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TD Ameritrade Holding (NYSE:AMTD)

Q3 2013 Earnings Call

July 23, 2013 8:30 am ET

Executives

Bill Murray - Head of Investor Relations and Managing Director of Communications & Public Affairs

Fredric J. Tomczyk - Chief Executive Officer, President, Director and Member of Non-Td Directors Committee

William J. Gerber - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

William R. Katz - Citigroup Inc, Research Division

Howard Chen - Crédit Suisse AG, Research Division

Alex Kramm - UBS Investment Bank, Research Division

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Christopher J. Allen - Evercore Partners Inc., Research Division

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Michael Carrier - BofA Merrill Lynch, Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Brian Bedell - ISI Group Inc., Research Division

Christopher Shutler - William Blair & Company L.L.C., Research Division

Macrae Sykes - Gabelli & Company, Inc.

David J. Chiaverini - BMO Capital Markets U.S.

Kenneth Hill - Barclays Capital, Research Division

Operator

Good day, everyone, and welcome to the TD Ameritrade Holding Corporation's June Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is President and Chief Executive Officer, Fred Tomczyk; and Chief Financial Officer, Bill Gerber. At this time, I would like to turn the call over to Bill Murray, Managing Director of Investor Relations. Please go ahead, sir.

Bill Murray

Thank you, operator. And good morning, everyone, and welcome to the June quarter earnings call. I'm sure you've had a chance to look at our press release in the June quarter earnings presentation, which can be found on amtd.com. Our Safe Harbor statement and reconciliation of certain non-GAAP financial measures to the most comparable GAAP financial measures are included in this presentation as well. Descriptions of risk factors are included in our most recent financial reports, Forms 10-Q and 10-K. As usual, the call is intended for investors and analysts and may not be reproduced in the media or -- in whole or in part without prior consent of TD Ameritrade. As is our normal caution, please limit your questions to 2 so that we can get through as many covering analysts as possible in the allotted time. With that, we have Fred Tomczyk, our CEO; and Bill Gerber, our CFO, here to review the June quarter results and major accomplishments. So now, let me turn the call over to Fred.

Fredric J. Tomczyk

Thanks, Bill, and good morning, everyone, and welcome to our third quarter earnings call for fiscal 2013. We had a strong quarter on virtually all metrics as we continue to focus on executing our strategy to lead the industry in trading and be a premier asset gatherer. Our core business is performing well and investor sentiment continues to improve. There are many things to feel good about as we start the last quarter of our fiscal year. Let's take a look at our results in more detail on Slide 3.

Total client assets ended the quarter at $524 billion, up 18% year-over-year. Interest-sensitive assets were at a record $94 billion, up 19% year-over-year. We earned record net revenues of $725 million, up 9% year-over-year. And we had another record quarter with market fee-based revenue of $65 million, which was up 23% year-over-year. That brings us to earnings per share of $0.33 for the quarter on $184 million net income, which was up 19% year-over-year as our revenues grew nicely, while expenses were kept in check. Trades per day for the quarter were the highest we've seen in nearly 2 years, up 6% sequentially to 399,000. And net new client assets were $11 billion, an 8% annualized growth rate and up 11% year-over-year.

Finally, we received another credit rating upgrade when Moody's adjusted our rating from Baa1 to A3. This move, like the others that came before it, is a reflection of the success we've had in strengthening our balance sheet, growing our business and mitigating the impact of the low interest-rate environment.

Let's now look at our growth strategy in more detail, starting with trading on Slide 4. In the June quarter, we had an average 399,000 trades per day, an activity rate of 6.7% and right around the average activity rate of the last 3 years. We saw an increase in intraday volatility and the VIX after the Fed suggested that it might begin unwinding quantitative easing sooner than the market was expecting. We do expect that as the Fed unwinds its unprecedented stimulus, we will see increased volatility in the market, which should help trading levels.

Our Investor Movement Index, which retracks the activity of our clients' portfolios, remained in relatively bullish territory throughout the quarter. And in June, our clients were buyers -- were buying under declines in the market, increasing their equity market exposure.

In July, trades have dropped back to an average of 366,000 trades per day, but that slowness is not abnormal for the month of July. We also continue to see good growth in mobile engagement, which now makes up 10% of our daily trades. We expect this trend to continue as more people use smartphones and tablets to conduct business in the place of PCs. And derivatives now made up 40% of our trades per day in the quarter, the first time we've reached that milestone.

We continue to see interest in these products from both our retail and institutional clients. In fact, our independent advisor clients set a new record for option contracts executed through for our thinkpipes platform. More than 80% of option trades from RIAs came from advisors that are using the tools, education and support offered through our Options Market Center.

Let's now look at asset gathering on Slide 5. We gathered $11 billion net new client assets in the quarter, good results on the heels of the retirement season and what is usually a seasonably slow quarter. Both results are up 11% year-over-year, and through 3 quarters, we've now gathered $39 billion in net new client assets, an annualized growth rate of 11%. That $39 billion is close to the $41 billion we gathered in all of fiscal 2012, which means that we expect to have a record year for asset gathering at our fifth consecutive year of double-digit asset gathering growth.

Both our retail and institutional channels continue to contribute to this growth. On the retail side, new accounts are up versus the same quarter last year, as we continue to streamline our new account, all opening and on-boarding processes, which we believe will continue to positively influence our future growth.

On the institutional side, net new client assets remained very strong. The breakaway broker trend continues to be an attractive opportunity for us, and our existing RIAs continue to do well in this advice and guidance market. We're setting our business apart with our approach to service, our commitment to practice management and education and our technology platform. For example, our advisor clients continually have access to more than 50 different technology solutions through our Veo open access program, which continues to be popular with RIAs and various technology vendors.

We also continue to see signs that we are, in fact, in an advice and guidance market. There are signs we are in the early stages of a rotation, with investors moving out of bond funds and into equities. But I would call it a mini rotation, as opposed to the great rotation at this point. They continue to look for advice and guidance before they jump in. This desire to be engaged, coupled with the need for help, is fueling a strong growth that we continue to see in our third revenue stream. And for more on that, let's turn to Slide 6.

Market fee-based revenue now makes up 9% of our total revenues, and we remain encouraged by the trends we're seeing as we continue to develop out this revenue stream. Average balances are up 36% year-over-year and 7% sequentially. Amerivest gross inflows for the quarters were up 28% year-over-year, and we ended the quarter with $8 billion in assets under management. And gross inflows to AdvisorDirect were up 33% year-over-year, and assets into that programmer currently stand at $19 billion. Let's now turn to Slide 7.

Looking back over the last 3 quarters, there's a lot of things to feel good about. We continue to perform well on the things we can control and against our growth strategy, which is the backbone of building our long-term earning power. Going forward, we will remain focused on maintaining our momentum and executing our game plan. When we speak to you in October, we expect to report our fifth consecutive year of double-digit net new client asset growth. We're seeing improved trading. And while there's some seasonality -- seasonal slowness in July, there is bullishness we're seeing from our clients, which gives us cause for optimism. And while investors are easing back into equity, they still have many questions. We have capitalized on this ongoing need for advice and guidance by growing our market fee-based revenue stream.

Sales into Amerivest and AdvisorDirect remained strong. And we've maintained good expense management. Rather than manage expenses based on the environment, we have maintained discipline throughout this cycle, while making prudent investments and growth on opportunity. In line with that, we will be making some investments in sales people and our middle and back-office systems over the next couple of quarters.

When we think about our asset liability management, or ALM, it's all about revenue. Over the past 5 years, we've been able to mitigate rate compression with a revised cash management strategy and strong organic growth. We've now hit an inflection point as the 5- to 7-year rates increased 74 basis points from the end of the March quarter to the end of the June quarter. In fact, based on the forward curve and the current economist projections, our RDA rollover rates are roughly equal to what we are reinvesting them at. This is the first time this has happened since the financial crisis began.

Now we are working through how we reposition our ALM strategy for a rising rate environment over time and finding a balance between optimizing both short- and long-term earnings. For now, that means we'll continue to do as we have been doing, employing a barbell strategy, increasing our float balances while taking advantage of the yield curve to -- and reinvest in the 5- to 7-year range. As we work through this, our focus remains on net interest revenue, not NIM. It's a dynamic strategy, and we'll update you on our October call when we give you our 2014 outlook.

The Knight-GETCO transaction closed on July 1, and as a result, we expect to realize a pre-tax gain on our investment of $54 million or $0.06 per share, which would be recorded in the September quarter. And when we consider a capital deployment, we're pleased to now have all of our options available once again as TD sold down to 42%, giving us room to buy back shares as part of our return of capital strategy.

When you consider our $250 million debt repayment, our special dividend of $0.50 and our quarterly dividends that we've already paid, we have returned more than 100% of our annual net income to our shareholders this year. We are reviewing our return of capital strategy for fiscal 2014 now. We'll discuss that with our board, as we normally do this time of year, and we'll update you further on our October call.

In closing, the June quarter was a strong quarter for us, regardless of which metric you look at. We had records in interest-sensitive assets, net revenues and market fee-based revenues, and we are poised to have our fifth consecutive year of double-digit asset gathering, something we're very proud of. Our balance sheet is strong, our credit ratings are where we want them to be, we remain disciplined on expenses and we're well positioned for an improved economic environment. We will capitalize on opportunities to continue building our earning power and deploy or return the capital -- our capital, to the benefit of our shareholders. We remain focused on executing against our strategy. And with that, I'll turn the call over to Bill.

William J. Gerber

Thanks, Fred, and good morning, everyone. The results this quarter speak for themselves. Earnings per share came in at $0.33, the third highest quarter ever and the highest quarter since the June 2008 quarter, just prior to the financial crisis. Furthermore, both operating margin and pre-tax margin were at their highest levels in 3 years. The rebound in trading, as well as the continued execution of our game plan has definitely paid off. We have a lot to be proud of and we're very pleased with how we've performed this quarter. For a closer look at our results, let's begin with the financial overview on Slide 8.

We'll start with the June-to-June comparisons on the left side of the page. Note that there was one more trading day this quarter. As I've said numerous times in the past, in the current rate environment, the variability of our results is going to be primarily driven by trading activity. This quarter was no different, as the increase in earnings was directly related to higher trading. On line one, transaction-based revenue was up $55 million, driven by 44,000 more trades per day, an increase of 12%, as well as increases in the commission rate by approximately $0.70 per trade. Trade mix and continued strong payment for order flow drove this rate increase.

On line 2, asset-based revenue is up $6 million due to balanced growth in the IDA and market fee-based assets. Overall, balances drove a $59 million increase in revenue, offset by rate compression driving $53 million of lower revenue.

On line 3, other revenue is down $3 million due to lower education revenue, as expected. As a result, revenue was up $58 million year-over-year to a record $725 million in the quarter.

On line 5, operating expenses before advertising are up $8 million, or 2%, primarily due to trade volume and mix, drove higher clearing and execution expense and cost associated with exiting our old headquarters and moving into our new headquarters, impacted occupancy and equipment and depreciation.

Before we move on, I want to update you on our expectations for operating expenses before advertising. We expect these to increase slightly over the next couple of quarters from a current $370 million run rate to approximately $380 million run rate, the high end of our guidance range, as we press forward on the investments Fred mentioned earlier.

Moving to line 10, other expense was a net 0 this quarter, as we sold a partial stake in our NYSE Amex Investment, resulting in a $6 million gain, fully negating the impact of interest expense and borrowings. This all resulted in net income of $184 million and earnings per share of $0.33, or $0.36 when excluding the impact of our intangible amortization.

On line 16, EBITDA as a percentage of revenue was strong at 48%.

Moving to the sequential quarter comparisons on the right side of the page. Note that there were 4 more trading days and one more interest day this quarter. Sequentially, revenue increased while expenses declined. The revenue on line 4 was up $46 million, primarily due to trading volumes and the additional days this quarter.

Total operating expense on line 7 was down $15 million, primarily due to the expected lower seasonal advertising spending. The net result was earnings per share is up $0.07, or 27%. Year-to-date, earnings per share is at $0.86 versus $0.80 last year, as revenue is up 3% and operating expenses are down 1%.

Now let's turn to spread-based revenue on Slide 9. Spread-based revenue continues to remain remarkably resilient. On a year-over-year basis, this quarter, we finished at $319 million in revenue, down $5 million or 2% from last year. However, average -- balances averaged $85 billion in the quarter, up $11 billion or 15% from last year. This growth drove $42 million of higher revenue, but was offset by 24 basis points of rate compression, which drove a $48 million decline in revenue, which is equivalent to $0.05 in earnings per share in the quarter alone, or $0.20 annualized. Sequentially, revenue is up 2% as balance growth and the extra interest day more than offset the continued rate compression.

Now let's discuss the IDA on the next slide. Given the recent steeping of the yield curve, we created a slide for your reference in the appendix that may be helpful for you as we talk about this slide. On a year-over-year basis, average balances are up $10 billion, or 17%, but revenue is down 3% as balance growth could not overcome the continued rate compression. Sequentially, revenue was flat, as growth fully mitigated rate compression. Of note, we carried an average of $13 billion, or 18% of the portfolio, in floating rate balances during the June quarter versus approximately $11 billion or 17% during the March quarter. However, we ended the quarter at $17 billion, or 23% in floating rate balances, as some clients build up their cash position. The net result of this was the average duration of the portfolio declined from 2.9 years at March 31 to 2.7 years at June 30.

We did execute our normal extension strategy, placing retail investments in the 5 to 7 year points on the curve, thus receiving benefits of the higher rates as the 7-year is up approximately 74 basis points from the last quarter. As you know, our focus is on income, and we believe we are nearing trough levels in the IDA net revenue. We will give you more color on this during our October call.

Now let's turn to Slide 11 to discuss our interest rate-sensitive assets. Interest rate-sensitive balances are up $15 billion or 19% from last year to a record $94 billion. Of note, IDA balances are up 22% year-over-year, ending the quarter at $73 billion. This was up $6 billion sequentially. As a result, client cash as a percentage of total client assets increased slightly to 17% by the end of June, up from 16% last quarter, but remains within our historical ranges of 15% to 20%.

Finally, as we have said many times before and will continue to emphasize, we remain very well positioned for rising rates. Our sensitivity, as shown on the slide, is unchanged. Now let's turn to the final slide.

We are 3 quarters of the way through the fiscal year and our business is performing well. We are on track for our fifth consecutive year of double-digit asset growth. Trading improved during the quarter, but there is some seasonal slowness thus far in July. We are optimistic that trading could improve, based on the bullishness we are seeing in our clients. Market fee-based revenue now represents 9% of total revenue. Expenses remain in check and we will continue to invest wisely when opportunities present themselves.

Additionally, the steepening yield curve during the quarter will help the IDA net revenue going forward. Our investment in Knight will result in a gain of $54 million, which will be recorded in the September quarter. Our balance sheet remains strong and we continue to be good stewards of shareholder capital as we are paying out another $0.09 per share quarterly dividend. The revolving line of credit is now less than $100 million and will be paid in full by the end of this quarter.

We are finalizing our plans for our next fiscal year and we'll be releasing fiscal 2014 guidance during our next earnings call. The June quarter was a strong quarter for us. We benefited from the improved trading environment and we stayed focused on our growth strategy. We're very proud of the results we've been able to deliver and we're encouraged by the positive trends we are seeing in the economy and among retail investors. We are confident that we'll have a strong finish this fiscal year and we'll build on that momentum as we turn to fiscal 2014.

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 of Sandler O'Neill.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

I guess, Bill and Fred, I guess the question comes now on the IDA. Because it seems like now you're in a unique position where you can actually manage the top line. We know you've managed expenses by variant marketing but now, you have some variability on the top line. So I guess, can you clarify when you say your objective is to maximize net interest income, but if it was -- can you just get more -- clearer on that because if it was just maximizing wouldn't you just extend out the $23 billion? Wouldn't that maximize NII?

Fredric J. Tomczyk

Well, we should back up here and -- I mean, the first comment on -- marketing, we look at as an investment, so we actually don't manage it if it's short-term earnings or manage expenses. Marketing, we look at as an investment to grow our business and it has to justify itself on a regular basis. On the ALM profile, we're working through that right now. We'll give you a lot more color in the fall, but I think we've hit a point where I think we've gone from worried about the economy and whatnot, and I think we all have to keep those in front of us here. But I think we've hit a point where people are now starting to think about a rising rate environment. And so the approach you have with ALM will be different, depending on how you view that and how you manage towards that. And it would normally meet a new shortened duration, as opposed to a lengthened duration and so to manage the interest rate sensitivity when rates rise. Now having said all that, our view is very much when we talk to our larger investors, says don't give away your upside. So that's -- we are taking -- heeding that advice. And it's all about balancing the short term or long term, but we really don't want to give away our upside for when rates rise.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

Okay. And I guess the follow-up would be -- I guess to change the subject, on expenses. Bill, you talked about -- or Fred mentioned the sales people, and I guess some, I think, back-office functions or something, but can you talk about why you're doing this right now? What investors can expect to get as far as the benefits of the added expenses?

Fredric J. Tomczyk

Well, the first one is on the sales people, the areas we're going to invest to keep the organic growth going, which is part of our strategy, is going to be either in marketing, sales people or some kind of technology investment. And so this one, we've decided to do sales people, recognizing that it is -- it has been, and we will continue to see it as an advice and guidance market. So it's a market where you do want to the sales people. So I think that's the right -- you were in the right market environment to do that. On the other investments, they are more technology and Lean related. And we're clearly, from our perspective internally, you don't see it externally, but our middle and back-office processes still have work to do and that's where the Lean initiative has focused us. And those areas and some of those areas are struggling to keep up with the organic growth we've been having without adding a lot of people. And so we're basically going to go in and lean out the processes in those 2 areas, automate a number of things and try to knock that growth off that they need, and help them keep up with the growth.

Richard H. Repetto - Sandler O'Neill + Partners, L.P., Research Division

And by the by way, I wouldn't suggest that you'd manage expenses or advertising to hit EPS.

Fredric J. Tomczyk

Okay, thank you.

Operator

Our next question comes from Bill Katz of Citi.

William R. Katz - Citigroup Inc, Research Division

Just looking at -- not to nitpick too much, but I think the -- if I did the math right, it looks like you had some modest outflows and organic inflows in June, I just wonder if you could talk a little bit -- and I know, obviously, June is a very difficult month from a macro perspective, in the industry. Is anything unique going on in this particular margin and conversely, how are these things looking to the July pipeline?

Fredric J. Tomczyk

We're having a hard time hearing you, Bill.

William J. Gerber

Can you speak up, Bill?

William R. Katz - Citigroup Inc, Research Division

Anyway, I'm sorry to repeat the question. It looks like you had some outflows in June, the market of June, and certainly recognizes June was a difficult month for everybody. But I'm sort of interested, can you talk about the details there and what you might be seeing in July relative to June trends?

Fredric J. Tomczyk

In terms of flows? I'm not sure I agree with your conclusion that we had outflows in the month of June. I'll have to look at that -- I didn't see anything abnormal in June, to be quite honest, so I'm not sure what you're looking at.

William R. Katz - Citigroup Inc, Research Division

Let's talk about that offline. I guess the other question, just going back to the operating leverage. If you look before your guidance on the incremental spend, your incremental margin, I think, was something like 75%, 76% year-on-year. And I guess you have a couple of quarters now with elevated expense. As you look out into the fiscal '14 timeframe, how should we be thinking about margin opportunity for the franchise overall, given the mix of the business?

Fredric J. Tomczyk

I think you're -- I hate to duck your question, I think you're getting into next year. I think the way you're looking at it is right, at the margin, any times you have growth, you're going to get very high operating leverage in it, particularly if it's an interest-sensitive revenue or market fee-based revenue because not really a lot of expense come out of that, nor is trading, you get some clearing execution cost. But I think the industry does have very high marginal profitability and margin expansion. We're working through that right now. It depends on a lot of factors as you look out into '14, including a -- your approach to asset liability management, as we talked earlier. So I hate to duck it, but I think we'll give you a lot more color on that when we give you our outlook statement for '14 in October.

Operator

Our next question comes from Howard Chen of Credit Suisse.

Howard Chen - Crédit Suisse AG, Research Division

You both spoke to the resilience of the net interest revenues, the desire to kind of focus on the ability to insulate those. But just given your remarks that reinvestment rates are offsetting what's rolling off the latter, and just the general growth that you continue to see, what would prevent spread income from growing from here if rates don't move?

Fredric J. Tomczyk

The only thing that could prevent it is if you decided to dramatically shorten duration and you wound up building your short-term balances and not doing extensions to position yourself for a rise in rate environment. And depending on how you do it and the pace you do that -- but that -- we control that, for the most part.

William J. Gerber

And that's why we said that we think that the IDA revenues are -- if they haven't trough, they're very close to a trough right now.

Howard Chen - Crédit Suisse AG, Research Division

Great. Okay, that makes sense. And then my second question, given the high level of liquid assets, just the performance of the stock, the opportunity you set out -- you see out there, Fred, I was just hoping you could just add a little bit more meat on the bone, on your views on rank ordering, excess capital return priorities here between buying back the stock at current valuations, special dividend, strategic M&A and further de-leveraging?

Fredric J. Tomczyk

All my boards want to ask me that question, too. But I go back to my earlier comments. A, first, I think as you know, Howard, I like strategic optionality, so having all of our options available is worth a lot, from my perspective. But I'd say, probably at the top of our list continues to be to invest in future growth and whether that be through organic means or through acquisition, is provided it makes strategic and financial sense that will clearly be our top priority. We've always said buybacks are second, recurring dividends are third and then we're actually indifferent between special dividends and debt. I think where we are right now is, we have our debt where we want it. It's at 1x EBITDA, that's our target. We've got our credit ratings right where we want them. So debt paydown would not be high on our priority list at all, it would be last. And then between sort of I think it's between recurring dividends and buybacks right now. Stocks performed very well, I think. I don't want to get ahead of myself here because I think this is something we will obviously have a -- management will have a debate about -- we'll discuss with our board, and I prefer to comment more in depth on that in October.

Operator

Our next question comes from Alex Kramm of UBS.

Alex Kramm - UBS Investment Bank, Research Division

It sounds like much more to come in 3 months, but maybe if you can just come back to the IDA for a second here. So obviously, duration is a little bit shorter now but yields in the 7-year, 5-year have gone up a lot -- I mean, if I can say so, I mean, it's basically erupted in everybody's face. So from that perspective, it sounds like you're being very conservative and you're going to revisit this over the next few months. But how quickly or opportunistic do you think you can be if you want to be, maybe in the next few weeks or so, right, if you decide hey, you know what, rates are maybe artificially high a little bit, I mean lets walk in and let's move a few billion out the curve. I mean, is this something that you would be willing to do, or is there really, hey, let's take a pause here and revisit this in a couple of months?

Fredric J. Tomczyk

First, our vision [ph]. Rest assured, we do have a strategy that we've been following and will continue to follow until we make our final decision. However, I think -- so you don't change these on a whim. And I would be clear that we don't sort of try to bet on the curve and sort of make bold predictions. We do have a view on when rates start to rise and that's based on -- the current forecast would be late '15, early '16, in that range when -- or particularly, when Fed funds is up around 75 to 100 points, and to us, is when it's sensitive, that you have that plan for. That's probably not until early '16. And so we have time to make -- track to where we want to be. But to be in the right position at that time, you would want to shorten duration from where it is today and you want to build up your float balances such that you have lots of flexibility to manage through a rising rate environment and take advantage and build your earning power at that point. And when we talk to our bigger investors, they're really focused on that. And they've been quite clear not to give away our long-term upside here. So I think we're weighing that against short-term earning power-- short-term earnings.

Alex Kramm - UBS Investment Bank, Research Division

Okay. And then just maybe on the margin side -- on margin loans, it looks like margin loan balance, is kind of range bound here, or has been for, I would say, like 5 quarters of so. And the rate is coming down as well. So can you just maybe talk a little bit about what's going on? Is there are no appetite for margin these days? Are you not aggressive enough, or are you getting a little bit more aggressive? And maybe, just an update of if that has changed at all at the end of the quarter in terms of the balances.

Fredric J. Tomczyk

Yes, good question, Alex. I think last quarter, we brought this up and said it was -- it puzzled us as well. So we've done some more research on this, and what we found out was basically that if you take our margin accounts, the buying power has not gone up as the market, in general. And the reason for that is our most widely held stock, our most actively traded stock and our most margin stock is Apple, and -- which has not participated in the rally, which has drawn in the buying power. So I don't think there's anything, as I call it, secular going on other than -- a very large company that makes a big part of our margin book has not participated in this rally over the last year.

Operator

Our next question comes from Chris Harris of Wells Fargo Securities.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

The first question here is on the outlook for trading. I think in prior good years, you guys have been able to achieve activity rates around the 7% level. Just curious to get your thoughts as to whether you think you can hit that level of an activity rate just from customers getting more engaged in the equity market, rather than materially higher volatility from here.

Fredric J. Tomczyk

That's a hard question to answer. I'd say, the volatility will actually impact your more active and engaged investors and traders. So that -- I think what you're seeing here right now is those people are very engaged in the market and the volatility helps with their trading. I'd say that the average investor is still quite cautious. They're bullish, but they're cautious. They're interested, but they're cautious and want to talk to somebody. So until that sentiment changes, I think I have a hard time seeing us go to 7% without a significant increase in volatility from here. And I can't predict when that might change, maybe when I see all their bond fund statements as interest rates go higher and they start to see further declines in their bond funds, they might change their view. But I think right now, the memories of the great recession are still fresh in a lot of people's minds.

Christopher Harris - Wells Fargo Securities, LLC, Research Division

Okay. The follow up then, real quick on the kind of your existing product offering. Fred, I think in your prepared remarks, you had mentioned a continued growing demand from investors for advice and guidance. Just wondering how you guys feel like your product offering, whether it's broad enough to capture that growing demand over the next couple of years.

Fredric J. Tomczyk

We think it's actually pretty good. We feel pretty good about where we're at. We do keep it simple. We don't try to get it overly complicated. We thought about adding products, but I think we're always way off simplicity, straightforward, lack of complexity. We think we find, in a lot of organizations, they get -- the more things you make complicated, the harder it is for the organization to execute it and for the customer to understand it. So I think we're pretty happy with where we're at right now.

Operator

Our next question comes from Chris Allen of Evercore.

Christopher J. Allen - Evercore Partners Inc., Research Division

I was wondering if you could provide a little bit of color on the SEC lending revenue stream. It was up nicely sequentially this quarter. I wonder if there's any seasonality there, how to think about that moving forward.

William J. Gerber

I don't think that there's any real seasonality, but as you know, that business has -- it ebbs and flows as the market does. And so this quarter, I think we did have a little more activity opportunity in there. But I don't think we've seen a huge secular shift that I would call a permanent change here.

Operator

Our next question comes from Joel Jeffrey of KBW.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Just thinking about the compensation expense, kind of going forward. Is this sort of -- is the high end of this point, barring the investments you're making in stats, sort of in the high 170s? Because the ratio came in a bit low. I'm just wondering if this is the function of kind of your payments on incentive comp for net new asset growth as opposed to sort of more profitability driven?

William J. Gerber

Correct. And so, yes, it's going to be in that 170s, maybe tip 180 a little bit, depending upon the quarter. And on -- I said many times, as long as we're paying it out for the success we're having in net new assets, I'm just happy as anybody to have that line item go up. But yes, I think your instinct on that is correct.

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

And then just lastly, can you comment a little bit on what appears to be a pretty meaningful pickup in just IDA balances in June? Was that just people pulling out of market as it pulled back the bidders and sort of how has that trended going into July?

Fredric J. Tomczyk

We did see, in the RIA channel, a little bit of a shift back to cash towards the end of the month. They were -- if you went back to May and previous quarters, where they were at all-time lows in terms of cash and as a percentage of client assets, so they were fully in the market, and I think they took some profits off the table and put it back in cash there to see -- until we saw how this all played out.

Operator

Our next question comes from Mike Carrier of Bank of America Merrill Lynch.

Michael Carrier - BofA Merrill Lynch, Research Division

First, just on some of the improvement on this overall retail trend, I just wanted to get your sense. On the net new assets, I think in the past, you've said, and I might get this wrong, but I think you said something like the growth rate on RIA side was double the growth on the retail side. I just wanted to get an update on that, given that you're seeing some improvement in the retail sentiment, you're starting to see kind of the retail side of the business kind of close that gap. And then just on the ETF side, given some of the new strategies, not only with you guys but across the industry, like how that's trending. Any significant pickup that you're seeing in those products as well?

Fredric J. Tomczyk

On the product side, we're not seeing a further pickup in ETFs. Right now, we just -- I think it's probably the -- for us, the options continues to grow, cash equities continue to be sluggish. I think the thing that's probably driving our derivatives more these days has actually done very well in the futures. I think we started in the futures a couple of years ago, and it's now up to roughly 9% of our trade volume, which is pretty remarkable. So from a standstill to 9% of your trade volume. And so if we saw a trend in our trading statistics from a product perspective, it would be the -- I think futures have turned out to be more popular than we thought. Your earlier question was on...

Joel Jeffrey - Keefe, Bruyette, & Woods, Inc., Research Division

Just the mix of the net new assets and like the growth rate that...

Fredric J. Tomczyk

I would say no. Our advisor business is performing very strong right now, like -- well ahead of expectations and continues to have very good momentum. The retail side is doing okay, but I wouldn't say it's robust, but it's doing just fine and our mix of M&A right now would roughly be 70-30, 75-25, between the 2. Our advisor business is now getting up. It has over $200 billion of assets at the front.

Michael Carrier - BofA Merrill Lynch, Research Division

Okay, got it. And just as a follow-up on the expenses. I just want to get your sense -- I mean, I think, investing in the sales side and just given the net new assets, that makes a ton of sense. But just in terms of where you're at on the project Lean side, in terms of how far through the organization you're at, and I guess just a longer-term view on expense growth versus revenue growth in the margin upside. And then also just given the Knight gain, it seems like you should reinvest some of that anyway because it's kind of a one-time item. So I just wanted to kind of maybe box that in versus kind of the long-term view on expenses with Lean and reinvesting in the business.

Fredric J. Tomczyk

Well the first one, we take the gain and I don't think we'd look at it, and say let's reinvest it. We made a one-time gain here. We did it for all the right reasons, strategic reasons that worked out well for us. We accomplished what we wanted to accomplish. The way we think about it is we take that gain and actually return it to our shareholders. And that's likely going to be in accelerating the debt repayment, which we're going to pay off by the end of the September quarter as opposed to by the end of the December quarter. With respect to Lean, it also [ph] is not a project, it's just part of the way we're going to be. And we've noticed that in the organization, the way we've done it, which is very much more, what I call, the Toyota model, all the main areas of the organization have huddles every day and they're in work cells and they really enjoy it, the managers are enjoying it. We're seeing very good initial productivity gains and efficiencies. But then you get into a run rate where it's -- where you might get 30% plus efficiency gains coming out of the gate. On your normal run rate basis, it's probably going to be more like 5%. And I think where -- we keep taking it where now we're looking not just inside a department, but across the organization and where you have common themes. And what clearly that points us to is our middle and back offices and some of the manual processes there as the best and highest way to invest at this point, and that's why we're focused there.

Operator

Our next question comes from Alex Blostein of Goldman Sachs.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

I just want to revisit your sensitivity that you guys provide to the eventual rising interest rates. It feels like the ideal balances continue to grow nice quite nicely. And then you're keeping a little bit more on the floating rate side, so I'm just wondering why the $0.30, $0.32 number with the first 100 basis points is not a higher number, given, I guess the fact that duration is a little bit shorter?

Fredric J. Tomczyk

I think you're right. It probably is a little bit higher, but we normally don't update those numbers other than once year, so we'll update those numbers in October. But you're instincts are right.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Got it. And then just to follow-up to you on an earlier question on capital deployment. Can you, I guess, update us on the latest thoughts for a strategic M&A, given the fact that the rate environment feels a little bit better and perhaps, the retail engagement is also probably a little bit better than we were over the last 24 months or so?

Fredric J. Tomczyk

We don't look at it as an opportunistic terms in something. But I definitely think the rate environment helps, but I don't think it solved it to any degree. But it has made it less of a problem in terms of interest rate revenue dissynergies on any transaction we might contemplate. Having said that, we don't see any strategic M&A that would be on our radar screen right now. We're very much focused on executing our organic growth strategy for this time.

Operator

Our next question comes from Brian Bedell of ISI Group.

Brian Bedell - ISI Group Inc., Research Division

Just go back to the idea, so the $73 billion balances, I guess, Fred, how sustainable do you think that is as we move into July? I understand, obviously, there was a reversion to cash it at the end of June, but just from a modeling perspective, it's hard to tell of course, but I mean, should we be thinking of that to be deployed back into securities, as you're alluded to on your commentary about bullishness across your client base?

Fredric J. Tomczyk

I would say, our retail side, our retail balances and as a percentage of client assets has been actually remarkably stable and continue to grow consistent with the asset gathering and growth and the assets from the market. So we've seen that be actually very inconsistent. The RIAs will be a little bit more fluid. That's one of the reasons we keep it on a much shorter duration and more in float there. I think any change you'll see there will be at the margin. I mean, when you look at June month end to June month end a year ago, when the IDA balances were up 22% year-over-year, I don't think that's sustainable. I'll be honest with you. But if you take our asset gathering rate and then add in the market impact that you want to estimate, I think that's not an unreasonable way to look at it.

Brian Bedell - ISI Group Inc., Research Division

Okay. And just as a quick follow-up on the institutional side. What portion are you at right now in terms of the -- in the barbell strategy on the institutional book between short and long?

William J. Gerber

I guess I don't -- we don't get that detailed in the disclosures, but you would expect it going into this -- the place that we'll be shorter will be the institutional book.

Brian Bedell - ISI Group Inc., Research Division

Okay. And then just lastly, on the trading backdrop. Fred, you talked about being relatively bullish coming into -- typically a weak seasonal summer, maybe either you or Bill could talk about the revenue capture outlook in terms of payment for order flow, which has obviously helped in the second quarter. And as we come into the third quarter, in terms of trading momentum, the 366 starts of July to date, I guess, was that negatively impacted by the July Fourth holiday timeframe, so that we're seeing better momentum move into the back half of the month.

William J. Gerber

Yes, it was impacted by the July Fourth holiday, I completely agree. And what we're seeing in the revenue capture side is that with the options, we, right now, have one more option contract per trade between this year and last year, so that, obviously, is helping. Payment for order flow continues to remain strong and we've really don't see much decline in that in the near term. And so, I think all in, our revenue per trade is probably going to remain in a fairly tight range here, right around where we're at for at least the next quarter or 2.

Operator

Our next question comes from Chris Shutler of William Blair.

Christopher Shutler - William Blair & Company L.L.C., Research Division

On the net new assets, obviously solid number. But with markets strong, we've seen quite a bit less advisor movement throughout the industry in the first half of the year. So I was just hoping you could talk about the recruiting environment in terms of bringing new RIAs onto the platform?

Fredric J. Tomczyk

Well, if there's a slow down, we haven't noticed it. I would say our breakaway broker pipeline remains very robust. We've got very good momentum. When I talk to new RIAs and the existing RIAs, we have a good very good brand right now, a very good reputation. And so my message to Tom now and his troops is you've got great momentum here and you've got this window of opportunity, make sure you take full advantage of it, let's just keep going.

Christopher Shutler - William Blair & Company L.L.C., Research Division

Okay. And then, so a follow-up on a question from earlier on the breadth of your product suite, your wallet share, I think, you've acknowledged in the past, in the retail business, is fairly modest relative to some of your competitors, which is probably a pretty big opportunity for you long term. So just thinking out beyond next quarter or next fiscal year, what do you believe that TD Ameritrade needs to do over the next several years to really drive that wallet share meaningfully higher?

Fredric J. Tomczyk

Actually, when we -- I think one of the things we've learned and why we don't talk about wallet share as much anymore is because I think when you look across broad client base, you can get misleading numbers. When you look at any anybody that has any account that has over $100,000 at TD Ameritrade, which we segment our customer base down for service and sales strategies, basically, we have pretty good wallet share. And if this group that we've acquired over the years of smaller clients without much money with us, that it's -- we have more trouble with, and probably not that engaged. And so it's -- we don't get preoccupied with it, but we do segment the customer base down by profitability, characteristics and also opportunity. And we set strategies against that, we've been doing that, that's what a lot of the BLRs are all about, the business lead referrals. And Tom Bradley and his team are actually working through that and how do we take that segmentation to the next level right now and that's something he's going to come back with.

Operator

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

Macrae Sykes - Gabelli & Company, Inc.

My question is more specific to the products in terms of what you're seeing from your retail institutional customers in terms of propensity for equity versus fixed income. Just mainly wanted to see if you could weigh in on the debate about the "great rotation."

Fredric J. Tomczyk

Well, as I said in my remarks, I would say, up until very recently, even in products, people were -- they were very conservative. And so I think that you are seeing a shift now, and I think this quarter, for the first time in a long time, if you look at our flows across all security classes, but particularly in the managed money side, whether there's more advice, you're seeing money come out of bond funds and bond ETFs and move into equity funds, mutual funds and ETFs. So you are starting to see a rotation, but I would say, it's far from a great rotation at this point. I'm sorry, I labeled that a mini rotation. We certainly haven't seen the average investors get -- all of a sudden, say, it's time to really get out of fixed income and it's average at this point. We haven't seen a -- we certainly -- we see the early stages of a rotation, but we're not seeing the great rotation at this point.

Macrae Sykes - Gabelli & Company, Inc.

And my last question is -- congrats on the mobile growth. I was just curious if you're seeing more of the growth coming from people looking for that mobile strategy and winning customer share, or just more adoption within your own framework.

Fredric J. Tomczyk

I think it's just increased adoption in our customer base. And we've been working very hard. Our internal marketing strategies and techniques that we have on our websites and whatnot are featuring mobile and we do find that whenever somebody moves from ads mobile, they're just more engaged. Like they log in more regularly, they trade more regularly, they invest more regularly. They just don't -- once you can actually get it, you make it easy and convenient to get it anytime, people do engage more.

Operator

Our next question comes from David Chiaverini of BMO Capital Markets.

David J. Chiaverini - BMO Capital Markets U.S.

So market fee-based revenue continues to grow nicely. Are you hiring additional sales people to help drive that revenue growth? Or is the sales force fully built out at this point?

Fredric J. Tomczyk

No. When we say we're hiring sales people, predominantly, most of them will be to -- in the branches to gather assets and sell Amerivest AdvisorDirect.

David J. Chiaverini - BMO Capital Markets U.S.

Okay. So any other changes going on in the advice area that you haven't discussed yet?

Fredric J. Tomczyk

No. I don't think so. I think we have a strategy that segments the market. And AdvisorDirect is for 1 part, Amerivest for another part. And we changed our whole mutual funds supermarket and ETFs supermarkets. So actually, I think we're in [indiscernible].

Operator

Our next question comes from Ken Hill of Barclays.

Kenneth Hill - Barclays Capital, Research Division

Just had a quick follow-up here on the NYSE Amex kind of partial stake you guys sold. Could you maybe walk us through your strategy there, maybe how much is left and what your plans are for the rest of it?

William J. Gerber

Sure. We have -- we own 3% of the company and we sold 1% last quarter. And in accordance with the agreement, you have put rates that come up every year and you evaluate the price and whether or not you want to put that -- those shares back. So ultimately, we'll look at liquidating this investment. But it's obviously performed extremely well on our basis. We started with 5% and we put in $5 million. So we obviously have had quite good success over the past couple of years. We've sold our 2 full points at about $10 million to $12 million all in, maybe a little bit more. So we still own 60% of what we originally bought, and -- but we have $3 million of basis in it.

Kenneth Hill - Barclays Capital, Research Division

Okay. And then just on the sales expansion, I know you guys have touched on it a little bit. But is that mainly tailored around a specific opportunity you guys are seeing here in the market, or kind of like a catalyst you guys can point to that's really driving that, where you guys feel you're going to be able to take advantage of some of the abilities of the company?

Fredric J. Tomczyk

This is something we've been doing now for 5 years. If you went back 5 years ago, we would've had 450 ICs in the branches. Today, we've got north of 800. And it's clearly worked for us. It is that type of market, which is an advice and guidance market. We see that in a lot of our trends and metrics. And so that's the kind of environment that you should be adding sales people.

Operator

And with no further questions at this time, I'd like to turn the conference back over to Mr. Fred Tomczyk for any closing remarks.

Fredric J. Tomczyk

Well. Thanks for joining us, everyone. We feel pretty good about the quarter and pretty good about our year-to-date numbers. We had a strong quarter. We have improved trades per day. The asset gathering remains robust, our balance sheet is very strong, and we've remained very disciplined on expense management. And we'll talk to in October when I know you'll be looking forward to hearing about our thoughts on 2014. Take care and we'll see you in October.

Operator

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

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