TD Ameritrade Holding at CLSA AsiaUSA Forum Conference Call Transcript

| About: TD Ameritrade (AMTD)

TD Ameritrade Holding Corporation (NASDAQ:AMTD)

CLSA AsiaUSA Forum Conference Call

November 9, 2011 1:30 pm EST


William J. Gerber – Executive Vice President and Chief Financial Officer


Matthew Fischer – CLSA Asia-Pacific Markets

Matthew Fischer – CLSA Asia-Pacific Markets

Good morning, I’m Matt Fischer, CLSA’s U.S. Brokerage Analyst. It's my pleasure to welcome back TD Ameritrade’s CFO, Bill Gerber to our AsiaUSA Forum. Once again, Bill is accompanied by Bill Murray, TD Ameritrade’s Head of Investor Relations. Bill Gerber has been with TD Ameritrade since ’99, and CFO since 2006. Bill oversaw 10 acquisitions over the past decade, and was a major force in transforming TD Ameritrade from primarily an online platform to execute trades to a more full-service platform that includes multiple investment products and distribution channels.

I think the most compelling number that you will see in Bill’s presentation is 12%. This is TD Ameritrade’s organic growth in client assets, and is more than double that of their competitors. Hopefully, Bill can touch on, how they’re able to achieve this growth, and how it helps to drive EPS growth and industry leading pre-tax margins.

With that I think, that’s all enough of your time, and I’ll hand it over to Bill Gerber.

William J. Gerber

Thanks, Matt, and thanks to CLSA for inviting us back. Sometimes after introductions like that, you just want to say thank you, and I’ll take questions. We do have a lot to talk about, we have had several good years, and I think that as we go through this, you will understand a little bit more about the excitement that we have relative to the next few years at Ameritrade.

Bill Murray as Matt said, works with me and incharge of Investor Relations. And certainly, we can wait to the Q&A at the end, but it’s also fun if it’s a little more interactive. So if you have something that you don’t understand, right at the time we can go from there.

The Safe Harbor basically, as I’ve said may be a couple of other occasions, we could boil this down that the future is inherently uncertain, and there is – we’ll just leave it with that, I always like thank our legal team for participating. Our mission; what are we trying to do? We have a couple of key words in here that I think are indicative of what the mission is, that the TD Ameritrade is trying to do. The key word here being better, better implying that we’re never satisfied, we are trying to be a better firm, we’re not going to rest on our laurels, we are going to continue to go forward.

Today’s investor also, we want to stay relevance to where the clients are, and the client’s needs. So what we are trying to stay relevant to today’s investor. So there are six things that I would suggest that would be the investment themes, that I would ask you to think about low risk, high operating leverage, high cash flow business, so we’ll touch on some of that.

We have an insured deposit account agreement with TD Bank in the United States. That at the end of the September quarter, and whether we’re a September 30 year-end company so you might hear me talking about our year-end, but we just went through our year-end. But the IDA agreement insured deposit account agreement with TD had $57 billion of client assets, and at the end of the September quarter. And the revenue that comes off the IDA agreement represents roughly 30% of our revenue streams. So something to be aware of.

Also on our business model, we are very client centric (audio gap) and objective, I will talk about that, you are not going to (audio gap) find any products that had TD Ameritrade’s name on them. No one gets paid in our whole organization to trade a bond. There is no additional compensation that goes to our associates from that. So we’ll touch on that a little bit more later.

We are a market leader in DARTs, Daily Average Revenue Trades and have been for years. We are a premier asset gatherer as Matt mentioned. We’ve had double-digit net new asset growth for the past three years. And I will show you that in a moment, but our net new asset growth has been remarkable.

Our relationship with TD, which again is Toronto-Dominion Bank. TD is extremely important for us, the IDA agreement as I mentioned earlier is critical. We also are going through and going into select TD branches up-and-down the Eastern seaboard to try to cross sell between the TD Bank clients and the TD Ameritrade business. And so, I’ll touch on that a little bit more later as well. But we do have a very, very strong relationship with TD, one of the few AAA-rated banks remaining in the world.

So we are extremely well positioned for rising interest rates, and someday they will rise, but we right now have over $77 billion of interest-sensitive balances within the four walls of the company, which we’ll touch on, but that's very important.

And we have extremely strong cash generation and a strong financial position, very clean balance sheet, very strong EBITDA, our EBITDA-to-debt ratio is 1:1, and we’re growing that, we’ll talk about that too. And we’re really looking right now in this environment to continue to build a long-term core earnings power to company and deploy in the 40% to 60% of our net income every quarter back to the shareholders through a combination of stock buybacks and dividends, and we’ll touch on that as well throughout the presentation.

So what are we trying to do in our business model? We’re trying to match the client’s needs with the different and distinct delivery channels. We let the clients interact with us the way that they would like. So you can touch Ameritrade through the web, through calling us on the phone, we receive probably 30,000 or 35,000 inbound calls a day; through our education business that we acquired with the acquisition of thinkorswim back in 2009; through our own branch network, which is 110-ish branches throughout the country; and then through our registered investment advisor platform for people who want a more professional management of their money, and they go to registered investment advisor. We are the back office for registered investment advisor, about 4500 of those throughout the country, and so we’re the third largest position in that industry.

We’re also an open architecture, and you’ll hear me say a couple of times, our objective and independence. We do not manufacture any product, and as I said, no one gets incentive to buy or sell anything. So clients like the fact that when you are sitting and talking to them that you don’t kind of have a horse in the race, you are just trying to give them the best guidance that you can and allow the client to invest their funds, the way that they feel most comfortable in their own risk profile, so very important there.

And lastly, we are aligned with the significant growth trends in the economy, in the world. The growth of the net self directed traders, now that people are investing more in savings and really move towards the independent mile through RIAs. So it’s very important to see those, so we think not only are we touching the clients directly and the clients are when the clients are interacting with us the way they want to, but significant secular trends in the world are benefiting us as well.

So further in our unique group and differentially a business model, our results are very strong and not just for our industry but any industry. And certainly, I would put our results up against all the companies who were here at this conference, and I think these numbers would hold up quite well.

The fed funds rate went to zero December 17 of 2008, and as I said we’re September 30 year end company, so basically they went just at the beginning of our fiscal 2009. So the headwinds that we have been enduring from that time almost 36 months ago now, have been significant, but as you can see we continue to have very strong results and our positive growth and our net new assets, which I’ll touch on in a minute have really mitigated a lot of the compression that’s going on in REIT.

So as I said, our business model combined with a relationship with TD provides for a low capital intensities, is a low capital business. The dollars that I’ll show you in a minute, in the IDA are actually half of our balance sheet on to TD’s balance sheet, and high return on equity, so two very strong things.

Our cash and capital generation; our cash generated every year approximates net income of course you’d add back D&A to that, but even if you assume that D&A is going to fund CapEx, our free cash flow is really approximating the cash or the net income that we are generating.

And we’re industry leader in operating margin, so you can see the operating margin on the slide and we’re now looking at next year for 2012, a range of $1 to $1.35, obviously a big range. There are a lot of moving parts in the world as we know these days, and we’ll have to see how it all shakes out, but we’re looking at a 36% to 41% operating margin.

So the market leadership in trading, we are a leader in revenue trades per day. We have obviously almost hit 400,000 trades for each day for last year. We are also a large options player. We purchased thinkorswim, which was one of the premier options platforms based out of Chicago in 2009. Our options trades right now are about 25% of our total trading activity on a daily basis. Our derivates, which include futures and just a smattering of foreign exchange usually, it hits right around 30%.

So we see the market growing at 8% to 10% for active traders over the next several years. We think that, certainly, the Barron’s rating is very nice, but the advanced trading platform and analytics tools functionality that we have are excellent and our clients really love the functionality.

So when you are looking at what makes the clients stay with us and how are they embracing the company, they really enjoy the tools, it’s really more, what products do you have that the clients will then engage with you.

And as we are looking going forward in our growth strategies, one of things that we did as we decided that we needed tiered a platform and we introduced Trade Architect. So what we had in the past was we had the legacy the classic Ameritrade platform, which has been out there for years and years, and then, we bought thinkorswim, which is again very high-end options trading platform.

What we found is that the jump from our high-end clients who wanted to go from the legacy Ameritrade to thinkorswim was a quite steep climb and people found that it was difficult to understand or just go from as may be driving a Chevrolet to flying a Learjet. I mean it just takes a little more skill. So we introduced Trade Architect, it really bridge the two platforms. Trade Architect has been out for only a couple of months, it has been significantly adopted by our clients, they continue to adopt it every day. And so we are very optimistic that we are going to help clients go to, if they want to get up to thinkorswim level platform that Trade Architect is going to be a great bridge to get them there.

We will continue to look at products, on options in futures and foreign exchange. The education business that I mentioned earlier that we bought with thinkorswim is doing quite well. We offer this for a fee, while we offer it to Ameritrade clients for no fee if they bring in more assets. So you can have from a basic to almost to a doctorate, and I think the doctorate level program is $25,000. And people are coming and taking it and it is very good and it trains you how to use options as a risk management tool. So the education business is primarily driven by risk management and etcetera. So we see that as a great growth strategy going forward as well.

And lastly, on this slide is the mobile platform. And the mobile platform, everything from your phone to your iPad today represents over 6% of our trades per day are coming through the mobile channel. Last year that would have been closer to zero. So we really do see the engagement with clients in mobile and wanting to be connecting to their account for – during the market hours being open is being very important in driving additional growth in trading.

Here is our asset gathering slide, we are getting very good at asset gathering. We think we’re good at it, but we think we have a room to grow and become very good. These are very strong numbers, and as you look at the bottom of the slide as Matt mentioned, in fiscal ’09 we had 10% growth, 11% and 10% and 12% this year. Our target every year is 7% to 11% growth of beginning client assets. So once using numbers, if we had $400 billion of client assets at the end of September 30, total client assets, we would look at 7% of that being $28 billion or up to 11%, $44 billion will be the range that we would look at for 2012.

We think that the 7% to 11% is not only achievable, but is something that we believe world class asset gatherers would get into the high single digits would be very happy. Of course, we are not trying to go backwards, I never like slides that go from left to right, then they start going backwards. But we are hopeful of course that this is conservative in our outlook for 2012, but the $27 billion to $42 billion is really mathematical based upon the 7% to 11% as I just mentioned.

We started asset gathering in 2007, and in 2007 we gathered $12 billion of net new assets. We were getting as I mention about 30,000 or 35,000 calls a day, we were very good at servicing those calls and we actually paid our call centers associates on average speed of answer, which got the clients on and off the phone quickly.

We also had our call center reporting into operations, this was considered a back office thing, and so we were very good at service, but as Joe Moglia, our former CEO said, we needed to transition to service and sales. Then we acquired TD Waterhouse in 2006. TD Waterhouse had all the branch network, they have the RIA network. We had basically none of that Legacy Ameritrade, and as we started going forward, we transitioned instead of being a backoffice function, we said the call center is essentially the first level of sales. And we need to get this group of people, Series 7 licensed, which they all are, and we transitioned them from being in operations to reporting to the Head of Sales, who is John Bunch.

With that, we also taught them how to listen, how to ask a few questions, we’re not looking for the call center reps to answer all the questions, we’re looking for them to provide leads to the branch network. And from these leads, so I would get a phone call from one of you, I would say, well are you happy with your retirement fund, are you happy with your child education fund? If you said anything else, but yes, I’m absolutely happy. I’d say, well we’ve got Bill Murray in our San Francisco, would you like him to call you and set up a timing to come in and talk about your investments and what you’re trying to do, most clients like that.

So Bill would call up, you’d go in, you’d sit down and talk with Bill, you’d agree on what potentially a strategy is for solving your issue, and you’d put more money likely put more money into your accounts. So not only would that count toward Bill’s getting his net new asset goal for his incentive for that quarter, but it would also, I’d get paid as the call center rep who asked the right questions, that brought up the lead, then I hand it off to Bill, so that he could close the deal.

If you do anything remotely, like paying someone in a call center, it goes to a call center like wildfire. And so these are cleverly called branch lead referrals, BLRs that was not my name for it. And from a standing start of zero net new assets that run in a couple of years ago, that represented $5 billion of the net new assets in 2011, came through the branch lead referral network.

So we think we are getting better at this, we have not yet maxed out our opportunity with our clients, but our call centers and our reps are getting better at referring to that, and it’s very, very important for us as one of the ways that we’re going to grow going forward. I’ll talk about the TD relationship in a moment.

So if you look, we had $100 billion of net new assets, net new asset, this does not include any market moves, it does include all the funds that clients take out, but it doesn't include market moves, but net new assets over the past three years.

As we look at in investments, there are three areas that we will continue to invest disproportionately to the rest of the company. One is sales, two is technology in our platforms, and three is advertising. So we will continue to look at that and we think that will assist in driving, and not just trading but asset gathering.

In our growth strategies, we are upping our cash management program to allow clients to move cash seamlessly in and out of their accounts, bringing in debit cards, checking accounts things of that nature, all in concert with TD. So that’s an important part of our growth strategy, we’ll see that rolling out later this month, I believe. The retirement, and I’ll talk about the TD cross selling in a moment.

So TD Bank, TD Bank owns 45% of TD Ameritrade, the most significant relationship that we have with the TD is in the top left box there, the $57 billion as of 9/30/11 in the insured deposit accounts. So we get the economics and rewards of a bank without having the risk of a bank. And I’ll show you in a couple of slides that we have tripled the number of dollars within the bank of TD in the past three years from $17 billion to $57 billion. We have zero capital associated with that, so the capital is all within TD. So this is a very important point, as I said earlier this represents 30% of our revenue stream right now with the opportunity to grow much higher as rates rise, but something that if in fact you choose to do little more research and work on TD Ameritrade, you will find that this is a very important component.

Second, TD also provides a money market mutual funds for us, which is little over $8 billion at September 30. We are currently waving about $15 million per quarter of our fee because of the nature of the interest rate environment. So that’s important as well, but TD does provide those opportunities for us.

The top right box is what I was mentioning earlier about the cross sell relationship between ourselves and TD. TD has 13,000 bank, they call them stores, and I call them banks, but they have 13,000 stores on the Eastern Seaboard of the United States. And Ed Clark, who is the CEO of TD has said, right now if a client who is very loyal bank TD Bank, who does not have a TD Ameritrade account, he is getting 100% or nothing on those revenue dollars. But because of the relationship of TD Bank and TD Ameritrade, if we can have the client move their relationship from another broker to TD Ameritrade, he is now getting 45% or something.

So it’s a very interesting strategy, we think we will continue to roll this out. We have as I said about, 25 of the branches right now, we are looking to see what works before we do it more massively. I don’t think ultimately we won’t get anywhere close to their 13,000 branches. But I do think that, we can get maybe to a couple of 100 over the next few years. And it’s actually quite easy where we decide where to put them, when we look at the demographics of our clients, and we see where they are most wealthy, and we say (inaudible) you have a bank branch in Hoboken, New Jersey. Yes, we do.

So if we don’t have a branch right nearby, we will put a person in those stores, and a little bit of a hub-and-spoke to, even though you only have 25, we are going out to the other branches that are nearby. So a very interesting strategy something that we think is quite unique to us, and I know Wells Fargo is here next, and want to just use Wells Fargo, and I like Wells Fargo, but I always just to use Wells Fargo as an example. Wells Fargo never asked us to put people in their branches.

And lastly, on the slide, TD Ameritrade executes TD Waterhouse, the name was retained by TD Bank for non-U.S. entities. So the TD Waterhouse name is in the UK, TD Waterhouse name is in Canada, but for those people in the UK and Canada, who want to trade in the U.S. markets, we have opened up the pipes from TD Ameritrade to those two countries, so that they are actually trading on the TD Ameritrade system despite the fact that they’re sitting in London. This help us quite a bit because, TD has the responsibility for all the regulatory rules and things of that nature, and we do a revenue share with them, which is not huge dollars right now, but again there’s another way to leverage our relationship with TD and provide opportunities for us going forward. So very important, a great partner, as I said earlier it’s always nice to have one of the few AAA rated banks in the world in your corner and be a 45% owner.

A very important slide, one that I alluded to a little bit earlier, we are well positioned for interest rates. You can see on this slide, in the grey box, if you can read that is the money market mutual funds, that’s at the top, the middle box is the interest earning assets predominately in their three items; margin loans, segregated cash, and there is actually other cash, it’s on our balance sheet too. But that’s in the light green box. The dark green box at the bottom that is the IDA, so the insured deposit account agreement with TD.

On the money market mutual funds, we’re looking at making anywhere from 5 basis points to 85 basis points. Today it’s probably around 15, and as I said earlier we’re waving our fees to the tune of about $15 million a quarter because of the interest rate environment. The IDA on the other hand and in the deck that you have in the back, you will see, we do have 2012 outlook, but the IDA we’re expecting a yield of 130 to 140, but that yield in the past has been over 400. So we are very, very interested in rising rate here.

Further on the IDA, we have a notional ladder with TD, so the money that we sweep it off with our balance sheet to TD, we get paid on the LIBOR swap curve. We believe that the duration of the portfolio is two to three years, and currently the duration of the portfolio is about 2.4 years. TD invests the money anywhere between zero, of course, you are managing liquidity, that’s really the art in this. But we work directly with TD’s Treasury group, so we basically invest the money between zero to eight years.

So the gross yield on the IDA portfolio has been deducted, three items get detected from them. One is, we pay TD a 25 basis point fee. Two we paid TD’s FDIC insurance premiums, which is about 13 basis points. And three, of course we pay the client something, but in this day and age, that up 10 basis points.

So the gross yield less of those three items determines what the net yield is for us. And in the third quarter last year, the June quarter that yield is 1.60%, this last quarter is at 1.45%, we can talk about that a little bit more, it was a steeper to climb than we thought. As we [pause] some of our extensions during the September quarter, particularly in August, when the rates got extremely low and we saw some very unusual economic relationships. But this area as I said the IDA agreements how it works is very important in understanding the economics of Ameritrade.

The interest sensitive assets are $77 billion as you can see, which is a record for us, that’s up 17% year-over-year, so we think is excellent growth, and one of the questions we frequently get is, what happens when rates do start rising? We say for 100 basis point increase, the first 100 that in year one, 12 months after Bernanke and Company woke up tomorrow and said, rates were up 100 bps. We would say that would represent $0.28 of incremental earnings per share for us, and that would then because the nature of the portfolio rolling over, how much the IDA portfolio rolls over in year two and year three, that $0.28 then would become $0.37 in year two, become about $0.45 in year three. So it’s the gift that we’ll keep on giving for a while once rate start going north.

Okay. We have, as I said very strong cash generation and a strong financial position. We look at liquid assets as being, if you know anything that’s specific about, workings with broker-dealer, the regulatory minimum net capital you are required to have is 5% of your aggregate debits. Our management target is doubled out at 10%, so we have a significant amount of cushion. This liquid asset is representative of the excess capital over the 10% within the BDs plus cash at the holding company. So we expect that our EBITDA right now is about 40% to 50% of revenues and we would expect that will go over 50% of revenues when rates start rising.

So we continue to see a strong and growing liquid asset position. With the liquid assets, we are targeting between $500 million and $1 billion to provide us with optionality, which would of course be available for deployment or return. And in that optionality, there are a few areas, one of course is acquisitions.

We will look at acquisitions, we’ll continue to look at acquisitions, we are the known consolidator in this space. So that is one of the areas for optionality. Two is stock buybacks, during 2011, we bought back 23 million shares or 4% of the company. In 2011 we have 37 million shares left on our authorizations, which represents about another 6% on the company. So we will continue to look at utilizing our cash flows for buying back our stock.

And lastly dividends, we have about, we just increased our dividend 20%; went from $0.20 to $0.24 annually. We just initiated the dividend last year, the payout ratio on that of course is just about 20%. We think that, that’s a reasonable number for us, but we will continue to look at that on an annual basis.

So what have we done with the cash over the past three years, we have generated $1.9 billion of cash, net income over the past, does that include D&A, but we’ve generated $1.9 billion of net income over the past three years, and we’ve used 95% of that in terms of either M&A activity, which we’ll be buying both cash component of buying thinkorswim, debt repayments, share repurchases and dividends.

So we think that, that’s a pretty good track record, we did buyback 80% of our net income, or we’ve used 80% of our net income I should say in 2011 to buyback the shares and to pay the dividend. So we are very keen on maintaining and utilizing the shareholders’ capital wisely.

So 2012, we continue to see a difficult business environment, we think that we’re not expecting rates to do very much in 2012. So therefore, we’re going to continue to maintain our momentum and focus on our organic growth. With an increased focus on our process and expense management, we think that we have opportunities because of the ten acquisitions we made over the years, to have a third party come in and let’s reassess the procedures that we’re using and see if we can streamline those, save some costs, redeploy those costs to the front end, again to the three key areas; sales, technology, and marketing, to keep our expense load flat, but essentially change the characteristics of the expense.

We’re going to continue to adapt the IDA extension strategy to the environment, some of the questions we’ve gotten in the past are, gee, if you’re looking at a flat interest rate environment through ’12 and ’13, are you getting a little worried or agitated, what is it that you can do to drive your revenue forward? Well our solution for that is to grow net new assets and grow the balances. Our other choices are extend further from the zero to eight, which we don’t want to do or try to change an asset class or something with our agreement with TD, which we also don't want to do.

So this is a cyclical business as you know, and I’d rather be here next year telling you, I understand that the midpoint of the outlook range is $1.18, we made $1.11 this year, get it. But I think I’d rather sit here and say, we hit a bunch of singles for you, and by the time rates do move, then we’ll be able to hit some grandslams, I don't want to be telling you that we try to reach for yield, and now we have, we’ll be paying or earning as you saw earlier something very low on a five year swap as an example in the terrible environment.

So we will adapt that strategy, but right now our strategy is to maintain what we are doing and continue on our path. We will also maintain a strong balance sheet and return on capital strategy. So 40% to 60% of earnings and more on opportunity. And as I said, we did 80% in all of 2011. We did 142% of our net income in the fourth quarter, so the September quarter, we bought back 13 million shares of our stock or 2% of our stock in the fourth quarter because we saw the opportunity.

As I mentioned, we have 7 million shares left on the original repurchase authorization, the board authorized another 30 million, so as of October 1, we had 37 million share authorization available to us. We increased the dividend of 20% and as I mentioned, the range for 2012 right now is a $1 to a $1.35.

So, in this environment we are trying to control we can control, build the long-term earnings power while return and deploy the capitals of the benefits of the shareholders and essentially right out the storm.

So, this is the same slide that we had right at the beginning. The things that I would hope as you walked out of here, you would remember these six themes and I will briefly summarize them for you again. The unique and differentiated business model, the $57 billion that we have in the IDA agreement with TD, the objectivity that we have with our clients that’s we are not trying to sell them any product that our associates don’t get paid, and a nickel if you make a trade, don’t make a trade via particular product, there is no, you were in the exact same side as the clients.

The education business we think is really a nice driver of good client, solid clients, who are trained in more risk management, which we think benefits us in the long run, and this is a low risk, high operating leverage, high cash flow business. So, if you like those that’s an unique and differentiated business model.

We will continue to be a leader in DERCs and options and certainly it’s nice to get, nice comments from Barron’s and being number one in their, number one platform. The premier asset gathering as Matt and I mentioned right at the beginning, of course we are going to continue to look for double-digit growth. We are not going to look to go backwards, but we continue to see that as a significant opportunity, not only in new clients, but in our existing client base. We think we have a lot of runway there as well. And so, and the important point is the sole incentive compensation area for our associates out in the sales force is net new assets, so that is their driver.

The unique relationship with TD that I think I’ve said quite enough, but it really is something that is not replicated easily at all. We have a huge partner, who wants us to penetrate their clients, gives us the IDA agreement for what we think is a very, very strong deal for both sides. TD gets a lot of low cost deposits; we get the benefits of a bank without having to be a bank, so a very good growth for us.

And we are well positioned for rising interest rates the $77 billion of interest rates, – interest-sensitive assets and growing, but right now, we think again 100 basis points, $0.28 of incremental EPS in year one, are growing to $0.37 and $0.45 in the next two years. And we have very strong cash and financial position.

So with that, certainly, I’d like to again thank Matt and thank CLSA for inviting us back and I’d like to open it up for questions.

Question-and-Answer Session

Matthew Fischer – CLSA Asia-Pacific Markets

Could you say something about the European online brokerage market, is that an area where you’ve looked at acquisitions in the past?

William J. Gerber

In the European market, no. We have not looked at acquisition opportunities in Europe. We haven’t, let me put differently, we have looked, we’ve decided not to go there. And we think that the opportunity here in the States is still very strong. We obviously have the agreement in England with TD, which is a good partner and we will continue to look at select countries in Europe obviously Germany, that would be top of that list, but we’ve not yet decided to make an acquisition across into a foreign country.

With thinkorswim, we got two very small entities probably not even almost worth mentioning; one in Singapore and one in Australia, but because we brought them, we kept them, but we’re hoping they are going to grow, but they are very, very tiny right now. That’s where the only foreign exposure we have.

Matthew Fischer – CLSA Asia-Pacific Markets

Can you just walk through, if I’m a Break Away Broker, how long does it take me to get started up with Ameritrade and how much is that cost me and if I want to leave what are the switching costs?

William J. Gerber

Sure. Break Away Brokers, it’s not all that expensive, I mean there is certainly setting up your offices and all the administrative stuff that they are doing. For us, I mean we provide a tremendous amount of services to the Break Away Brokers without any fee at all. So right now Tom Bradley runs the RIA business for us, he has said that his sales funnel as he calls it, [as this holds] it’s ever been and if you got all the assets from all the people who said, yes, we’re interested in talking to TD Ameritrade about coming under our platform, is in our RIA, that number now is about $350 billion of incremental new assets.

So last year that number is $300 billion, certainly I’d love to get all of it, I would like to get 20% of it, but we’ll see where that goes. But the timing that it takes I think probably a three month would be, probably a decent time horizon in there. In the time they actually make the decision switching and actively switched when they are up and running. That’s an educated guess on that (inaudible).

Matthew Fischer – CLSA Asia-Pacific Markets

Is it fairly commoditized between whether that broker goes to any of your competitors, if you get them incentives to come to essentially clear to Ameritrade?

William J. Gerber

The pricing in the industry is actually pretty standardized, I mean there is always maybe little tweaks, but we are not doing anything to buy the business per se, matter of fact, what we earn on the new RIA is higher than what we are earning, kind of the old existing RIAs because we have gotten to the size and statue that the pricing is now less of a component and that’s been that way for probably three, four, five years.

But it's a very good business, the clients are very sticky. Essentially, if you think about it the RIA is like a wholesale side of our business. So one RIA has hundreds of clients underneath and so as they have all the forms come over and we get 200 more accounts. We have one client was the RIA, we are obviously. We send conference to under the client themselves and the RIA at the same time, so everybody knows what's going on in their account. But all the services that we do with each other are good. I think ours not only significant differentiating factor that we have with the RIAs, this is our open architecture and something we can talk about later, but that is a differentiated process. Yes.

Unidentified Analyst

Two questions, the first is, you mentioned your relationship with TD and $57 billion at the end of September (inaudible). How much of that goes to the client versus (inaudible) that’s first question. And the second is, are you thinking of letting some of your clients who wants to trade in overseas market lets say U.K. or Canada or some other developed markets like what E-Trade allows their customer to do. Do you have any such future plans? Thanks.

William J. Gerber

Sure. And the first part and how works with TD and what the client gets. So, the gross yield from the portfolio and then you subtract three items from it, the 25 basis point fee from TD or two TD. The 13 basis points that we are paying TD’s FDIC insurance premiums on that. And the third piece is what we pay the client, and the client right now is on average on a sub 10 basis points. So, obviously [we cheer], uncertainty will get more than 10 basis points surprises the people who have more money with us and the certain people who get below 10 basis points because they don’t have much cash with us. So, those are the key areas there.

And clients trading in the foreign markets we can do it, it’s not the easiest thing to do right now. We have not have a lot of request or demand from our clients to do that and have that, it’s on our list of things to build, but not something that we expect fully done anytime in the next 12-months.

Unidentified Analyst

You talked about the opportunities for some cross selling of the products with the TD branches, you do (inaudible) any sort of idea how much, how the margins will compare, if you’re using credit cards and all the other ancillary products to these people would be better or less than your current sort of margins with your clients?

William J. Gerber

We see on a pure margin it will probably be less but the opportunity here is to get more of the client’s assets that currently we’re missing and broadening and tightening our relationship with them. So the overall margin would be slightly lower, but we think that net-net it’s certainly added to our net income, to our cash flow further allowing us to leverage that cash flow into shareholder value.

Unidentified Analyst

Bill, you spoke about the breakaway broker opportunity, and I guess the new customers coming in may be you could touch on existing customer wallet share and how do you move that, where are you now and how do you kind of push that north?

William J. Gerber

The last time we did a study on this, we said we were about 12% of our clients’ wallet share and investable assets. And I think Thrive and Fidelity would claim that they’re about 60%, 50%, 60% of their client’s investable assets. We’re not getting the 50% or 60% anytime soon, but we think, I’d doubt if we did that, I doubt we’re into the mid teens. So we still have a lot of runway. I think that the opportunity for us to get it into the 20s and maybe up to 25 to 30 is within reach. It’s going to take a few years to get there, but again we’re doing the things like the credit cards, like the checking accounts to get more of their wallet share to get them more connected to Ameritrade, and we think that’s quite doable.

Unidentified Analyst

You touched on the international, your objectives there, are there any other areas or potential holes in your platform that you do look at and potentially invest in?

William J. Gerber

I don’t think there is many holes in our platform, so no I guess would be the direct answer. I do think that the opportunities, and we go back and we look and kept our challenge, our basic premises should we own our own market maker, and we said, no. Should we own our own money market fund? No. But you have to, the question is things every now and again, as the market continues to move and evolve and try to determine, is it still in the best interest?

One of our basic tendency is, we do not want to be on the opposite side of a trade from our client. So we would prefer not to be owner own money, our own market maker. We prefer to be the advocate for our client with the market makers to make sure that the client gets best execution. But we continue to look at different areas like that, Matt, but right now, we are very comfortable and confidant that what we are doing is the right strategy for us and our shareholders.

Unidentified Analyst

You spoke about the asset gathering side, maybe on to the trading side, a concern that I hear is, will the retail investor to pitch [right] kind of, you’ve seen in a volatile market, and like today a declining market, do they make their last trade and then it’s in the side line. We haven’t seen that, maybe you could discuss why that is, what keeps them engaged?

William J. Gerber

I think that, we are approaching $6 million from that accounts, and so it’s not that everybody is doing it, but you don’t need. We did 400,000 trades per day, 407,000 trades per day in the month of October. So you are looking at a fairly low activity rate of the number of people who are trading versus the total plat of potential trades.

So we think that is the retail investor fatigue, are they going to leave, trading in sit on the sidelines, certainly, we’ve have seen some of that in the past. But the volatility is certainly our friend in this business and when you see that volatility our clients are trading back and forth based our clients are contrarian a down day like today, I would strongly bet that our net settlement with the Street would be our clients buying, but that’s true about 80% of the time when market goes way up, about 80% of our clients were selling, and so very contrarian in nature. But I’m not worried about the clients, our retail clients being fatigue. Yes.

Unidentified Analyst


William J. Gerber

The question for those who didn’t hear was regarding capital gains, taxes and if those got changed, how will that impact trading. We will all adjust to any changes in the federal tax code obviously it paints the entire industry. So my guess is there would be a significant amount of activity in the last 30 days before the rate changed. And then after that its, we will see if it goes as an ordinary income or what the proposed change would be. So I think it would, it’s not depending upon if that was the only change and may be it have other areas, it would become potentially more attractive, but I think that in the long run, people are still big believers that capital gains in the equity markets are still a very strong component of their personal wealth plan.

Matthew Fischer – CLSA Asia-Pacific Markets

And we run out of time. So thank you very much Bill Gerber, CFO, TD Ameritrade.

William J. Gerber

Thank you very much gentlemen.

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