E*TRADE Financial Corporation Presents at Goldman Sachs US Financial Services Conference 2011, Dec-07-2011 09:20 AM

| About: E*TRADE Financial (ETFC)

E*TRADE Financial Corporation (NASDAQ:ETFC)

December 07, 2011 9:20 am ET


Steven J. Freiberg - Interim Chairman, Chief Executive officer and Member of Finance & Risk Oversight Committee

Unknown Executive -


Unknown Analyst

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

We're going to go ahead and get started here with the next presentation. We're really fortunate to have Steve Freiberg here today. He's been with E*TRADE since early 2010. Before that, he was CEO of Citicars and Chairman and co-CEO of Citi's Global Consumer Group. Obviously, E*TRADE had a very interesting few years. And from here, forward-looking and ahead to the company executing on its standalone strategy, it certainly appears that there's an opportunity for the income statement to continue to be moving towards a more normalized environment. Obviously, that's where a lot of interest is, in understanding what the opportunity set for E*TRADE is and how they continue to manage their legacy loan portfolio.

And so I'd actually like to spend time on 4 areas. I want to talk about highlighting your strategy and your targets, discussing the brokers' near-term opportunities, moving on to the bank and then interest margin and then a couple of questions towards the end. So let's just start with corporate strategy. The strategic review you guys had highlighted the overwhelming decision to move forward on your core strategy, and I think Matt did a good job of highlighting that last week. But in the most efficient sense, if I had 30 seconds to try and convey that, how would you put that?

Steven J. Freiberg

It's a lot for 30 seconds. So let me just take more than 30 seconds, I'll take some liberty, but -- and it's your point. It's been a little less than 2 years since I joined E*TRADE, clearly, a company that has a terrific brand, a terrific underlying core franchise and clearly, challenges from the legacy, particularly the legacy balance sheet. And from a priority standpoint, we've had, I would say, a relentless focus on continuing to improve the financial position of the company, and the way we would describe that is improved both the quality and quantity of our earnings. And I think the trend lines are reasonably good, but anybody that's looking at results would see we're probably, on a running rate basis, looking at 2011, about 1/3 of the way back to where we were before the credit crisis. So if you're an optimist, you would say, which I think is what you were alluding to, with the passage of time, that march towards normalcy will continue, but we don't predict precisely a particular date, but we drive towards normalcy.

There are really 3 large variables that, at least, we have in our sights. One is to continue to tightly manage both through, I would say, traditional and nontraditional means, how we manage the credit exposure, which is really the legacy assets of the company. The second is because of the, I would say, the profile of the company, and I know that Matt, last week, gave more precision on this, we pay a substantial amount of FDIC premium that, over time, will decrease as the profile of the company continues to improve. And then finally, we have, again largely, but not exclusively from that period, a capital structure that is costly and that we'll continue to basically improve upon, but that requires time, both in the standpoint of our ability to access those particular instruments as well as the markets themselves.

So when we think about normal, we're driving down a path of normalcy on our financial position that we have confidence in, although we can't predict with certainty or precision when. And then in addition to that, which is more systemic or more systematic, we are -- as most financial concerns today but not really legacy related or directly legacy related, we have an interest rate environment, that almost sounds un-American, that we'd prefer, as most banks, higher rates with a steeper curve. And at some point, we expect that will occur, and I know Matt shared at least some degree of analytics around that, but clearly, that's putting some pressure, near term, on our margin. Although interest overall, our net interest has looked reasonably good, because our volumes have continued to grow.

So when I think about, when you wake up in the morning, say, "There are certain things that we have to continue to work regardless." And I'm not talking about customers. I'm talking about basics. This is the blocking and tackling to get us back to where we once were. The image that I want to leave though with the group, which I think is very positive and again, Matt showed it very precisely, that if you look at the underlying franchise, which essentially is largely driven by the online self-directed business, that has been remarkably stable, both the brand as well as the economics and the customer base over the last, I would say, 4 or 5 years, which was surprising to me when I joined the firm. We also quantified the financial benefit of that aspect of the company. And I believe, if I'm citing the data correctly, that that business has -- on an operating basis, been very stable, contributing somewhere between $800 million and $1 billion, depending upon the year in which you look.

And so it leaves me extremely optimistic if, in fact, we can continue to march towards normalcy, which we believe we can. If we can enhance, essentially, to accelerate the rate of growth of our franchise, which is what we've been working on. And I think we have good results but not great results yet. And in addition to that, at some point, there's an expectation that, particularly in North America which is where we have the majority of our business, there will be a return more broadly to normalcy, but we can't predict whether that's 2, 3 or 4 years out. So the optimist in me would say time is essentially our ally.

And we feel that we have good liquidity. We have good capital, and we have a return to earnings that we expect, with the passage of time, will continue to improve so that we have the luxury of time, where 2 years ago or 1 3/4 years ago, when I joined the company, it wasn't absolutely clear.

So not 30 seconds. I thought a long framing was important.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

So in the strategy you guys have laid out and again, it is very exhaustive, where are you spending most of your time today? I mean, is it the broker? Is it the bank? Is it the capitalization? How do you think about where you're spending most of your time in? And therefore, I guess, for us, where do you see the most opportunity?

Steven J. Freiberg

Okay. There are just a few categories I think are critically important and beyond what was just discussed. One is to accelerate our growth, AKA take market share in our core franchise. And we typically measure, as you folks measure that, by metrics like DARTs, asset growth and net asset growth, things of that nature. And we think we've made progress against that, but it's still, relatively speaking, early days. But fundamentally, we can normalize the company, but if we can't grow the company at or above market, you don't have a franchise that, in my view, would be sustainable. So I spend the majority of my time focused on that and dependent to that.

For example, so on one hand, you could argue, given what the company's gone through over the last 4 years or so, we would be extremely distracted by the balance sheet and the cascading effects of that. But we've been fortunate, as I said a moment ago, that the core franchise has held relatively well, and our competitors weren't distracted by what we were distracted by now, as our distractions are becoming less. They haven't gone away but less, and we're focused now on customers, on market, on competition. We believe that we can begin to elevate the core franchise, first and foremost.

What you'll see largely in the first quarter of 2012 are several things that will come to market. One is a complete top-to-bottom retooling of our prospect website, which essentially is largely the face to 15 million or so prospects a year coming through to E*TRADE. And we're very excited about it, because it essentially, in our view, will create a distinctly different, enhanced, better, more productive experience. And we'll launch that at some point in the first quarter of 2012, and it really is a front-to-back redo of our prospect and capabilities.

In addition to that, and parallel to that, and we're coming out of beta in probably the next several weeks, we will have a complete retooling of our web experience for our customers as well which will provide, in our view, a broader picture of who we are, what we do. It would allow them to completely customize the experience that they get, and we believe it will set the tone for several of the priorities that go beyond our core franchise.

One is growing larger and growing more rapidly in what we could either describe as wealth management, long-term investor segment, however you want to describe it which is, today, our customers come to us largely so that they can trade. But we want them to come not only to trade, but to think about their more serious money to invest. We have the capabilities. We have at least comparability, if not some superiority, against many of our competitors, but the awareness level of that is, relatively speaking, modest. So through our marketing and advertising, and through how we present ourselves either to our prospect sites or our core website, we expect, starting in the early part of 2012, we'll begin to change sort of that interaction model and in some degree, the game.

And so given that we've been working on, I would say, the remedial work of the company, there's been a large group at E*TRADE that's been working on how to beat the competition. That is really where we win. The other is essentially we will get, in the short term, value but over the long term, a franchise. And that's sort of how we think about the world, and it does take up a fair amount of time.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

Yes. So maybe more specifically, in the broker and on that -- and I can appreciate you guys don't provide guidance, and I'm not looking for it. But net new asset growth, 7.3% year-to-date, that's about 400 basis points below the market leader but above some of the others in the spec sector. How do you think about where that number can go? And what's sort of the trajectory to get there?

Steven J. Freiberg

Just a couple of, I think, points, because I think it's a fair, very fair question. On one hand, we're quite proud, because we think the range from high to low and only a few competitors sort of in the range is probably, on the low end, about 3% and on the high end, about 11-ish percent, maybe 12%. And we're sitting in that 7% to 8% range, as you made point. Just a few comments on it and then talk about, kind of prospectively, what our views are.

Given the facts and the data, as I'm sure Matt expressed last week, that if you look at 2011 -- which has been an extraordinarily interesting year, a fair amount of volatility, good, bad, ugly, all sort of compressed into a relatively short period of time -- 2 out of the 3 quarters of 2011, the firm had, by far, its best asset growth on record ever regardless of the period in which you look. So we feel pretty good about that, because if you look at that in just absolute terms, you'd say we're doing much better than we've done before in light of everything else that we've had to work. And then in addition to that, we're -- if you look at it on a year-on-year basis, last year, we grew in, let's say, around 6-ish percent. This year we're growing in the mid-7s. So we have, basically, some lead way.

So the -- again, the optimist in me would say, "Not bad, all things being equal." The sort of the more aggressive nature that comes through though is, "Boy, this is sort of not pessimism but frustration in that our customer base." And I can kind of give you the broad statistics and not precise, but I think they're telling that our typical customer only has about 12% of their financial assets with us. So again, they largely view us through the lens as a good place to trade but not so much a good place to invest. We're working very hard, both through our advertising, our imagery and now, on the re-architecture of both our prospect and our core websites, to change that perception. So the optimist in me would come back and say, "Boy, if we can grow at 7%, 8% when we're hindered by both image as well as some degree of, let's say, functionality in this particular category, think about what happens when we overcome that given the best guy is only doing -- you're saying he's doing 400 better -- I think he's only doing 400 better, plus with the broad distribution channel."

Obviously, we don't have any materiality in the RIA segment. Not to say we won't in the future, but we don't. That's just a fact. And a lot of asset growth is driven by, let's say, channels like that, but the throughput economic of that channel looks nothing like if you own, essentially, the front-to-back relationship. So not every asset is created equally, right? So I wanted to kind of give you both sides of it. On one hand, we can feel pretty good, both on trend as well as absolutes. The other is there are people that are doing or a particular group that are doing better 400 basis points.

But on the other hand, they're doing better, but they have a fully developed image, and we have a partially developed image, but we have high degrees of aspirations. And if you look at the 2 areas, because you're leading me into one, the 2 areas that we think about out over the next horizon, let's say the next 12 to 36 months, one is that we want a much higher penetration, of that aspect of the wallet of our client. And then in addition to that, we have a terrific banking franchise, and we only have, really, half the balance sheet from our customers, roughly $35 billion or so of customer cash, $32 billion of deposits.

And the question with the passage of time, we're doing some testing and learning right now, is whether or not beyond margin, let's say, can we lend money to that customer base? And we're not talking about going out and creating a distinctly different customer base, but we're talking about, roughly speaking, 3 million relatively high-quality individuals that we know and know us, and we're doing testing and learning as we speak. And if we like what we see, that will give us another leg up with the passage of time, but we're not there yet.

So in some regards, we have a legacy that's challenging, remains challenging but I think well managed to being worked. We have a core that's been remarkably resilient and has leveraged up. And then we have some areas that are sort of fertile ground that we've let though basically lay idle that we're beginning to focus our energies into. I don't know if that helps. Put it in a continuity.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

No, it does. And well, I have a few other questions, but I just want to come back to the testing you just mentioned. So one of the things you guys have talked about is the balance sheet and the size of the balance sheet that you want to maintain and have that grow with the client assets. But also, we have a significant amount of loan rolloff, and paydowns and charge-offs.

Steven J. Freiberg

Won't you guys like that? There you go.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

I won't really weigh in on that right now. But I guess maybe the question is on the testing, what are you looking at? Are you talking about lending first liens, home equity, asset loans to high quality?

Steven J. Freiberg

Let me put -- again, for the group, let me put the balance sheet sort of in perspective. And again, I have the luxury of not having to basically pass the rigors of accounting, so I would sort of give a kind of a broad construct. But roughly $42 billion of our balance sheet is interest earning, rough numbers, moves around a little bit. Today, one could argue about $20 billion of that is roughly situated either in legacy assets -- must have made us $14 billion -- and the remainder of that piece, let's say a margin, which adds up to were close to let's call it $20 billion. And the remainder of that part of the balance sheet is, roughly speaking, predominantly in agency securities.

And so sort of the kind of the conundrum that we're in, on one hand, if you look at, on any normal period long-term view of the world -- and we've had a number of highly esteemed investment banks, yours being one of them, come through and kick the tires as well as one of the best management consulting companies look at it to make sure that we're looking at it in an appropriate way -- you'd say, "Given the deposit base we have and if we only went down the path on the margin of investing in agency securities of similar duration, we have a fairly healthy spread." I think that Matt said in a normalized environment, it probably runs probably about 300 basis points or so. And so -- and that's to the best of our knowledge unless the world is different this time forever. That's probably a reasonable view if you're modeling a company over a long period of time. And then you sort of deal with the vicissitudes of the marketplace. And right now, we're essentially in probably the more challenged of those environments. So on the margin, what we've been investing in doesn't look like the average.

That's just a fact. It's simple arithmetic. It's not that complex. And question becomes what happens over time. First question is what happens to the macroeconomic environment. And we can look at forward curves, but they change all the time. In fact, if you'd looked at the curve at 4 different points during 2011, you conclude 4 very different things, so we know that. And we can't, basically, strategically manage our business every 90 days to a different outlook of what's going to happen over the next 3 to 5 years. We have to get to some smoothing and some normalcy if we do that.

On the other hand, we do have options, so to speak. We could basically mildly change the risk profile of the company. You've made one point. We could lend money to our customers. And the questions is what's the risk and what trade-off. How good are you at that? What's your executional capabilities? And how scalable is it? So right now, when I say we're testing, we're testing, basically, not on our balance sheet, but we're testing what we call demand. We want to understand how much demand there would be from our customer base if we offered certain types of asset-based product, because if demand was small, why would we waste our time building operational expertise and infrastructure in order to go do that? If the demand were large and the resulting P&L were compelling, we might basically have a different viewpoint, and we're sort of in the middle of that right now. So that's one way.

Second way would be -- is would you have a balance sheet that's exclusively, over time, based on agency securities? Or would you use other instruments ala a treasury function? And if you're basically anyone that -- as we all know, that has experience, you would say, "Of course, you'd use other instruments in addition to using, essentially, agency securities." And so we have degrees of freedom that will become, basically, clearer with the passage of time on 2 fronts.

One is as the overall risk profile of the company improves, which it has been improving, gives you more flexibility, both because the profile is improving. Your capital is improving, and therefore, essentially, your degrees of freedom improve. And the other is, which is really franchise related, is what's the demand of your customer base and if you can satisfy the demand. In fact, the old joke, which is sort of ironic, that E*TRADE had underwritten a fair amount of mortgages for its own customers and unfortunately, sold that and kept the other stuff. The stuff we sold performed extraordinarily well. And if you look at the customers that basically had those relationships, they performed actually substantially better on their brokerage relationship than a group. Not exactly a pure control, but I would say a fair surrogate.

So we know relational businesses work better than non-relational businesses. We know serving your customer needs work extremely well, but the question for us is scalability. If we knew over time that the portfolio can only get this big, why waste our time? If we think it can get this big, it's worth basically putting in the energy. And in -- to your point earlier, I spent most of my career lending money. I lent it in cars, lent it in mortgages, lent it in consumer finance, secured, non-secured, U.S., non-U.S. We can do that, but we can only do that if it makes sense for us. So it's not an intellectual challenge. It's essentially a situational one. I don't know if that answers your question.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

No, it was great. So let me go back to one of the other things we talked about in the broker, and then we'll move on to the balance sheet in just a second. You made a major push over the last few years to get the gross attrition down as part of your strategy. And again, I know that targets and guidance aren't necessarily what you want to do. But that attrition rate's gone down from 15% to 10-ish percent right now. Can that get lower? Should it get lower? And if it can, what do you do to drive it there?

Steven J. Freiberg

Yes. One, low interest is always a good thing. I wouldn't debate anybody on that topic. I think the key though is what you have to look at. And then I'll try to answer the question without answering the question precisely. We look at attrition -- we've -- we disclose it, like everyone, in the aggregate. So I call 10%, and you can say 10% is better than 15%, which we'd all agree, but 8% would be better than 10%. On the other hand, the attrition that we're -- attrition is essentially account based. And effectively, for us, if an account falls below $25, we call it gone. Other folks let it go to 0. And you're right, there's lots of nuances to it. But the attrition that really matters, we segment our base as most consumer-oriented companies would do, and it really is the 80-20 rule or the 90-10 rule. And so what you find is that the customers that really matter, the attrition rates, without giving you a precise number, are basically close to 0. They're a fraction of what we report in the aggregate. And the customers that are either -- particularly new customers coming in, have high attrition on the margin, or customers with either narrow and/or small relationships, are where all the attrition happens to be.

So the real question that we pose back at the business level is, on the segments that matter, can you drive the attrition even lower? And -- but the overall aggregation is always going to be biased by that broad picture. So we feel extremely good about what we've been able to accomplish with the relevant segments. And then the question gets back to, ultimately, with attrition, it's always cost benefit. How much are you willing to spend to keep the marginal count? And that's something we'll continue to work, so I would hope to drive it lower than what you're seeing. I'm not sure though how much cost benefit there will be over the course of time, but if we had the information on the table and you looked at it by segment, you'd feel very good.

And we continue to basically work some of our best segments in ways that we work that. One, as I said a moment ago, putting out, we think, will be if not the best, pretty much the best experience, which is coming on essentially our new web-based capabilities. And then in addition to that, over the last, I would say, 15 months or so, to the segments that matter, we've been largely providing them our own financial consultants, which materially change the relationship as well. And what you see is the relationship grows substantially faster. It gets broader, and attrition base decompresses more. And we run models all the time to see the cost benefit of that, because it's not inexpensive to append a financial consultant to an account. The thing we want to be careful of is not basically replicating Merrill Lynch's cost structure on our revenue stream. So we have a very fine line between how much of that we can actually do. And we've brought in outside help there as well to ensure that we're actually seeing the world objectively versus more subjectively.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

I've got a whole list of questions. I'm just going to ask one more and then open it up, and let's move to the bank. I thought that one of the really interesting tables you guys put up last week was about the transition of the loan portfolio, down 56%. But if we focus on the home equity book, nearly half of the reductions from $12 billion to $6 billion have been in paydowns, not charge-offs. And so the quality of the book is obviously something people consistently ask about, but half of that has been people actually paying it off. As you look at the remaining $6 billion or just under $6 billion, how do you think that trajectory goes? Is there as many paydowns in there still over the next 5 years? And does the 2015, '16 amortization period, as that creeps up on us, how does that impact how we think about that book?

Steven J. Freiberg

I mean, a few -- one, there's speculation, obviously. We'll come back in 2016, and we'll see whether or not there's precision around that. Just a couple of points. Probably the best leading indicator of any of the books happen to be delinquencies. You look at delinquencies at any stage. And using home equity -- and I think the last data that we provided externally are basically delinquency, particularly at home equity, which tends to be the most challenged, obviously of, the books -- is at effectively the lowest it's been since, essentially, the crisis began. So the positive side of this is that where you typically see leading indicators of risk or stress, they continue to perform well. And that's very -- that's concrete. You can look at the map. You can basically make your own -- you can make your own assumptions and own conclusions from that, but it's hard to argue with the fact that the book itself has sort of worked largely through in that regard, meaning delinquencies continue to basically perform extremely well.

I think the challenge or the question that people chronically ask is, "Okay. You've got a fair amount of paper that, at this point, is essentially really non-amortizing paper. What happens -- I think to your question -- when you look at, basically, out over the horizon?" And what I'd tell you, if I could predict that, but I can't, I would try to tell you. But on the other hand, I have a separate view.

Here are folks -- most of the seconds, not hours, but have firsts in front of them. Most of the firsts get them. We have access to bureau data and the like. The majority, vast majority of the firsts are performing. And so it's not like we're sitting here sort of with a Ponzi scheme where you've got, essentially, a nonpaying second by contract, and you have a stressed first. And most of these loans are aged out anywhere probably now between 4 and 7 years. So this has been going on for quite a while. So it's just hard for me to believe that the average American, 3 or 4 years from now, is going to say, "Okay, honey, let's take the kids and leave the house, because I've been paying my first, but I'm going to have to make a payment on my second, and so we have to leave." I just don't believe that. And plus, I think the real wildcard is going to be 3, 4, 5 years out, what's the macroeconomic environment look like that we're in. Where's unemployment? Where are home prices? Things of that nature, which are almost impossible to predict, all things being equal. What I can hope for is that they're better than they are today, but obviously, we can't predict that.

So you've got several things that are positive, clearly, one that's not so positive, right? The several things that are positive is, these are well seasoned. Delinquencies are performing very well, and the firsts that basically are in front of the seconds, overall, tend to be performing to the best of the information that we can extract from the bureaus. So those are all, I would say, lined up to be reasonably good.

On the negative side, we all know these are loans, basically. If you look at valuation, they essentially have high valuation, meaning that the loan-to-values exceed 100% which, as an old-time banker, is not good. And in addition to that, we haven't asked people to make payments by contract for an extended period of time, and so there's no real empirical data on that exact metric on what they will do when they need to pay. So that's sort of the counter to that. But I kind of look at the whole picture, and I'd say, on balance, it's performing reasonably well. World could change, including the macro.

And then in addition to that, if you run the company out 3 or 4 years from now, look at where we've gone over the last, since I've been here, which is about 20 months. Look at where our capital was. Look at where it is. Look at where our earnings had been. Look at where it happens to be today. Look at the overall risk profile of the company. Even in that 20-month period, the risky assets have come down by roughly $6 billion. And you run that out 3, 4 years, and we have a different company 3, 4 years from now than we have today, which means our capability to absorb risk should improve immensely with the passage of time.

So again, I always caution people my bias is optimism. But if you sit in my chair, you have to be more optimistic than not. But I'm trying to look at it rational as well, and I just don't see -- unless there's something extraordinary that will happen in the next 12 months that will materially change not E*TRADE but the world, which is always possible, then I'd be worried, but I just don't see it.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

Let me open it up to the audience for questions.

Steven J. Freiberg


Question-and-Answer Session

Unknown Analyst

Just a follow-up on these home equity lines, are they not even paying interest payments on these lines at this time? Were they paying nothing? Or are they -- or is it just interest only?

Unknown Executive

They're interest only.

Steven J. Freiberg

Yes. Yes, I would say, the vast majority of the loans have been paying -- I think I've said that, but -- they're interest only, but I said no amortization.

Unknown Analyst

So they have monthly, really continued to pay the interest, E*TRADE on a monthly basis.

Steven J. Freiberg

That's correct. And again, if it wasn't clear, maybe sometimes language is confusing, I say they don't amortize, but they are basically paying interest. Sure.

Unknown Analyst

Just to follow up, are these lines closed?

Steven J. Freiberg

I would say the vast majority of the lines have been closed, so no utility in the product. We still have outstanding, roughly speaking, I think the number's about $500 million or so, of lines that are open. But clearly, if you have an open line today, you have to basically walk on water. And what you'd expect is because of that, those lines are rarely ever utilized. But they are outstanding, and they are relatively speaking small. I think the positive side, this company did take early action probably back in '07-ish to really slam closed a large contingent exposure. And the residual that's open today, honestly, I would wish they would use it. I'd like to basically lend money to that $500 million of liens outstanding, but the utilization rates in any given month are really small.

Unknown Analyst

So once they're closed, it can't open again?

Steven J. Freiberg

This is not something you can open and close at will.

Unknown Analyst

You also made the point earlier about I guess going on offense with the bank, which is -- or getting more wallet share of your customers. This is the other thing you said. How do you expect to do that? I mean, if you look at the Schwabs and Fidelities, they have a huge mutual fund complex or are starting to. How do you become less of a trading shop and more of a one-stop shop?

Steven J. Freiberg

There are couple of ways one could do it, and let me split it into 2. Typically, when we talk about wallet share, the focus is really on the financial assets, the assets of our customers. And to put it in perspective, our customers today have roughly $180 billion to $190 billion, depending upon the markets -- $180 billion to $190 billion of their financial assets with us, which is roughly 10% to 12% of the financial assets that they hold. So obviously -- and we segment that, and in some cases, we have 50%, in other cases, by segment. And so we sort of know -- we know through sort of these behavioral segmentations, we know where the money is. We know where the customers are. We know who has a thick relationship with us and who has a thin relationship with us. So from that segmentation, and predominantly driven by the segmentation and also through testing learn, and this was back starting really in the middle of 2000 -- and middle to late 2010, as we learned through it, that the thesis was if you had, let's say, $1 million of financial assets but $100,000 with us, what could we do in order to change that. And so the test and learn here was to provide you both either with proximity in one of our stores or our national sales center, a financial consultant who could take it from what I would say the web experience to let's talk. And what we found is when we did that, the relationship changed. We picked up substantially more assets against the control. And in addition to that, the economic benefit and the payback was quite extraordinary. Now the limits to that were that we tested it into segments that we thought, through thesis, would actually work well, and they have. But the limits to that are how many financial consultants are limited by how large the segments are. We're now testing into segments that are multiples in size larger than what I'm talking about, but those relationships are either -- are even thinner relationships. So we don't know whether the financial consultant can pull to the degree that they did when the relationship was thicker. So we already had a good relationship, and now we have a great relationship. If that would work out, then I could tell you we could add another x hundreds of financial consultants, because the hardest thing is to get the raw material for these folks, and get it that it's workable. So that's one way you go about doing it. The other is through -- basically, through marketing. And so if you go through research today of our customer base, for example, and you ask them, "Can you buy an individual bond through E*TRADE," most of them would say no. Even though we probably have one of the best access to one of the best bond desks, period, both for breadth as well as cost, but our customers don't know that, because they've come to us to trade equities or options, largely speaking. So part of it is the brute force of marketing, so to speak, and the other is the really brute force of sales. And it's the combination of the 2 but understanding the cost benefit, because as a lot of you folks who either track or invest in our company know, we've been trying to do this by being smarter about how we spend money, not aggregating up spending more money, and that's sort of where we've been coming out. So I don't know if that answers it, but that's a piece.

Unknown Analyst

Other than [indiscernible] what other things like that are you starting to [indiscernible]?

Steven J. Freiberg

Oh. Basically, what we're seeing is higher penetration in funds, not ours, where we're earning basically an actuarial stream, but it's mostly 12b-1s and other related fees, essentially, several types of managed accounts and -- but the MIPs or UMAs. And we're seeing phenomenal growth actually, particularly through our sales force, on those products, but our base we're starting from is relatively small. So you'd like the road of where the growth, but we have to add 2 more 0s after the number in order for, at least, for me to be satisfied. But we're getting going, because we haven't really been in the category before. So there's general theory here as well. We don't need proprietary product in order to prove the case and to basically provide what our customers need and probably demand. If we would get large enough in certain of these categories, that might compel us to explore either JV-type structures and/or basically proprietary product, where we would believe that active management would not add value, because who's going to believe that E*TRADE would become one of basically the more advanced active managers of money and funds. I just think it's too far afield from our core. So that's sort of where our heads are.

Daniel F. Harris - Goldman Sachs Group Inc., Research Division

We're going to have to cut it off there. Steve, thanks very much for your time.

Steven J. Freiberg

All right, Dan. It was good to see you. Thanks, everyone.

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