, in any environment, there are opportunities. Today, it’s a stronger appetite for guidance and advice. Tomorrow, it will be something else.

Our business model and strong sales and service teams give us the flexibility to capitalize on opportunities as they arise. As a result, we’ve delivered a strong start to fiscal 2013. We delivered strong organic growth in asset gathering with record quarterly net new client assets of nearly $16 billion or a 13% annualized growth rate.

Our sales teams worked together to produce record guidance and advice sales, leading share growth and market fee-based revenues of 28% year-over-year. And through it all, we remain disciplined with expenses, which were down 4% from the same quarter last year.

Our revised IDA agreement gives us more downside protection in the current rate environment and the flexibility to better manage our investment profile, as net interest rate – as net interest margin – and net interest margin in a rising rate environment. And we remain good stewards of shareholder capital, while maintaining a strong balance sheet.

In closing, the first quarter of 2013 is now in the books. And while we’re very pleased with the trends that we’ve established, we know that we still have three quarters to go. We remain confident that our strategy and business model continues to work well for us. We continue to take advantage of client and investor trends to grow our business, develop a third revenue stream and continue investing in the future to keep up the momentum. We remain very well-positioned to deal with unexpected issues and take advantage of opportunities as they present themselves.

And with that, I’ll turn the call over to Bill.

Bill Gerber

Thank you, Fred. Good morning everyone. We are off to a great start to our fiscal year with strong results this quarter despite the relatively slow trading period. We continue to benefit from organic growth and disciplined management of our balance sheet, and we continued to effectively utilize our strong financial position. We paid our $0.09 quarterly dividend, paid off $250 million of maturing debt and paid a $0.50 special dividend all in the last three months. In all, this was a great quarter and we have a lot to be proud of.

So with that, let’s begin with the financial review on slide nine. We’ll start with the December to December comparisons on the left side of the page. On line one, transaction-based revenues down $16 million, driven by 33,000 less trades per day and 1.5 fewer trading days, notably due to Superstorm Sandy. However, offsetting this lower activity rate, commission rates increased by $0.72 due to trade mix and payment for order flow.

On line two, asset-based revenue is up $19 million due to the growth in market fee-based balances and continued growth in spread-based balances. As a result, revenue was flat year-over-year. On line five, total operating expenses are down $15 million, or 4%, primarily due to lower professional services as we continued to tightly manage consulting and contractor spend, and lower advertising, particularly in the education channel. This resulted in net income of $147 million, and earnings per share of $0.27, or $0.29 when excluding the impact of our intangible amortization. On line 16, EBITDA as a percentage of revenue was 44%.

Moving to the sequential quarter comparisons on the right side of the page. Revenue was up slightly, as asset-based revenue remained resilient, up $2 million. On line seven, total operating expenses are down $5 million, due to lower advertising, as we had the Olympics spending last quarter which obviously did not recur. The net result was earnings per share up $0.01.

Now let’s turn to spread-based revenue on slide 10. This quarter, we finished at $321 million in revenue, up $7 million or 2% from last year. Balances averaged to $79 billion in the quarter, up $6 billion or 8% from last year. This growth was offset by 11 basis points of rate compression. Of note, margin lending revenue is up $4 million, due to $1 billion of higher balances, partially offset by lower rate due to the mix of clients. Margin balances ended the quarter at $8.6 billion.

Now let’s discuss the IDA on the next slide. As we discussed in the past, it is difficult to outrun interest rate compression. On a year-over-year basis, average balances are up $5 billion, or 8%, and revenue is flat, as the balance growth contributed $19 million of higher revenue, offset by lower rates driving $19 million less revenue.

Sequentially, average balances are up $3 billion, or 5%, and revenue is essentially flat, as the net yield dropped 7 basis points since floating rate balances were elevated. A couple of items drove this higher float balance. First, the record net new asset flows, and second, we stopped extending during the quarter while we got through the fiscal cliff. We began extending again in January, and now that the yield curve has moved approximately 20 basis points. The net result of all of this was that floating rate balances are above our targeted 5% to 10% range, ending the quarter at nearly $13 billion of float, at 19% of our total $68 billion in ending balances. Our duration is now 2.6 years, down from three years in September, but still within our targeted two to three-year range.

Let’s now turn to the next slides to discuss the revised IDA agreement a bit further. I want to briefly discuss the economic implications of the revised IDA agreement for your models. We’ll discuss these changes on slides 12 and 13. In essence, we will be incurring a lower management fee on our floating rate balances until rates rise. Also, there will be an increased fee on new extensions when rates rise. And as Fred said, this agreement was effective January 1, 2013.

On floating rate balances on slide 12, the current fee is 25 basis points on floating balances. The new management fee is formulaic and will range from a low of 3 basis points to a high of 25 basis points. Further, the earn rate on the floating balances is moving from 30-day LIBOR today to now the higher of the Fed funds rate or the rate the Fed pays banks on excess reserves.

You can see how the rate changes in the four examples on the slide. Based on current forecasts, the net benefit of this change for each of the next three years is expected to be approximately $30 million.

Moving to the extensions example on line – on page 13. When the Fed funds rate is at 75 basis points and the five-year swaps are at least 150 basis points, we will begin to phase in an additional fee on new extensions only. This new fee will be capped at 10 basis points. Obviously, since five-year swaps are currently at about 90 basis points, and the Fed funds are about 25 basis points, this has no impact in the current environment, and given our laddering strategy, this will take several years to fully impact all of the balances.

Based on current forecast, this fee won’t have an impact until at least 2016. We continue to be very pleased with this arrangement with TD and believe the agreement is a positive for both companies and our clients.

Now, let’s turn to slide 14. Interest rate sensitive balances are up $11 billion or 14% from last year due to organic growth. We are now at $90 billion of interest rate sensitive assets. We remain very well positioned for rising rates. Given the substantial growth in balances, the shortened duration of the IDA portfolio as well as the revised IDA agreement, we increased our rate sensitivity. Remember, this sensitivity assumes 100 basis point increase in rates and the revised IDA agreement. So you can see a four-step additional EPS impact in each of the three years.

Now, let’s turn to the final slide. We are off to a very good start for the fiscal year. Asset gathering remains strong with a record $16 billion quarter. Record sales in Amerivest and AdvisorDirect are fueling strong market fee-based balance growth and revenue.

We remain disciplined on expenses, holding quarterly spend essentially flat from last quarter. We experienced another quarter of relatively low activity rates, but nevertheless delivered strong results. Although trading remains sluggish compared to what we normally would expect this time of year, we’re pleased to see trading pick up in January.

We revised our IDA agreement with TD, which provides us more protection in a continued low-rate environment and better aligns with proposals in Basel III and Dodd-Frank. And finally, we have maintained a clean and stable balance sheet, which coupled with our strong cash flow allowed us to deploy a significant amount of cash during the quarter in the form of dividends and debt payments.

We’re very proud of this first quarter. You can’t paint a much better picture given the trading environments. As we move forward, we will continue to focus on maintaining our momentum.

And with that, I’ll turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Rich Repetto, Sandler O’Neill. Please go ahead.

Rich Repetto – Sandler O’Neill

Yeah, good morning, Fred. Good morning, Bill.

Fred Tomczyk

Hi, Rich.

Rich Repetto – Sandler O’Neill

I guess the first question is on your new IDA agreement, so Bill, I guess the way – we haven’t had a lot of time to digest it, but it seems like you’re getting a benefit in the current low rate environment, you sacrificing some 10 basis points of minimal and when you get rates higher. I guess my question is – on an NPV basis, was this designed to come out neutral or was this designed to give a little bit back over time to TD because it has been such a beneficial agreement from your end? I’m just trying to see whether I’m evaluating the economics of it correctly?

Fred Tomczyk

Yeah. The reality is what you’re going to calculate as the NPV is all dependent on your interest rate outlook. So it really wasn’t designed around that. This was all done because of – it started with a discussion because of the result of the changes in Dodd-Frank and then Basel III. And once the Basel III capital rules became clear, TD wanted some improved economics to them when the interest rate environment improved and we basically said, yes, but right now we’re – it’s costing us money to keep balances short and float, which is the right profile for – when you’re going into a rising interest rate environment.

And that’s really how it’s paid off – paid and it will phase in – I think the most important thing right now, in the next couple of years – there isn’t an economist out there that will project that 10 basis points will kick in. So you’re really $30 million to us this year in this environment when – it’s a tough environment from a net interest margins perspective allows us to position ourselves profitably in a rising rate environment and then gives them some benefit down the road when interest rates eventually do rise.

Rich Repetto – Sandler O’Neill

Okay. Okay, that’s helpful, Fred. And then my one follow-up question would be, it seems like we’ve got some mix signals in regards to the retail investor. Trading, it is up, but it doesn’t appear to be as up as at least we thought it was initially in the beginning of January. And then, but you got record net new assets, both you and your counterpart. So, I guess Fred, I know you have the Investor Movement Index as well. But I guess is your read or evaluation of retail at this point, given those indicators?

Fred Tomczyk

I think it’s – as I said in my talk, I think it’s improved, but there’s still uncertainty hanging over the – I’ll call it more of a long-term investor. The active trader is active in the market, the more active investors are active in the market. There’s no question no matter – it seems like no matter what you read today people are tending to be bullish on equities, but I think the long-term investor is still fairly cautious in light of the uncertainty out of Washington. And my own bias here, the reality is that the S&P 500 was up 13%, 14% last year, it’s up 4% year-to-date already this year, eventually they’ll come back, but I do think we need some certainty and some clarity out of Washington before I think the long-term investor really does start to come back.

Rich Repetto – Sandler O’Neill

Okay. Hopefully, we’ll see record net new assets in this quarter as well. Thanks.

Fred Tomczyk

Okay. Thank you, Richard.

Operator

Our next question comes from Howard Chen of Credit Suisse. Please go ahead.

Howard Chen – Credit Suisse

Hi. Good morning, Fred. Good morning, Bill.

Fred Tomczyk

Hi, Howard.

Howard Chen – Credit Suisse

Congrats on a strong quarter. Two questions on the idea, first, I was wondering this thinking behind maintaining your guidance in light of that restructuring agreement and the incremental $30 million you spoke of, how much of that is – is are you thinking about reinvestment versus conservatism given where we are in 2013?

Fred Tomczyk

Well, we think – we think the guidance is basically the same. Obviously, we’re only one quarter into it. This year, obviously, with three quarters left, it would be a little over $20 million tax that would be beneficial to the current fiscal year. So, yes it’s beneficial. Yes, it will help to maintain the range, but we’re not ready to change the range quite yet.

Howard Chen – Credit Suisse

What are you thinking about, reinvesting that $20 million, Bill, like more than if we chatted three months ago?

Bill Gerber

No, we’ve got, I mean certainly the 100 sales people that we talked about will be the investments over the remainder of this year, but we’re not looking to add anything incremental to that right now.

Howard Chen – Credit Suisse

Okay, thanks. And then my follow-up on the revised IDA agreement, what’s specifically changed that aligns both parties better to Dodd-Frank and Basel III?

Fred Tomczyk

Well, that all has to do with – when you get into Dodd-Frank, there’s this whole thing about liquidity, funding sources, and triggers and living wells. And so the big things that changed in this document will be filed publicly with our 10-Q, is it 10-Q?

Bill Gerber

Yeah.

Fred Tomczyk

Yeah, which goes on in a couple of weeks, but really what it’s trying to do is basically, we gave up some of our termination rights, which is fine with us. And so there’s less termination rights on the Ameritrade side, which increases the funding and liquidity and the stability of those deposits for TD. And then in the event that there’s ever a termination, and we have no reason to believe whatsoever there’s a termination, both sides are happy with it. The reality is this, that in the old agreement, essentially there was a two-year notice period and then the agreement ended. It was unclear how that worked, and that may have been one thing where the deposits were $15 billion, but now they’re closing in on $70 billion. That’s a big deposit base for any financial institution and one of the top deposit banks in the United States.

So this new one basically says there’s a two-year notice period and then there’s an orderly transition out of the agreement that honors essentially both the synthetic bond ladder. So it will take a protracted period of time, which increases the stability of the deposits for them and actually is good for us because if that ever should happen and we have a lot of time to economically adjust.

Howard Chen – Credit Suisse

That makes a lot of sense. Thanks for the detail, Fred.

Operator

Our next question comes from Patrick O’Shaughnessy of Raymond James. Please go ahead.

Patrick O’Shaughnessy – Raymond James

Hey, good morning, guys.

Fred Tomczyk

Hi, Patrick.

Patrick O’Shaughnessy – Raymond James

So first question on the IDA, when you were talking about restructuring some of the agreements, and it looks like you restructured the investment for the floating rates – so in terms of how they’re going to benchmark the rate that you earned there, was there any discussion around the investments for the fixed rate vehicles – maybe benchmarked to something else to give you a little bit more flexibility?

Fred Tomczyk

No and we wanted to just stick with an external benchmark. I know, there’s lots of discussions going on about LIBOR right now, but the reality is LIBOR is the published standardized rate, and there was no discussion about changing that.

Patrick O’Shaughnessy – Raymond James

Okay.

Fred Tomczyk

The reality is it’s on the floating balances. We did go from 30-day LIBOR to a grade or up calculation.

Bill Gerber

Right.

Fred Tomczyk

Fed funds and what the Fed pays on reserves.

Patrick O’Shaughnessy – Raymond James

Right, thanks. And then for my follow-up question, so you guys had a nice uptick for net new assets. Your San Francisco based competitor also had a really strong quarter for net new assets. Can you talk a little bit more about what sort of underlying trends you’re seeing that’s really driving that right now?

Fred Tomczyk

Well, in the – both our retail and institutional channels continue to do well. I think – plus I can’t speak for any of our peers, but I’d say that the market environment is challenging, but all of us at least on our side continue to be aggressive in the market in terms of marketing, in terms of sales and service. I think the most important thing is that you take what the market gives you as opposed to fight the market and that’s really worked for us, the first thing. And right now, the market is very much a guidance and advice market. We saw very strong sales of Amerivest and AdvisorDirect. And on our institutional side continues to – they just had a record quarter there. Our RIA channel continues to do very well, both existing RIAs and new RIAs. Now, they’re just firing on all cylinders right now.

Patrick O’Shaughnessy – Raymond James

Great. Thank you.

Operator

Our next question comes from Roger Freeman of Barclays. Please go ahead.

Roger Freeman – Barclays

Hi, good morning. I guess first on, Bill, you said you resumed extensions in January. Where are those generally concentrated? Is it closer to five-year or seven-year timeframe?

Bill Gerber

It’s actually in that exact range, Roger, so we have some going to – in all those levels.

Roger Freeman – Barclays

Okay. Okay, great. And then, the second question, a follow-up is just with activity starting out low at least relative to what you would have thought seasonally, does that have any implications for what you’re thinking about advertising spending for the year or any additional layers of cost cutting that you’ve talked about in the past or is it just kind of too early to make any assessments?

Fred Tomczyk

No, it doesn’t, I mean, I think we don’t manage advertising, so to speak in terms of just earnings or short-term earnings. Throughout this environment, we’ve been varying much, as long as we’re getting the momentum and getting the business and continuing to build our long-term earning power and its economic, we’re going to continue to spend the money on marketing, gather the assets (inaudible) the market based fee revenue and go from there.

Roger Freeman – Barclays

Okay, great. Thanks.

Operator

Our next question comes from Keith Murray of Nomura. Please go ahead.

Fred Tomczyk

You there, Keith?

Keith Murray – Nomura

Sorry about that. Return on client assets, that’s sort of been stuck in the 20 basis point range give or take the last few quarters, obviously rates play a factor, trading has been sluggish, what’s your view over time where you think that ROCA can get back to. Do you see any reason it won’t get back to, call it in the 30 basis point range someday?

Bill Gerber

I don’t – I don’t see any reasons, which is like double negative. I don’t see any reason, it won’t get back to 30 basis points, but I do think it will get back to 30 basis points, I think that way we’ll get closer to 30 basis points. You’re right, the interest sensitivity with that number is extremely step on powerful. And so as that starts to move, I think you’ll just see a natural uptick in that metric.

Keith Murray – Nomura

Okay. And then, to the strength in the – net new money, it seems like whatever you guys choose to focus on, whether it’s gathering assets starting in 2008 or excuse me, now focused on the fee-based assets. Whatever you focus on, you seem to be able to do it with relative ease or at least it looks easy from the outside. So what is it? Is it incentives that you have for the sales force? Is it the way your retail channel is set up? Just curious what do you think is the main driver for your, what I would call outsized growth in whatever specific new initiative you focus on?

Fred Tomczyk

Well, first off, I’m glad that it appears easy from the outside. I can tell you, it’s not easy on the inside. But to get into – the reality is I think -we have a model. We have a very clear strategy. We’ve worked on it over time. The reality is the Amerivest AdvisorDirect. We’ve been working on that for three to four years. And lining up all the pieces to be able to make it a recommendation versus a non-solicited trade, broadening out the product suite, bringing in Morningstar and actually increasing the objectivity of that offering.

And so, we’ve done a lot of things to really strengthen ourselves and build our sales forces and sales disciplines. And then the reality is what our organization is good at is tweaking and its minor changes at the edge to get people focused on what we think will work in the current environment based on the trends. So, but it’s been – it’s been three or four years of work. And there’s no easy way to do it. You can maybe do it in a quarter, but you can’t keep it up on a sustained basis the way we have. So it’s been a lot of hard work and I do think the management team has been good at sort of adjusting to what the market gives them in the short-term, but not changing the long-term strategy or goal.

Keith Murray – Nomura

Thank you.

Operator

Our next question comes from Bill Katz of Citi. Please go ahead.

Bill Katz – Citi

Hey, thanks. Good morning, everybody. Can you just give us a little more thought on ad spend, as you look out to this year, that’s growing at the lower end of your guidance. So just sort of curious, if you’d look to take that up, should activities come back, or are you getting a better return on your ad spend, all else being equal, and these are more reasonable levels?

Fred Tomczyk

Well, actually we’re getting very good returns on our ad spend. It’s become more focused, and more targeted. It – I mean, we have no intention that will be between $235 million and $240 million this year. We’re going into our heavy season here. It’s in quarter two and quarter three, and our new ads are showing up very well. We got a nice brand lift from the Olympics. So everything, all the metrics we look at, whether it’s cost per count or return on investment, and all that kind of stuff actually are trending in the right direction right now. So we see no reason to pull back.

Bill Gerber

And the biggest reason, just a little extra color on that, Bill, the biggest reason for the decrease this year as I mentioned in my remarks was the education channel. And as we’ve talked in the past, we used to pay partner commissions. We ended that agreement last year. And so the ad spend that we had this quarter on the company was pretty much flat with last year. Our taxes again the ad spends or the education spends. So you’ll see that triple through a little bit more the rest of the year.

Bill Katz – Citi

That’s helpful. And then just when you – just going back to your rate sensitivity. I’m just sort of curious. When you look at the parallel shift of rates, what is the underlying assumption for deposit levels against that shift?

Bill Gerber

They are – $10 billion to $11 billion then.

Fred Tomczyk

It’s less.

Bill Gerber

The ladder sorry, is that what you’re asking, Bill, the ladder, how much will roll every year?

Bill Katz – Citi

Well, I was just asking whether or not, how much of it is sticky, because we’re making the assumption that the balance sheet remain as is. So I’m curious will there be any potential runoff into the re-risking?

Bill Gerber

Likely, we expect it’s going to be static and historically even in bull markets or bear markets, we’ve seen that number increase. Obviously, we will see and have to watch what happens coming off of historic lows like this, but that will be something we will obviously have to test but in our model, we’re assuming that the levels remain static.

Fred Tomczyk

And if you go to slide 21, you can see what the balances have been like all the way back and it has historically except for – sort of really a market crash has been between 15% and 20% of plain assets pretty consistently. And, when you look at that slide, you can see when it’s outside that zone, it’s not because of the balances. That’s usually because of the market movement so it’s the denominator not the numerator.

Bill Katz – Citi

Okay, thanks for taking my questions.

Fred Tomczyk

Thank you.

Operator

Our next question comes from Alex Kramm of UBS. Please go ahead.

Alex Kramm – UBS

Hi, good morning. Just wanted to come back, I think this has been asked a couple of times in different ways already, but on specifically the guidance on the expense side, if I now think about professional fees running lower at residing you just commented on a little bit more and then the 100 additional sales people being phased in over time, so net-net does it pretty much mean the expense guidance that you gave at the beginning of the year is kind of intact?

Bill Gerber

Yeah, I think it will be, Alex. I think we’re looking at basically the guidance range is still very, very much intact.

Alex Kramm – UBS

All right, thanks for the clarification. And just switching to the RIA side, I think you made a comment about 110 new breakaways that obviously continues to be pretty strong. Can you just remind us where that’s coming from between wirehouse, the independent broker dealers and so forth. And then maybe under wirehouses, I think those guys are getting a little bit smarter around succession – I think Merrill is the last one that announced kind of like a new succession retirement plan. So just wondering if you think that’s going to change things a little bit, make the wirehouse channel a little bit more attractive again for the long-term or if the RIA channel still is kind of like best-in-class or has different things that differentiate it to still attract at this healthy rate?

Fred Tomczyk

We’ve always found the RIA place. There’s lots of people that weren’t looking to go into RIA space. So one year, it could be one of the wirehouses and next year it could be one of the independents, and in our reading this has been a long and continued secular trend. We don’t see it changing, where it does change is the wirehouses are getting better at keeping the billion-dollar-plus producers and so with them maybe the $200 million producer, the $500 million producer that you pick up more of but it’s been going on for a while. They’ve become pretty good at keeping the bigger – the bigger producers that are focused on the $1 million plus affluent market. They’ve been pretty good at keeping them now for a number of years, and I don’t see that as a change.

Alex Kramm – UBS

Okay. Very good, thanks.

Operator

Our next question comes from Chris Harris of Wells Fargo. Please go ahead.

Chris Harris – Wells Fargo

Hey, good morning, guys.

Fred Tomczyk

Hi, Chris.

Chris Harris – Wells Fargo

So it sounds like you guys have been getting really good momentum here in your advice channels. What percent of Ameritrade’s customers are now utilizing you for advice whether it be AdvisorDirect and Amerivest. And where do you guys see that possibly going over the next year or two? It seems like there’s a lot of upside there, but just maybe if you can comment a little about that, it would be great.

Fred Tomczyk

I’m not going to get into that what percentage of our clients and all that kind of stuff. But we’ve been saying, we’ve been focused on this and you should expect that the market based fee-based balance is, the revenue side should grow in our view based on our internal objectives, roughly 15% to 25% per year. So roughly double the rate of the asset gathering is where we’re targeting. And we’ve been doing that now, and so I don’t know how far it can go, but – and it will vary by market, but the reality is we have an opportunity there, and it’s just – it takes time to build it out, but that’s our internal objectives.

Chris Harris – Wells Fargo

Okay, great. Then a completely different question here. You guys have had – your stock has been acting better so far over the last couple of months. Can you remind us what TD Bank’s cost basis in your stock is? And then, related to that, I know you’ve had some discussions with them on the IDA. Any comments on what their appetite would be to sell down a stake in their equity at cost, so you guys could an potentially buy back more stock?

Fred Tomczyk

First off, I don’t know their cost basis, but my mental math would say probably 21%, 22% based on what I’ve known it to be before. We’ve had that discussion on them selling down and whatnot. And I think, the parties, I think if their stock got above their carrying value, they probably would be very happy to give us some room. But until that happens, I think we are where we are.

Chris Harris – Wells Fargo

Okay, Fred. Thank you very much.

Operator

Our next question comes from Brian Bedell of the ISI Group. Please go ahead.

Brian Bedell – ISI Group

Hi, good morning, folks.

Fred Tomczyk

Hi.

Brian Bedell – ISI Group

If we just go back to the IDA agreement, does this change your strategy on the floating rate side, and maybe you can just talk a little bit about the dynamic there with obviously very strong net new customer growth coming into cash, yet you cited $68 billion end of period. Can you talk a little bit about whether you intend to keep a little bit more on the floating rate side, or you see stronger new customer asset growth coming in and keeping that floating rate balance elevated perhaps to even more than $13 billion? And whether you also intend to sweep any more balances over from the money market fund side?

Fred Tomczyk

Let me start with the last one, there’s a lot of questions there. First off, we don’t have any plans to move anymore of the money market funds over at this point in time. The people that are there have chosen to be there. So, that’s where it is. With respect to the retail side, which is about $52 billion, $53 billion of those balances, I don’t think this changes our view at this point in time.

On the institutional side, when you go through the math and the reality is, as part of the agreement, if you’re investing or rolling out ladders of two and three years, you probably would leave it in float, because the reality is, you’re getting the same basic fee, so why would you lock in money for two or three years for no benefit and give up some potential net interest margin expansion when interest rates rise.

And so, while it’s a ways out, the institutional buck is, we will keep more in float there and so we’ll wind up with a – we changed that asset liability profile for the investor, the institutional book, where we put 40% of that roughly out four to seven years, where we’re getting a nice positive carry and keeping the rest of it relatively short. It used to be between floating and a two-year ladder or three-year ladder. In this environment, you would basically let the rest of it build up into float and leave it there.

Brian Bedell – ISI Group

Okay, great, that’s helpful. And then just – just following up on the net new asset growth, obviously December was stronger than expected and above your target range. Do you see that momentum continue into first quarter, I know Fred, you mentioned still the cautionary environment on the retail side, but it looks like you’ve got better momentum, net new customer asset momentum; if you can just comment on the IRA channel versus the retail channel in terms of that mix? And then whether you see that net new asset momentum continuing here in the first quarter, at least in the beginning part?

Fred Tomczyk

Well, I’m not going to tell you what our net new assets are month-to-date in January, if that’s what you’re asking. I think the momentum, whenever you come back from the holidays the first week or two is, it takes a while to get the sales forces all back up and get their pipelines full. So it’s hard to read at this point, but we haven’t seen anything that tells us momentum won’t increase. I’m not going to say we’re going to do $16 billion again next quarter. I think that’s a high bar, but I can tell you we can maintain very strong focus on this right now. The RIA channels just – we’re doing really well and the retail side is also doing well, and – but we are shifting some of the focus in retail to the advice and guidance0based products, given the strong sales there and the appetite in the market.

Brian Bedell – ISI Group

Okay, great, that’s helpful. Thanks so much.

Operator

Our next question comes from Joel Jeffrey of KBW. Please go ahead.

Joel Jeffrey – KBW

Good morning, guys.

Fred Tomczyk

Hi, Joel.

Joel Jeffrey – KBW

Apologize if I missed this earlier, but I just want to make sure I’m clear on this. In terms of the lower rate that you guys are paying to TD in the near term, that’s going to be based off just the floating rate balances, but going forward when rates rise above that, is that higher potential 10 basis points paid on the entire balance?

Bill Gerber

Yes, exactly. Yeah, so the floating rate – the floating rate would be – there will be a – the rates can vary between 3 basis points and 25 basis points and as I said, that’s formulaic, then the fees will kick in on extensions only in the future, so anything that’s extended.

Fred Tomczyk

But you got it right. On all extensions, eventually, the fee will be 35, but that’s probably quite a few years out before that’s fully effective.

Joel Jeffrey – KBW

Okay, great. And then just – I mean, in terms of thinking about retail and advisor activity going forward, I mean how are you guys sort of anticipating any kind of reaction to – any kind of Washington issues with the debt ceiling and things like that? I mean, should we expect another spike in trading volumes if volatility spikes, or just any color you could give us on that would be helpful?

Fred Tomczyk

I’m not sure I can forecast that at this point. I think three months ago, I would’ve said, whenever they get around the debt ceiling, you could see a spike. We did see a big spike last time. Right now, I’m loathe to say that. I think many people are just kind of tired of it and tired of the constant debate, partisanship and just want to see them get their act together, do the right thing. And then they’re going to take their cues on the economic indicators in the markets. And I think that’s the way the markets are behaving right now. When I was reading an article on the weekend, Joel, it’s the first time I think in 40 years that the dividend yield on the S&P 500 is higher than the high yield bonds are yielding or something like that, I find that hard to believe, actually.

Joel Jeffrey – KBW

Okay. Thanks for taking my questions.

Operator

Our next question comes from Alex Blostein of Goldman Sachs. Please go ahead.

Alex Blostein – Goldman Sachs

Hey, good morning, everybody. Just some more follow-up on the IDA. Thanks for all the color. Did you guys talk at all about where you’re exiting, as you exit the quarter, what the net new reinvestment yield is in the whole portfolio?

Fred Tomczyk

I’m sorry, I lost the last part, Alex.

Alex Blostein – Goldman Sachs

So, as you exit the quarter, what’s the net new reinvestment yield on the whole IDA book? I think so, 125 basis points for the quarter. I think last quarter, you mentioned you’re somewhere in the 50s. Can you give us a sense what the net new yield is right now?

Fred Tomczyk

I don’t think you can do that, because the – where you extend is dynamic. But right now, on the retail side, if you assume seven years, you can go figure it off the–

Bill Gerber

Swaps.

Fred Tomczyk

Off the swap. You just take the swap rate there. I think it’s probably 90 to 100 basis points. 90? 135. I’m sorry, it’s 135 basis points. So, take off 40 basis points that will tell you the number. So, 90 – I think 90 to 100 basis points is the net on the retail book. And on the institutional book, it’s going to be shorter, so we are extending 40% of that four to seven-year range, but the rest is staying shorter. But when you do these things, what the latter does is, it mitigates the impact of interest rate changes at any given point. So, it’s designed basically to give you time to adjust. So, the only way you – like the whole mark-to-market and what you would get today if you re-emulate it is kind of an interesting thing. But I would never happen, and it’s designed to prevent that from giving you a shock.

Alex Blostein – Goldman Sachs

Right, but I mean – I don’t think last quarter you guys kind of I think gave the number looking at the book from a kind of from static perspective just say look, given where the balances are today, assuming everything kind of gets roll forward in line with history, I think you mentioned it was roughly about net 50 basis points, I just wanted to clarify whether or not that’s still roughly the number?

Fred Tomczyk

I think your net is probably the five-year rate. But right now, you should – the bulk of the balances are in the retail book and if we were rolling over exactly the way that it’s designed it would be – the net would be rolling over at about 95 basis points.

Alex Blostein – Goldman Sachs

Okay. And then my second question is on commissions per trade, I’ve seen us pick up this quarter. Bill, I think you mentioned there’s a mix of things, some of it is trade mix related, some of it is payment for order flow. Can you dissect that out a little bit and just kind of give us a sense, how much was each and as you’re looking out into this quarter, what’s that shaping out to be like?

Bill Gerber

I think, Alex, the way I would characterize it is, I think the rates that we’re getting right now are probably going to be pretty stable in payment for order flow, and so the variable is going to be what people are trading. And as we have 40% of our trades almost this quarter were derivatives, that gave it a little extra pop. So, I would expect that we should stay in this range for a while. It might be a little bit south if more regular equity trading kicks in, but then on the payment for flow side, that should be pretty constant here.

Alex Blostein – Goldman Sachs

Got it. Thanks so much.

Bill Gerber

Welcome.

Operator

Our next question comes from Chris Shutler of William Blair. Please go ahead.

Chris Shutler – William Blair

Hey guys, good morning.

Bill Gerber

Hi there.

Chris Shutler – William Blair

You talked about adding 100 sales people at least I think focused on guidance and advice for the fiscal year, so just hoping maybe we could get a little bit of more detail. Are those mostly field sales – how much – how does that compare to the number of people in the base right now? Then maybe just help us – walk us through how the sales process actually works from a blocking and tackling standpoint? Thanks.

Fred Tomczyk

Well – those new sales people got split between retail and institutional, retail probably has 800 sales people, institutional probably has a couple of hundred, so let’s call it 1,000. So it’s a 10% expansion of your sales force, roughly. It will go – the bulk of them will go to more towards the retail side, and they’ll be spread across the country, based on the account loads in different branches in parts of the market, and it’s also based on where we see good opportunities, we may even open a new branch.

Chris Shutler – William Blair

Okay. And then, how the process actually works. Is it – is that mainly field sales then?

Fred Tomczyk

It’s mainly which?

Chris Shutler – William Blair

It’s mainly field sales, not telesales?

Fred Tomczyk

Oh, yeah, I would say, the – 90% of that is going to new front office sales people.

Bill Gerber

Yeah, it won’t be as much on the phone side, if that’s what you’re referring to.

Chris Shutler – William Blair

Yeah, exactly.

Fred Tomczyk

It would be much more in the branches and out in the field.

Chris Shutler – William Blair

Okay. Then what....

Fred Tomczyk

Otherwise, some of it will go up against the TD initiative because we do think we have that working pretty good now.

Chris Shutler – William Blair

Okay, great. And then just one quick follow-up on the questions on M&A from earlier, can you give us the percentage of M&A in the quarter that was retail as opposed to RIA?

Fred Tomczyk

No. And I’m not going to give you details. If you look at the overall assets today and the fact that we’ve always said institutional should grow at two times the rate of retail. Historically, we said that would drive you a number of 50-50, today that would drive a 60% institutional, 40% retail. If the institutional was hitting on double the retail rate. And right now it’s probably a little higher on the institutional side.

Chris Shutler – William Blair

Okay. Thank you.

Operator

Our next question comes from Mac Sykes of Gabelli & Company. Please go ahead.

Mac Sykes – Gabelli & Company

Hi, good morning gentlemen, congrats on the IMX launch, it was very interesting.

Fred Tomczyk

Thanks, Mac.

Mac Sykes – Gabelli & Company

Just – just wanted to see if I can get more color on your mobile efforts. My questions will be, how important a platform do you see it becoming? And secondly, will there be opportunities in the future to leverage the costs of that platform versus some of your other traditional channels?

Fred Tomczyk

Well first off, I mean you go to any technology article or convention today they will remind you it’s about mobile, mobile, mobile. And in some respects all of the platforms are blending together and you have to be able to, whether it’s the Web, it’s mobile, whether it’s a tablet, a phone, a smartphone. The reality is, as I think it’s just becoming a reality if you want to be in this business. And so, it’s not easy to keep up if you don’t have good technology and good technology architecture, that’s the first point. Second point is that we do know that people that do have mobile and use the website and mobile, the reality is, is they tend to be more active in managing their investment portfolio, and that’s good over time, but there is a strong trend towards mobile. And anybody in our space -I think you have to be there.

Mac Sykes – Gabelli & Company

Okay. Thank you.

Operator

I’m showing no further questions at this time. I would like to turn the conference back over to Mr. Fred Tomczyk for any closing remarks.

Fred Tomczyk

Okay, thank you, everyone, and thanks for joining us this morning. We feel good about the quarter. We had very good growth both on the asset gathering side and on the advice and guidance sales. We basically also have kept very good expense control, and we’ve renegotiated the IDA agreement to the satisfaction of both ourselves and TD. We do believe that deals with – some of the things that are coming forward in Dodd-Frank and Basel III, it gives us some downside protection in the current environment. And gives back some economic strategy over the long-term when rates rise. And so we feel pretty good about that. We’re going to stay very focused. We’re going into our peak season here the next quarter or two, and the management team is very focused on maintaining momentum. And we’ll talk to you again next quarter.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may all disconnect and have a wonderful day.

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