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TD AMERITRADE Holding Corp. (NYSE:AMTD)

F4Q06 Earnings Call

October 24, 2006 8:30 am ET

Executives

Joe Moglia - CEO

Bill Gerber - CFO

Donna Kush - IR

Randy MacDonald - COO

Analysts

Rich Repetto - Sandler O'Neill

Casey Ambrich - Millennium

Richard Herr - KBW

Mike Vinciquerra - Raymond James

William Tanona - Goldman Sachs

Prashant Bhatia - Citigroup

Avery Kosh - Banc of America

Howard Chen - Credit Suisse

Matt Snowling - Friedman, Billings, Ramsey

Patrick Pinschmidt - Merrill Lynch

Barry Cohen - Merrill Lynch

Eric Lai - Computerworld

Roger Freeman - Lehman Brothers

Presentation

Operator

Good day and welcome everyone to the TD AMERITRADE fourth quarter fiscal 2006 earnings results conference call. Today's call is being recorded. At this time I would like to turn the call over to your moderator for today, Ms. Donna Kush. Please go ahead, ma'am.

Donna Kush

Thank you, Sylvester. Good morning, everyone. By now you have probably seen our press release that was made public this morning. You can also view a copy of the release, listen to the call, and submit any questions to us via our corporate website at amtd.com. We will be discussing a number of financial metrics in this call. So in order to more easily follow along with us, we strongly encourage participants to download and print the presentation for this call now on the home page of amtd.com. Also, if you want to contact us directly after the conference call, please call Investor Relations at 800-237-8692.

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

In this call, TD AMERITRADE management will discuss some non-GAAP financial measures, such as operating margins, EBITDA, non-GAAP EPS, and liquid assets. Listeners to the call can find a reconciliation of these financial measures to the most comparable GAAP financial measures, and the other required disclosures in the slide presentation during this call, which can be found, again, on our website at amtd.com.

Please note that this call is intended for investors and analysts, and may not be reproduced in the media in whole or in part without prior consent of TD AMERITRADE. This call will cover fiscal year 2006 and September quarter earnings results for TD AMERITRADE Holding Corporation.

At this time I'll turn the call over to TD AMERITRADE’s CEO, Jim Moglia, who will be followed by TD AMERITRADE’s CFO, Bill Gerber.

Joe Moglia

Thank you, Donna. Good morning, everybody. This was our fourth record year in a row. I think there isn't any question that the year was highlighted by the acquisition of TD Waterhouse, and the fact that we were able to pay our shareholders a $6 dividend. One of the things that we said when we announced the deal that at the end of the integration, we believed it would be 39% accretive. As of today, the deal is 32% accretive, and we are only about halfway through the integration.

Our compounded annual growth rate over the span of the last four years has been about 40%. That does not include the dividend when you compare that to the S&P 500 of 10%. We're certainly pleased with our progress over the span of these four years, and with what we did this year.

Now, the next slide talks about our 2006 numbers. In effect, our EPS, our non-GAAP EPS and our net income, they were all records. When you look at our net revenue number, also a record at $1.8 billion, 57% of that was driven by our assets. If you looked at that same number a year ago, it would have been 42%. As we roll out our client segmentation strategy and we as we become more of an asset gatherer, that percentage, rather, becomes more important to us.

Our pretax income at $788 million, is also a record. Our pretax margins, however, 44%. I remind you that we are still committed to delivering 50% plus pretax margin at the end of the integration, which is still several months away. Record EBITDA of 52%, almost $1 billion. About $500 million of that we used to pay down our debt. Our debt today is around $1.7 billion. For the quarter, we invested $67 million in buying back about 4 million shares of our stock. As we look at '07, barring anything unforeseen, we will continue to use our cash flow, in effect, to pay down debt and buy back stock. And we came in at an ROE of 30% for the year.

Now, when you look at our operating metrics for '06, I ask you to please remember that '06 includes only eight months of TD Waterhouse. So it's four months AMERITRADE, on our own and then eight months of TD AMERITRADE. Our average trades today came in around 217,000 for the year. October to date so far is 225,000. Those are actually the best numbers that we've seen since May.

Now on the rest of the data, I want to give you my perspective in terms of how I feel about the actual numbers with regards to our progress of our shares. As far as trades go, I feel really good about that where we are and I think where we're headed. In terms of new accounts, we try to break that down for you so it's very clear where the organic growth came from. So you've got 2.25 million or so from TD Waterhouse, and 425,000 new accounts over the span of the year.

Now the 425,000 is our organic growth, and I think that's okay. I think that that's a solid number. I do not think that that's a great number. Net new accounts came in at 2 million and change. We closed a little over 200,000 of those. Our net new account growth was good. We're very pleased with what we saw there.

Now, qualified accounts at 3,242,000, we're not pleased with that number, period. We're not pleased with that number at all. Now as we break it down, our assets per qualified account are up. And in fact, if you look at our assets per account, they're up. But the absolute number of the qualified accounts is not where we want it to be, and that will be something we will continue to look at. We'll give you better color on as far as the next quarter goes. But suffice it to say, we're not pleased with that number.

Client assets, $262 billion, that's up about 9% year-over-year. We're okay with that. Cash and money market funds around $38 billion; average investable assets a little over $23 billion, and the net interest margin for the year was about 378.

Now let me spend a minute on guidance for '07. Our range for '07 is $0.98 to $1.22. The midpoint is $1.10. That's up 26% from where we finished fiscal '06. Now, a comment on the midpoint of that range relative to both outlook and relative to where we were in '06. Revenues are clearly up. We feel good about that and we continue to carry our expenses longer than some people may have modeled or estimated.

The clearing conversion when we first started to talk about, we said would take place in December. Last quarter, I told you it would not take place until the spring. It is modeled in our March numbers. Plus, we are carrying expenses longer as well for the client segmentation strategy, so we can provide a better overall long-term investor suite of products, along with Amerivest, and in effect, do a better job of completing a more enhanced client experience. All that stuff gets done post conversion. Now, I recognize that the $1.10 is lower than some of the numbers that you've modeled for 2007. So I'd like to address that specifically on the next page.

Before you even look at the next page, I want to remind you of the fact, in June, 2005, when we announced the deal, I said this. Every meeting that we've had since then, I've said this. Every quarter that we've had since then, I have said this. And every meeting that we've had with investors or analysts, I have said this. That for the first time, we have the opportunity to be able to, in effect, truly, absolutely focus on the future. The key to whether or not the TD Waterhouse acquisition is going to be successful, will be determined at the end of 2007, by the run rate we have going into 2008. It's not going to be by a great blow out quarter prior to that integration. That's our focus. So '06 was clearly spent getting ready for '08. '07 will absolutely be spent getting ready for '08.

Now on the chart, we try to give you a sense of where the earnings will come in, in the green bars, but also where our actual operating costs are by quarter. You will note a pretty significant drop-off from the March quarter to the June quarter. That's the clearing conversion. Then you notice an even more pronounced significant drop-off from the June quarter to the September quarter. I want to spend one minute on that.

That is, when we closed the deal, Randy had walked you through the amount of dollars that we said we were going to save with regards to expense synergies. That translated into a fixed cost run rate of $333 million. A year ago in effect, that was our promise to you. If you run this $189 million number, in effect, Bill will spend a little more time on this, the fixed cost run rate comes in around $300 million, significantly better than the $333 million.

So we are pledging to you a number greater, with regards to expense reductions, than we had up until now. The reason why we want to do this is as follows. In any business, in virtually any industry, you cannot always control what takes place with your revenues. But in almost all businesses, in almost all industries, you have far greater control specifically over your costs.

I believe that up until the acquisition, that we have been given credit for being a productive, efficient machine. That was demonstrated in our pretax margins. We are a productive, efficient machine. I want our Board to hold us accountable for that. I want you to hold us accountable for that. And I want our leadership within TD AMERITRADE to hold ourselves accountable for that.

These are numbers that are our internal goals that we are establishing externally, as well. They are important to us, and they are numbers that we expect to get to. If you just take the numbers of the September quarter with mostly incremental costs behind us, you would annualize 2007 at $1.28.

Now, with regards to other matters, over the span of this past quarter, we announced an entire management realignment. The reason why we did this, is once again, we want to be more efficient, we want to be more productive, and we want to have an intense obsession with a focus on the integration and the ultimate alignment of all of our costs. We also want to do the exact same thing with the exact same focus with our client segmentation strategy with our active trader, the long-term investor, and the independent advisor as we move to more of a sales organization and more of an asset gatherer. We think that the realignment will make us more efficient.

During the quarter we also had Bob Slezak rejoin our Board. He was the CFO for us prior to Randy joining the firm. Bob's real claim to fame is that he's actually a World Series of Poker all-star.

With regards to ownership of the Company, the Ricketts family increased their ownership to 20.9%. That allows them to keep their third Board seat. And a comment on the TD transaction; basically what that does, I can appreciate it can get a little technical. If it does, you need to address that specifically with TD. But basically, what the transaction does is lock in their ability to buy another 5% at today's prices. Period. That's what it does. It also demonstrates a belief in where we're headed, what our strategy is, and the fact that they believe the stock today is at good value.

Now, before I turn it over to Bill, I thought it would be appropriate to have a comment on Bank of America’s free trade offering. First of all, I've been on Wall Street now approaching 22 years. I haven't found anything that's for free. Something that you give away over here, you make up for some place else. I certainly know the investor and the analyst community recognize that.

Secondly, we like to look at this from the perspective of our clients. If you're an active trader, you've got to have risk management tools so you can, in effect, do your job. And execution for a transaction absolutely matters. By execution, I'm talking about the speed of that transaction, the size of the transaction, i.e., the depth of the market, the transparency of the numbers, and at the end of the day, the potential for price improvement. For what it's worth, about 60% of all TD AMERITRADE clients get price improvement.

If you're a long-term investor, you have your serious money that is focused on a more strategic, disciplined portfolio approach to life. That almost always has something to do with a well thought out, asset allocation model. And when a typical investor is thinking about where they want to put their long-term money, typically they would tend to think about a brokerage firm for that.

Thirdly, you have all said this, I don't need to repeat it, this has been tried before, and so far historically, it's never really had much traction as far as having an impact on the industry. Might have accomplished what a particular firm wanted it to do internally, but didn't really ever have an impact as far as the overall industry goes.

And then I would assume an automatic question with regards to our value proposition, I love our value proposition. For $9.99, you get anything an active trader needs, you get great execution, you get what a long-term investor needs. And you get that with no asterisks or no footnotes associated with that dollar. It's simple, it's to the point, it's good value, and we've seen nothing so far that would suggest we're supposed to tamper with that.

Now, with that, let me turn it over our new CFO, Bill Gerber. And I recognize many of you do know Bill. I also recognize some of you don't. So I asked him, before he actually got to the numbers to give you a little color on himself.

Bill Gerber

Okay. Thanks, Joe. For those of you who may not know me, I'm Bill Gerber. I'm a native of Detroit, a University of Michigan graduate, married, and have four children, three of whom are in college this year, so nothing really scares me anymore.

I joined the Company in 1999, was previously the Managing Director of Finance. I've spoken with many of you on a variety financial, M&A, and other business topics over the years. I'm looking forward to working with you and continuing to provide as much clarity and transparency in communicating our financial results as possible. We do have excellent Investor Relations and Communications teams, so please feel free to contact them with questions or feedback regarding our call or other financial questions, as well.

As Joe said, 2006 was a record year. But now let me give you more color on the September quarter and our updated outlook statement. The September quarter EPS of $0.21 came in at the low-end of the range. In general, revenues were down due to lower than anticipated trading activity and margin balances, both of which tend to move in concert with one another in our industry.

We produced $489 million in net revenues, we achieved net income of $128 million, pretax income of $202 million or 41%, EBITDA of $256 million or 52%, and a return on equity of 30% annualized. Trading activity for the quarter was 204,000 trades per day, or a 3.3% activity rate. We opened 96,000 accounts, resulting in 52,000 net new accounts. Investable assets averaged $26.7 billion, and net interest margin averaged 3.95%.

Now let's look at the September quarter in relation to the outlook midpoint on slide 10. Detailed information can be found in the outlook statement and in the information attached to our press release distributed this morning. Before we go through this slide, the important point is that asset-based revenues comprised 65% of total revenues, which is a record for the company. As we continue our asset gathering strategy, we expect asset-based revenues to remain around 60% for 2007.

So now let's go through the slide. As I just mentioned, transaction revenues were impacted primarily by lower trading volumes. Commission revenues versus the outlook were $18 million lower, mainly as a result of a 14,000 decrease in trades per day. Commission per trade was $12.76 for the quarter, compared to a midpoint of $13.25, principally as a result of a final commission true-up related to the Canadian business we temporarily serviced for TD Securities of $4.6 million or $0.35. Without this final adjustment, commission per trade would have been $13.11 within our expected range.

Our asset based revenues were down $7 million, which I will explain in two pieces. First, our net interest margin earned on investable assets was down $15 million, largely due to $800 million in lower margin loans, and $400 million lower MMDA balances than anticipated.

Second, offsetting both these declines was an increase of $8 million of money market and mutual fund fees, driven mainly by $5 billion in higher money market and mutual fund balances, most of which came from money market funds as clients took advantage of higher yielding products.

In the September quarter, we accelerated implementation of our sweep offering to legacy Ameritrade clients, and moved $6 billion to MMDA. As of today, we have extended $12 billion of our MMDA sweep program and going forward, we will monitor our extension levels based on client activity and liquidity needs. Said another way, we have significantly reduced our sensitivity to changes in short-term rates, and have significantly reduced our previous GAAP risk, therefore stabilizing net interest margin.

Now let's talk about expenses. With $30 million of lower revenues, you would have expected our revenues, excluding advertising, to be approximately $4 million lower than the midpoint of $252 million, or at a $248 million level. As you can see, expenses before advertising were $255 million for the quarter. The primary difference was in other expense, which was $8 million higher, predominantly as a result of a stock split where we received inaccurate information from a third party, which ultimately resulted in our clients being short shares of the company that split.

As an accommodation to those clients who acted on this information, we made them whole, costing us $6 million. Processes have been changed to mitigate this type of risk going forward. Additionally, we had $4 million of expense related to fraud from identity theft, which we reimbursed as part of our asset protection guarantee. Both of these were partially offset by a $2 million gain from the sale non-core business.

I would also note that we spent $35 million in advertising for the September quarter, resulting in a cost per account of $361, which was slightly higher than anticipated, as we continued our investment in the brand.

One other item to note, our tax rate for the quarter came in at 36.5% due to two items. First the reversal of a $4 million reserve for uncertain tax positions from the Datek acquisition as the statute of limitations expired on this item this quarter. Second, a $2 million cumulative effect of lowering our effective state tax rate for 2006 based upon our mix of business between the states, which we trued-up at year end. We expect our tax rate to approximate 40% for 2007.

Now, let's look at the integration and our achievements to date, as well as the milestones we will complete in '07 which is on slide 11. During 2006, some of our key achievements were:

  • The consolidation of investor services, or our call centers.
  • We increased trading capacity to 600,000 trades per day, and can easily scale to 1 million.
  • We completed the MMDA sweep in the September quarter and will realize the full effects in '07.
  • We divested our non-core capital markets in corresponding clearing businesses.

2007 will be a significant year for us as we finalize the integration efforts. This is our top priority. This quarter we will be launching an enhanced web and product experience to our clients that includes long-term investor products and tools. This is a significant milestone in the consolidation of products and services between legacy Waterhouse and AMERITRADE. Additionally, this is one of the major steps in bringing the full offering of the long-term investor products to all our clients.

However, the biggest priority for the integration is the clearing conversion, which is scheduled for the March quarter of '07. More on this in a minute. We expect our enhanced advisor platform to be completed by the end of '07, which is the last phase of our integration.

Finally, as a note, we also continue with expense reductions through the consolidation of locations in Jersey City, which happened last week.

Now let's turn to '07 guidance on slide 12. First, I'll walk you through the major changes from '06 to '07, and then we'll go through changes from our previous guidance. The largest change between '06 and '07 is obviously having Waterhouse for an entire year. From a macro viewpoint, our 2007 outlook midpoint includes a modest 6% growth from the revenues we have seen over the past six months.

We have included the following growth assumptions for 2007:

  • Trades per day up to 256,000 from a pro forma 241,000, or a 6% increase.
  • Investable asset growth of 4% to $27.5 billion
  • New account growth of 540,000, up from a pro forma 488,000 in '06
  • Retention rates of 95%, resulting in net new accounts of 230,000, which equates to a 4% growth in total accounts.

As a result for '07, we expect transaction-based revenues of $0.09 reflecting the higher trades per day; asset-based revenue of $0.29 primarily due to higher full-year balances; expenses increase $0.05, and a higher share count and tax rate differences decrease EPS $0.10. Year-over-year, this is a 26% EPS growth from $0.87 to $1.10.

Slide 13 reflects the change in our July outlook to the current outlook. The midpoint stays at $1.10 with the following changes: Increase of $0.05 in transaction revenue as trades per day increase to 256,000 or a 4% activity rate, which is in line with our actual and pro forma 2006 experience. We will see an increase of $0.02 in asset-based revenue, primarily due to higher balances in our money market fund and mutual fund accounts. Variable costs negatively impact EPS by $0.01 and the timing of the conversion and the build out of product and services negatively impacts EPS by $0.08, as we have decided to hold on to the resources longer to make certain the client experience is seamless.

Finally, as we continue with our share buyback, we expect that to positively impact EPS by $0.02. So our midpoint for '07 remains at $1.10. However, it should be noted that the September '07 quarter annualized at the run rate of $1.28 as Joe mentioned, and represents the first full quarter with full realization of merger synergies between legacy AMERITRADE and Waterhouse.

So now let me explain how we are going to accomplish that on slide 14. This is the one change you'll see from me, because note the cool University of Michigan colors on this side. To illustrate the quarterly expense trends, this slide shows our September quarter run rate expenses in blue, once we have achieved our synergy targets and the redundant expenses in maize, which will be eliminated through our synergy efforts.

Notice that the expenses do not start significantly tapering off until the June quarter. This is a result of the clearing conversion that will occur in the March quarter. Expense reductions will come primarily through:

  • compensation as we reduce head count
  • clearing expense as we eliminate the ADP outsourcing service
  • Professional services as we eliminate extra technology contractors who are assisting in the integration and build out efforts.

It should be noted that the $189 million of expenses in the September quarter are virtually identical to those in the July outlook. We are hitting our synergy target by the end of '07, as we have told you.

If you will turn to slide 15, you will see how we are delivering on the synergy goals. On the April earnings call, we announced that we had delivered on our revenue opportunity goal of $200 million. We exceeded that goal by 64% with more than $328 million in revenues created.

Now let's look at the $333 million fixed cost goal we committed to at the TD acquisition announcement, and walk you through how we get there. This slide shows the fixed cost run rate from the midpoint of the September quarter of '07. We start with annualized net revenues of $2.2 billion and annualized operating expenses of $756 million. We then take out the interest on the debt, and the new intangible amortization of $42 million, both of which are deal-related, less 15% of revenue as variable costs, and we get to $302 million of fixed costs, which is at $31 million or 10% ahead of our synergy goal.

Now let's turn to liquid assets on slide 16. We are a strong generator of cash and have tremendous financial flexibility. We ended '06 at $505 million in liquid assets. Our midpoint is $673 million in net income for '07, and $76 million in depreciation and amortization. We are using working capital, regulatory capital, and capital expenses of $109 million.

Due to our accelerated debt pay downs in '06, we have reduced our mandatory debt payments to $25 million in 2007, leaving more than $1.1 billion in discretionary cash. This free cash allows for several uses, including debt repayment, stock buyback, M&A, or additional organic growth.

Currently we plan to use $143 million to finalize our 12 million share buyback program, and plan to use $690 million in discretionary debt payments. Assuming we complete this as expected, we will have paid 55% of the original $2.2 billion of debt in only 20 months, and we would still maintain $287 million in ending liquid assets.

As always, we will continue to review our capital structure with our Board of Directors and determine the optimal uses of our free cash flow. We have great financial flexibility, and will ensure we are best utilizing our cash.

On slide 17, as always, we provide you a sensitivity table that includes four drivers of growth and the impact they generate in EPS. This sensitivity really hasn't changed much over the last few quarters. A 1% change in activity rate equals $0.21 per share; 100,000 net new accounts results in $0.04 per share; $1 billion of new investable assets is also $0.04 per share; and a 25 basis point Fed move is now zero, as a result of the stabilization of our net interest margin as I mentioned before.

On side 18, before we go to the Q&A, I want to state that 2006 was our fourth consecutive record year. We paid shareholders a $6 dividend, we generated more than $900 million in EBITDA, we paid approximately $500 million or 23% of our debt, we initiated a stock buyback program, and we stabilized our net interest margin through the extension strategy.

We are delivering on our integration goals and expect to be completed by September, 2007. We have exceeded our revenue opportunity goals, and are on track to exceed our expense synergy goals. Our midpoint in '07 is $1.10, up 26% from '06, and our September quarter run rate is $1.28 per share.

We are focused on our growth strategy, and I'm excited for our prospects in '07 and setting the Company up for 2008 and beyond. With that, I'll now turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Rich Repetto - Sandler O'Neill.

Rich Repetto - Sandler O’Neill

On the guidance, you can see revenue is up, expenses look like you're retaining for a little bit longer. But there was a lot of talk in the quarter, including some comments at a conference that you'd bring the guidance range up. And I guess the question is, what change or what decisions that were made, it looks like the guidance just got widened by $0.01, rather than you can see the revenue side had an increase for '07.

Joe Moglia

Right. Rich, I think all that basically happened in that, at the very end when we were making that decision, we still thought it was the beginning of the year. We thought there was a lot of things going on as far as the industry goes. We just thought discretion was the better part of valor. Every year that we've approached, so far, we've always done a pretty good job, I think of tightening it quarter by quarter. There were enough things going on that we just thought for the time being, we were better off leaving it where it was.

Rich Repetto - Sandler O’Neill

Okay. Second question is, Bill, the average commission this quarter was $12.76. We've seen a decline, or below the range in the last couple of quarters. So, when you look forward, why do you believe it's going to be up next quarter and throughout '07?

Bill Gerber

There were two things really, Rich. The $0.35 that I mentioned from the true-up of the TD Securities and we had $0.15 from promotional trades. So that was probably a little bit higher than what we normally have. So we would expect to stay in that $13-plus range for commission rate going forward.

Rich Repetto - Sandler O’Neill

Okay. So the true-up you would have been up you said $0.35?

Bill Gerber

Yes, $0.35. It was a $4.6 million true-up for Canadian business that we serviced for TD Securities for a few months. We had a final commission true-up with them this quarter, so it was $0.35 per trade.

Rich Repetto - Sandler O’Neill

Understood. Last question is, Bill, you mentioned some fraud charges, of I think you said $4 million. Peers had mentioned fraud charges in this past quarter. What's the usual run rate for fraud charges?

Joe Moglia

It's normally less than that. In this particular case, the $4 million, what took place at our place has taken place, in effect, across the industry. And so at least everybody's aware: remember, here we've got a client asset guarantee, so no client lost any assets and nobody was effective at trying to get into our systems. What ultimately happened was individuals, almost always outside the country, were on public computers that had spyware and they weren't able to protect their own IDs. That's being addressed not just by TD AMERITRADE, Bill, but by the entire industry, as well as the FBI.

Rich Repetto - Sandler O’Neill

Okay. Thank you. The last question is, I'd like to know what Bill Gerber's handicap is, golf handicap, so a year from now we can ask what the change in guidance is there.

Bill Gerber

Okay. Right now it's a 12.

Rich Repetto - Sandler O’Neill

Thanks, guys.

Operator

(Operator Instructions) Your next question comes from Casey Ambrich - Millennium.

Casey Ambrich - Millennium

You've been pretty visible that you don't expect any pricing deterioration with the BoA initiative. Can you just go through the thought process behind that?

Joe Moglia

Yes. I'll probably repeat a little bit, Casey. I said first of all, I do think, based on at least the stuff that I've read, I do think the media, as well as the analyst community is making a point to the investing public that you really don't get anything for free in this world. If there's something for free over here, they're making up for that in what they charge you with regard to deposit CDs, et cetera. What you don't get with your return on the $25,000 plus of deposit CDs could easily offset anything you might save as far as the actual trades go.

Secondly, as far as the individual active trader goes, their execution on a trade really does legitimately matter to them. 60% of the time, we get price improvement. If you don't have quality risk management tools, as well as good execution, it doesn't matter that your trade may be a little cheaper someplace else. The long-term investor is less interested in what a particular trade cost, and much more interested in what kind of portfolio allocation service they have, and what kind of discipline they have associated with their long-term money. Most of the time, instead of thinking about going to a bank for that, they think about going to a brokerage firm.

Thirdly, there are a number of firms that have done this in the past and it may have been effective in something that they were trying to accomplish internally, but it didn't change the landscape of the overall industry.

Fourthly, at least when I look at our situation, I feel pretty good about where we are. But that's my thought process on that. If you've got something you'd like to add to that, I'd love to hear that.

Casey Ambrich - Millennium

No, that's it. I just wanted to see the other side of it. Thank you very much.

Operator

Your next question comes from Richard Herr - KBW.

Richard Herr - KBW

Talk a little bit about options if you can. If you can give us the numbers around what percentage of trades has changed materially from prior quarters. The percent of trades that were options trades?

Joe Moglia

It really hasn't changed much. Options are still on an aggregate basis, we're not breaking them out specifically, but they're less than 10% of our overall transactions. But the revenues they generate are probably closer to double that.

Richard Herr - KBW

Okay. OptionsXpress announced yesterday that they've put in the functionality for penny spreads on the pilot securities under the options penny trading pilot. Have you taken similar steps already?

Joe Moglia

Yes, we are in the process of doing that literally as we speak. But when it's time to go to penny spreads, we will be well prepared for that.

Richard Herr - KBW

On the fraud again, is there anything in your '07 guidance that bakes in higher than normal run rate fraud charges?

Joe Moglia

We have an assumption built into the other line item on our financial statements.

Richard Herr - KBW

Is it $4 million a quarter? $2 million a quarter?

Joe Moglia

It's comparable to where it is.

Richard Herr - KBW

Okay. Thanks. You touched on the slow growth in qualified accounts. I mean, Joe, do you feel that this will kind of work itself out as you build the brand, and as the TD Waterhouse and the legacy AMERITRADE businesses come together?

Joe Moglia

Yes, Rich I do. And again, as I have said, we are working hard now on trying to get the long-term investor platform itself up. That coupled with Amerivest, I think will be a wonderful differentiating offering in the marketplace. We want to be able to sell that, not just market it.

But again, everything's got to come together on one platform for us to do that effectively and that's what we need to get done by the conversion. So I feel good about all of these things coming together then. Not as good about how perfect that might be prior to that.

Richard Herr - KBW

Okay. Thanks so much.

Operator

Your next question comes from Mike Vinciquerra - Raymond James.

Mike Vinciquerra - Raymond James

First for Bill, I just want to remind you that the maize and blue is number two, and that's about as high as you can expect to get for the remainder of the year. But at any rate, a couple of numbers questions if I could clarify. You guys had a fair value derivatives base adjustment in the quarter of $3 million. How do we view that?

Bill Gerber

That, Mike, is actually completely offset in the comp line. So the comp line was $3 million higher, this was a $3 million deduction. It is related to the legacy TD employees who had Toronto Dominion stock as a component of their comp. We bought the TD stock to mirror the movement so that ultimately when we pay the people out at the end of '06 and at the end of '07, we will be neutral in terms of total cost. So that's essentially what it is.

Mike Vinciquerra - Raymond James

I see. So we need to net that out against the $103 million, essentially your real employee compensation was $100 million?

Bill Gerber

There you go, yes.

Mike Vinciquerra - Raymond James

Very good. Okay. Then the gain of $2.5 million, does that relate to your corresponding clearing business, or what was that from?

Bill Gerber

Yes.

Mike Vinciquerra - Raymond James

All right. I just had a question on the assets. Is there any possibility you could break down for us the gains from the market itself versus your actual net new assets brought in by clients? Could you possibly break out the total assets at the RIA operation? Obviously, one of your growth engines at this point.

Joe Moglia

Yes, Mike, I think that's a fair question. It's unusual you would just bring it up for the 75th time, as many of you have. We will consider that. I am not -- listen carefully -- I am not promising that. We will consider that. But I don't think we're going to seriously consider that until after the conversion gets done.

Mike Vinciquerra - Raymond James

Okay. That's fair, thanks a lot.

Operator

Your next question comes from William Tanona - Goldman Sachs.

William Tanona - Goldman Sachs

I have a couple questions for you. Just try to help me reconcile some of these things. If I look at your old outlook statement and compare it to your new outlook statement, I'm looking at the number of trading days, which actually declined by a half a day.

Your activity rates, which remain relatively unchanged, and your average commission rate is staying the same. Yet I'm seeing you forecast commission and transaction fees up 10% at the low end and 8% at the high end. Help me understand that.

Bill Gerber

That was more accounts, actually. We grew accounts between the two.

William Tanona - Goldman Sachs

Okay. So the forecast for 2007 is that you plan on having more accounts?

Bill Gerber

Correct.

William Tanona - Goldman Sachs

In the base?

Bill Gerber

Yes.

William Tanona - Goldman Sachs

The other part I'd like to kind of reconcile is the margin balances. Obviously, fourth quarter came in well below where you guys were forecasting. Yet when I look at the average margin balance forecast for '07, it's higher than your original projection. What's out there that makes you feel confident that margin balances are going to be higher, considering they came in lower in the fourth quarter?

Bill Gerber

Ultimately, this is something that we have seen margins go up as trading activity goes up, and as more accounts come in the door. So that is really the modeling technique that we use. As you know, if we see material differences from that, we will adjust the outlook going forward. But that's the method.

William Tanona - Goldman Sachs

On slide 15, you're talking about your revenue synergies being 60% ahead of goal, your expenses being ahead of goal. Yet when I look at your original forecast when you announced this deal, the midpoint of the range was $1.15. Now we're on an activity rate of 4% shaking out at $1.10. Can you reconcile that for me, as well? I'm just a little surprised that you would be talking about being ahead of synergies and ahead of expense opportunities yet your guidance is lower at the midpoint of the range on the 4% activity rate.

Joe Moglia

Yes, Bill, if you remember at the end of April, beginning of May when we rolled out the value proposition, and we talked about that then. We said we were going to take $100 million hit. That entire $100 million hit was taken up front. We went from $1.15 to $1.06. And then based on what had been going on in the market on the last quarter, we took the $1.06 to the $1.10. When we originally talked about the $1.15, there was no anticipation of $100 million hit to revenues based on a lower price. That's most of that.

William Tanona - Goldman Sachs

Okay. But is that $100 hit included in that original goal of $200 million? Or is that ex that? I guess I'm just looking at slide 15.

Joe Moglia

No, the original $1.15 never had a price decline of $100 million in it. When we announced that we took that up front, and the $1.15 became $1.06.

William Tanona - Goldman Sachs

Yes. No, no, I understand that math. I'm just looking at slide 15 and just if you're achieving things that are better than your original estimates, I'm just curious as to why even guidance is lower than it was originally.

Joe Moglia

Well, had we not taken the original $100 million hit, this number would be $1.19, $1.20 right now. That would be ahead of the $1.15.

Bill Gerber

I mean, the $1.10 includes the costs that we are carrying for the timing of the cost to build out the system, et cetera. So that is the one of the main drivers of the shift.

William Tanona - Goldman Sachs

Okay. On the back of that, if you look at the expenses and the expense guidance relative to what it was last time you're talking about up 10%. I heard, obviously what you said in terms of investing here for the long-term. But again, I guess I'm curious that it's that much different this time around. Could you give us a little bit better explanation as to why you expect things to be up so dramatically, and give us areas of where you expect that to be?

Joe Moglia

When we closed the deal in January, we had a large meeting with all of our key leaders in the organization, which was followed by a three-day off-site in Pittsburgh. What we told everybody back then, and they had known this was going to happen, is that what we want you to do, is you figure out what kind of client experience is going to allow you to be a market leader and take market share, literally down the road in 2008. Whatever you need to be able to get that done, is what we're willing to invest in now.

So you had different groups, had different thought processes, and different objectives and different goals in terms of what they wanted to come up and spend. People that came up to us since then and said, "I think we could do A, B and C, as well," we allowed them to do A, B, and C.

Now as we approach the conversion, we approach D-day. And in effect, investments that you've made over the span of the last 12 months, if we see that they're going to have a significant positive impact on our revenues, that's not a problem for us if that's going to impact our earnings. We'll allow those to continue.

For those that are not, they will be absolutely eliminated, and there are still areas where we have redundancies, they'll be eliminated. So I guess the point that Bill made that I really didn't make, was we are carrying expenses longer for this very reason. That obviously impacted that $1.15 concept, as well.

William Tanona - Goldman Sachs

Okay. Thanks.

Operator

Your next question comes from Prashant Bhatia - Citigroup.

Prashant Bhatia - Citigroup

Joe, real quick, you talked about being disappointed with the qualified accounts, the growth there. I guess what exactly is happening there? Because you have a lower price point now, you've had an ad campaign, you've got branches. So, what's your best guess as to why that's not growing?

Joe Moglia

Prashant, what I want to be able to do, is really kind of look at it more carefully and look specifically at the numbers. When I look at the assets per qualified account, they're pretty good. When I look at the assets per overall account, they're okay. There are a number of accounts, remember when we originally established the qualified account data metric, we said that that was 90% of our overall revenues and profitability, and it came from 50% of our account base.

Well, there are a number of people, or accounts, that are at that 50% of that account base, that in effect, are just around that $2,000 threshold. Just moving money in and out of the account, consolidation of some accounts, for example, if you consolidate two accounts into one , you might take two $2, 500 accounts, in effect, and move them into an account that's already bigger than that, your qualified account number winds up going down.

So we need to get our arms around that. But that actually takes a little while. I don't want us to do anything that's going to take our eye off the delivering of the client segmentation strategy or the integration. So as we approached this quarter and we were displeased with the overall numbers as far as qualified account goes, we were pleased enough with the other numbers that it wasn't an emergency for us to raise the red flag.

So as I said in my comments, I think we'll give you better color, if in effect that number doesn't pick up. Also we talked a little while ago, keep in mind that we haven't yet really rolled out that long-term investor effort yet, the way we plan to in a few months. I think that will help, as well.

So I'm not happy with the number. We will analyze it in greater detail. We'll keep a closer eye on it. If there's something really specific we've got to say on it, we'll be able to say that next quarter.

Prashant Bhatia - Citigroup

Great. And then you also talked about moving to more of a sales organization. Could you give us an idea of what you've done in the branches and in the call centers, either on the comp side or otherwise, to drive that change?

Joe Moglia

Yes, I mean, our sales force in effect, dominantly get paid on net new assets. Their responsibility is not necessarily to service, it's how they can figure out to bring net new assets in the door. So really, they've got two jobs: (a) to what extent can they bring in new prospects, and ones with higher assets. And (b) we've talked about this internally, we've got 6 million accounts. But we've only got about 20% or so of their assets. So they've got most of their long-term money away, and they have good relationships with us. So to what extent can we start to provide them solutions for their long-term needs, i.e., get more yield out of the current base that we have? So that's what their focus is, and that in effect, is how they get paid.

In the call center, we have always focused with an online mentality. We want to take care of you, but it's important for us to get off the phone. That has shifted. The shift is now, if you call us, the objective when you're on the phone is to solve what your problem is. So bottom line is, we're not trying to get you off the phone quickly. We're trying to make sure that when you are on the phone, you get your problem taken care of. That translates into a client satisfaction index. And that's also part of how your individual group gets paid.

Prashant Bhatia - Citigroup

Finally, on the RIA business, that's probably the business that we've seen the least disruption with from an integration standpoint. Can you just give us a feel for trends before the merger and trends in that business post-merger? Is it accelerating?

Joe Moglia

Yes, I think in general, growth in the independent advisor business I think is one of the faster growing segments in financial services in the United States. I think there are more and more financial consultants that work for full service, full commission firms that recognize that while they may have a plethora of resources behind them, they don't use 90% of those resources.

In effect, if they could do this on their own with somebody like TD AMERITRADE providing them with the back office support, especially now as we get more involved in with the long-term investor space, they have the opportunity to make much more for themselves, and potentially even be more effective for the clients.

So our RIA assets are up to about $60 billion now. We've seen good growth when we were AMERITRADE, we saw good growth when we were Waterhouse, we've seen good growth at TD AMERITRADE. But that's not necessarily unique here. I think in general, there's pretty good growth in the independent advisor segment within financial services. I see that only growing over the span of the next several years.

Prashant Bhatia - Citigroup

Okay, thanks, Joe.

Operator

Your next question comes from Howard Chen, Credit Suisse.

Howard Chen - Credit Suisse

Bill, congrats on the new position.

Bill Gerber

Thank you.

Howard Chen - Credit Suisse

Joe, I hear your thoughts on the qualified accounts. But do you feel like you're seeing any positive impact elsewhere from the new value proposition that you guys installed in the spring?

Joe Moglia

Oh, yes. I think again, if you look at our market share as far as trades go, I feel good where we are there. Our retention numbers have actually improved, and that's in the face of a major integration. Our asset growth is certainly reasonable, relative to what's going on. The NASDAQ was up about 5% year-over-year. Our assets were up about 9% year-over-year. The information that we're getting, ancillary information, along the lines of what kind of brand awareness are we achieving? We're seeing all of those things improve.

So I do feel good, Howard, about the impact of the value proposition so far. Again, I think at the end of the day for TD AMERITRADE, it's going to be a matter of our growth, our retention, and yield. So whether that's a specific result of the value proposition or whatever other things we might be trying to do to enhance that value proposition, it's all going to be part of that.

So we are going to focus on growth retention and yield. You are going to see all of our growth retention and yield numbers. Frankly I'm pleased so far with what I see, with the exception of I don't like where qualified accounts are.

Howard Chen - Credit Suisse

Thanks, that's helpful. On the revenue and fixed cost synergies, we can see from that slide 15, that you're well ahead of your own goal. Have you found more? Or is this completely a function of shape of the yield curve, where rates have gone, and doing it faster on the expense side?

Joe Moglia

With regards to the revenue piece, I think what we've found, we have already found. We're not making assumptions other than, hopefully, our balances and our assets improve. And if so, then obviously the revenue opportunities improve. But I think in effect, remember, we have already matched our assets with our liabilities. We have almost completed the overall extension strategy. So in effect, we're locking in that part of our net interest margin.

On the expense side, again, we have intentionally allowed our costs to carry with the idea that we may be able to find something that we think is a better differentiator, or something that our clients tell us that they really, really want, that we want to be able to put in, and then ultimately scale.

So when we looked at what our expenses are, we looked at two things. We looked at we have a lot of initiatives that are going on. Some are successful, some don't seem that they're going to be that successful. We're going to clearly eliminate those. That's fair. We are trying, in effect, experimenting, we look at that as R&D.

Secondly, we know we still have some redundant expenses. So that's the reason why we said we believe we can do better than the $333 million fixed cost run rate by year end.

Howard Chen - Credit Suisse

Thanks for the details on the $10 million in one-timers on the other expense line. But can you speak to any insurance or other measures you have to potentially recoup a portion of the fraud losses or processing errors?

Bill Gerber

Sure. We have insurance that we are seeking right now and we would not recoup the entire amount. But we would get a very nice healthy portion of it back if we can continue to prove that it came from the same source. So that is one of the metrics. We have a $500,000 deductible and then a $2.5 million coverage per occurrence. So that's what we're looking at right now.

Howard Chen - Credit Suisse

And then on the other processing loss?

Bill Gerber

That other processing loss, we do not have insurance for. No.

Howard Chen - Credit Suisse

Bill, you're ending the year with $1.7 billion in debt on the balance sheet. If I look at the outlook statement for fiscal '07, your non-GAAP net income goals have you generating something like $700 million to $850 million of free cash. It seems like you're only using $600 million of that to pay down debt. We know the business isn't capital intensive. So are you intentionally holding back a bit more capital for investment spend, like Joe was speaking to? Or is there something else going on there?

Bill Gerber

If you flip to slide 16, you'll see that we would end the year with about $300 million of free cash, of liquid assets. We would be using about $700 million to pay down the debt. So by the end of the year, we'd be at virtually right at $1 billion. So we are going to meet with the Board and talk about what the proper uses of our cash are. But right now in the outlook statement, that's what we anticipate. So we would have paid down 55% of the debt by the end of '07.

Howard Chen - Credit Suisse

Finally Joe, thanks for the guidance on October to-date activity trends. Not sure, did you give us a sense of where margin loan balances and/or product mix has gone in early October?

Joe Moglia

No, Howard, we normally wouldn't give you that much detail.

Howard Chen - Credit Suisse

Okay. Great, thanks.

Operator

Your next question comes from Matt Snowling - Friedman, Billings, Ramsey.

Matt Snowling - Friedman, Billings, Ramsey

It seems that you had a big shift towards money market fund balances during the quarter, presumably because of the higher rates. I'm just wondering if it makes a little bit more sense to start paying higher rates on some of that cash that's on balance sheet, given that you make a wider spread.

Joe Moglia

Right, we are literally looking at all of that as we speak.

Matt Snowling - Friedman, Billings, Ramsey

Is this more on a segmented basis or just generally across the board?

Joe Moglia

It's both. It's on a segmented basis and it's generally across the board. We're looking at literally what kind of cash management program do we really want? What kind of offerings do we want as far as the front end goes with regards to our clients? And we're looking at that literally by segment across the board in its entirety, a lot of different ways. But we're doing that as we speak.

Matt Snowling - Friedman, Billings, Ramsey

Joe, is that factored into your outlook statement at this point?

Joe Moglia

We have not factored in changes. If there was something significant we we're going to do that required changes, we would certainly make sure you were all aware of it, though.

Matt Snowling - Friedman, Billings, Ramsey

Okay. Thanks, Joe.

Operator

Your next question comes from Patrick Pinschmidt - Merrill Lynch.

Patrick Pinschmidt - Merrill Lynch

Focusing on the fourth quarter '07, the total expense number is a little bit higher. I understand what you're doing with carrying over some of the costs a little longer relating to the clearing conversion. But is this a delay of some of the full cost synergies that you now expect to not be really realized until the first quarter of '08? Or is this maybe a higher run rate in total expenses?

Bill Gerber

We were at $189 million versus -- .

Patrick Pinschmidt - Merrill Lynch

Just a couple million, yes.

Bill Gerber

About $2 million. Most of that is in variable costs.

Patrick Pinschmidt - Merrill Lynch

Okay. So, but none of that reflects anything associated with the incremental expenses?

Bill Gerber

No, there's not any incremental expenses associated with that.

Patrick Pinschmidt - Merrill Lynch

Moving on to the costs per new account. You're taking your ad spend up, but you're also taking down the underlying assumption for how much you pay for each new account. I think the midpoint now is 300 versus 350 in the prior guidance. What's driving that? Do you feel that the ad campaign is going to start getting better traction, or just the better market conditions?

Joe Moglia

No, I think it's a combination of both of those. I think we do expect better traction. When we were first rolling out in effect, we were relaunching a brand new brand. Our brand has been around a while. We are starting to get more messages across, i.e., to the long-term investor. I do think we are entering, at least this quarter and next quarter, a time in the marketplace where in effect, market trends tend to be reasonably positive on a seasonal basis. There tend to be more people interested in opening accounts. As you start to get into the second quarter, you've got more activity with regards to, IRAs, et cetera. So what we're looking at is a little bit more of a seasonal perspective on that.

Patrick Pinschmidt - Merrill Lynch

But that's aside from the point that you took the full-year '07 guidance down, the midpoint from 350 to 300. So what's driving that is just better traction then?

Joe Moglia

Yes.

Patrick Pinschmidt - Merrill Lynch

Okay. Thank you, guys.

Operator

Your next question comes from Avery Kosh - Banc of America.

Avery Kosh - Banc of America

Just a quick question on the MMDA balances. There seems to be a big ramp in MMDA balances from the September quarter through the December quarter on the outlook statement it is going from $8.1 billion to $14.3 billion. Can you remind us of what customers are on these MMDAs?

Explain to me the value proposition to clients when they can earn closer to 5% or so in money market and mutual funds? It seems your clients this quarter, individual money market and mutual fund balances were up around 10% to $18.2 billion. So why won't clients continue to shift their cash there?

Bill Gerber

The big change in the MMDA balances is the $6 billion that I referenced, that we shifted at the end of September, from the legacy AMERITRADE clients to the MMDA. So, that is the big shift. And the other part of your question was?

Avery Kosh - Banc of America

Choosing money market mutual funds at 5% versus MMDAs, which have probably a lower rate.

Joe Moglia

Yes, I think in effect, one of the things that you want to take into account that when we look at our long-term investors versus the active trader, the typical active trader is not necessarily coming here to be able to park their cash. Now, as we get involved over the long-term investor, there's going to be more of that. But remember, that heats up post-clearing conversion.

So the typical active trader that comes here uses their cash balances for liquidity, in effect, to get in and out of the market. But we're going to continue to look at that as time goes by.

Avery Kosh - Banc of America

Thanks.

Operator

Your next question comes from Barry Cohen - Merrill Lynch.

Barry Cohen - Merrill Lynch

Thanks for taking the call. Could you tell us what your assumptions for share count are in '07, since it's part of a $0.10 swing?

Bill Gerber

Yes, it's 611 million this year, because we made the acquisition in January. It was 556 million on average for '06. So you'll see, there's just a 10% jump in share count for the full year.

Barry Cohen - Merrill Lynch

Great, thank you. The other is, if you had to think out loud a little bit about timing, would you think that the conversions could accelerate as we go through the year? Or do you think that there is a probability of them getting pushed out a little bit again?

Joe Moglia

I would not assume that the conversions accelerate. I think that there is an excellent chance that they're going to be on target. Now, as I have said to the group before, as we approach that, right now, it's all systems go. As we approach that, though, we are not going to be bull headed on that. Just because we said a particular date we are going to have the clearing conversion, if for some reason we think as we approach that, that there is a sector, an area of the firm, whatever it might be, where we will create too much of a disruption for our clients, we will not go through that disruption. We will slow down the clearing conversion.

Barry Cohen - Merrill Lynch

I believe either on the last call or the call before that, you alluded to but didn't give any real details to the TD relationship. I was wondering, now that you have had more time with the folks there, if you could talk about it for shareholders of AMERITRADE. What is that relationship going bring to shareholders of AMERITRADE?

Joe Moglia

First of all, besides just being a large investor, they have significant presence on our Board. They are very much involved when we discuss what we believe our strategy should be. They're very much involved when we look at where we stand with regards to our overall market share, and our overall numbers. They are great when it comes to overall corporate governance.

At the end of the day, their interests are literally almost identical to the interests of most of the rest of TD AMERITRADE shareholders. They want to see how we're going to be able to provide sustainable long-term growth, grow market share, rollout our client segmentation strategy, deliver on the integration, and get our costs in line.

One of the things that Ed Clark has said again and again, he feels that their role is to support management. They certainly do that, and they certainly stand behind us. By the same token, they are great at asking the tough questions. Frankly we're supposed to be prepared to answer those questions anyway.

We've got a relationship with regards to the bank, where we get most of the benefits of having a bank with regard to the management of our client assets, without most of the liabilities or the costs associated with that. That's a great strategic relationship for both TD, as well as TD AMERITRADE.

Thirdly, I think as we look forward, I do think there may very well be a number of things that we might be able to lever from a business perspective, i.e., outsource, et cetera. But we recognize that our number one objective is to deliver long-term shareholder value for the TD AMERITRADE clients, TD recognizes that, as well.

Barry Cohen - Merrill Lynch

Great. Thank you for your help.

Operator

Your next question comes from Eric Lai - Computerworld.

Eric Lai - Computerworld

We've written in the past about the great technical infrastructure you've got over there at AMERITRADE, interviewing Jerry Bartlett. So I wanted to get a little more color about (a) about what sort of scheme was being involved here in the fraud. Was it a pump and dump scheme, as some of the news reports have talked about? And (b) what are some of the steps you're taking to improve the technical infrastructure you've got over there, security-wise?

Joe Moglia

Yes, we've got Randy MacDonald, our Chief Operating Officer.

Randy MacDonald

Yes, I think when you characterize it as pump and dump, let's be a little bit more specific. This is an industry-wide issue. So we're working as an industry to protect people's passwords and log-ins. This seems to be something that's happening overseas. People are traveling and allowing their log-ins and their user IDs to be obtained. It mostly seems to be through wireless systems. We have artificial intelligence here that we use to identify the scheme moves. We work with NASD, with other people in our industry. Frankly, a lot of the agencies, like the FBI, and Secret Service now.

So some of it is technical in nature. That is, if you go to our website and look at education, we're spending a lot of time educating our clients about the need to keep their information secure. We're working with software vendors to develop new techniques for preventing this from even happening at their keyboard level.

We can do this offline too, Eric, if you want. I think part of what the industry would like not to do, is disclose too much of this, in terms of the scheme. We're trying to catch people and prosecute them. I'm not sure that the industry wants to disgorge too much of this information until we bring some of these people to trial.

Eric Lai - Computerworld

Okay. Actually, I'd love to talk to you offline then.

Randy MacDonald

Great.

Eric Lai - Computerworld

Thanks.

Operator

Your next question comes from Roger Freeman - Lehman Brothers.

Roger Freeman - Lehman Brothers

Hi, good morning. Joe, I wanted to come back to something you responded to a few minutes ago. I think you said as you look at the long-term investor more, you'll take a closer look at cash management options. I think you mentioned something about that coming after the clearing. Are those two connected? In other words, will you wait until that point to consider paying more competitive rates on money market accounts?

Joe Moglia

No. I mentioned earlier, Roger, that we are looking at all that cash management stuff right now. I said the cash management piece is a part of the long-term investor offering. The real long-term investor offering gets really rolled out and sold post-clearing conversion. But the cash management piece we are looking at now.

Roger Freeman - Lehman Brothers

Is it fair to say that given the focus on the differences in the value propositions, say a bank like Bank of America offers, and what you and other online brokers offer, that this sort of brings this more to a forefront at this point in time? Because this is one of the only areas where you don't stack up to some of your peers in terms of rates.

Joe Moglia

Can you repeat that again? I'm not sure I understood you.

Roger Freeman - Lehman Brothers

I was just wondering if, in light of the Bank of America announcement, or the focus on the differences in value propositions between what you pay for a commission, a trade, versus what you get in rates, that you're now taking a closer look at this because your money market rates aren't quite as competitive as some of your peers?

Joe Moglia

No, I think that's fair but, I don't know if it's got much to do with Bank of America. I think, again, I do think it has something to do with our client segmentation strategy. Earlier I said the typical active trader is a little less worried about that, because what they are really interested in is liquidity, getting in and out of the market. At least that's been our experience.

The typical long-term investor, as you certainly point out, Roger, is clearly more interested in like, what am I getting paid for my cash? We're 25% of the active trader market in the United States. We're only 3% of the assets in the brokerage world in retail in the United States, that includes full commission firms.

So as we become more effective in the long-term investor space, we recognize we need to be more competitive there. So we've got to be more competitive there, period, if we're going to be effective with the long-term investor. It's really got nothing to do with Bank of America's offering.

Roger Freeman - Lehman Brothers

Got it. Okay. Thanks, that's helpful. And then just a question on the qualified accounts, again. Sorry to come back to this. But can you segment out the comparison say for base Ameritrade versus the TD Waterhouse? How those stats might have been different quarter-to-quarter?

Joe Moglia

Yes, we don't break that out.

Roger Freeman - Lehman Brothers

Can you talk about what the attrition looks like, I guess, close to date, versus what you had expected at this point?

Joe Moglia

Yes. We had, in effect, modeled 5% attrition for legacy TD AMERITRADE clients. We modeled 10% through the integration for TD Waterhouse clients. As of the last quarter or so, that overall retention for the entire company is more in the 95% to 96% range. So that's coming along. There was a while where those numbers were up. That's actually improving nicely.

Roger Freeman - Lehman Brothers

Okay. Thanks a lot.

Operator

There appears to be no further questions. At this time, I would like to turn the call back over to our speakers for additional comments and closing remarks.

Joe Moglia

Okay. Folks, once again, I appreciate you joining us this morning. I recognize that if you just take a look at your numbers and your models, and if you just understand what we have been saying literally since the close, we expect to be held totally accountable for what we are delivering, and what we ultimately deliver with regards to our client segmentation strategy, with regard to the integration, and our overall costs. We expect that.

We also said, though, that we will carry our costs and do what we need in effect to get done, so we really have as strong a base and foundation as we possibly can coming out of '07, going into '08. Those are the simple reasons why we're carrying our costs a little longer. They're the reasons why the integration is scheduled where it is. We still have every objective and we will make every effort to make sure that those things happen.

So, thank you very much for joining us. We're excited about the start of 2007 for us. Again, the bottom line is we are doing all this so we're strong coming out of '07 into '08. Thanks for joining us, everybody.

Operator

This does conclude today's conference call.

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Source: TD Ameritrade F4Q06 (Qtr End 9/29/06) Earnings Call Transcript
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