TD Ameritrade's (AMTD) CEO Fred Tomczyk on Q2 2016 Results - Earnings Call Transcript

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TD Ameritrade Holding Corporation (NASDAQ:AMTD)

Q2 2016 Results Earnings Conference Call

April 19, 2016 08:30 AM ET

Executives

Bill Murray - Managing Director, IR

Fred Tomczyk - CEO

Steve Boyle - CFO

Analysts

Mike Carrier - Bank of America

Rich Repetto - Sandler O’Neill

Devin Ryan - JMP Securities

Conor Fitzgerald - Goldman Sachs

Ken Hill - Barclays

Dan Fannon - Jefferies

Chris Harris - Wells Fargo

Brian Bedell - Deutsche Bank

Chris Shutler - William Blair

Mac Sykes - Gabelli

Dough Mewhirter - SunTrust

Patrick O’Shaughnessy - Raymond James

Bill Katz - Citi

Operator

Good day, everyone and welcome to the TD Ameritrade Holding Corporation’s March Quarter Earnings Results Conference Call. This call is being recorded. [Operator Instructions] With us today from the Company is Chief Executive Officer, Fred Tomczyk; and Chief Financial Officer, Steve Boyle.

At this time, I would like to turn the call over to Bill Murray, Managing Director of Investor Relations. Please go ahead, sir.

Bill Murray

Thank you, Andrew. Good morning everyone and welcome to our March quarter earnings call. Hopefully you’ve had a chance to review our press release and this morning’s earnings presentation which can be found on amtd.com. The earnings presentation includes our Safe Harbor statement and reconciliation of certain non-GAAP financial measures to the most comparable GAAP financial measures. Descriptions of risk factors are included in our most recent financial reports, Forms 10-Q and 10-K. As usual, 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. Please limit your questions to two, so that we can cover as many of your questions as possible.

With that, let me turn the call over to Fred.

Fred Tomczyk

Thank you, Bill, and good morning everyone and welcome. Well, it was a volatile start to the calendar year and as a result strong quarter for trading, which was at record levels. We were also able to realize the benefit of the first 25 basis-point Fed funds increase. Strong trading plus the Fed funds increase combined with strong organic growth drove record overall revenue for the quarter. And with good expense discipline, we were further able to drive a 15% increase in pre-tax income year-over-year.

We’ll start with the review of our second quarter highlights on slide three. Average client trades per day were a record of 509,000 in the March quarter and activity rate of 7.6%. Net new client assets were $14.1 billion, an 8% annualized growth rate. Client assets ended the quarter at a record $711 billion up 2% from last year. Fee-based investment balances ended the quarter at a record $161 billion, up 3% year-over-year. We’ve grown interest sensitive assets to a record $112 billion, up 11% from last year. And we earned record net revenues of $846 million, up 5% year-over-year. All of this resulted in our delivering $0.38 in diluted earnings per share for the quarter, which is up 9% year-over-year.

Now, let’s look at how we executed in each area of our growth strategy, starting with asset gathering on slide four.

Over the March quarter, we gathered $14 billion in net new client asset, an 8% annualized growth rate. Fiscal year-to-date, we’ve gathered $31.6 billion, a 10% growth rate with two quarters yet to go. Our retail channel had an exceptionally strong quarter, in fact a record quarter for net new client assets. Amid mixed investor engagement, our teams maximized opportunities before them, netting near-record inflows, which when combined with low attrition, drove the strong asset gathering results in retail. We were pleased to have been named Barron’s as the Best for Novices and Best for Long-term Investors in the publications annual broker review for reach of the last four years.

The institutional channel delivered solid results this quarter but saw a slower growth from existing RIAs, as a result of the market conditions during the quarter. That said, our new RIA sales pipeline is quite strong. And coming out of our National LINC Conference in February, we won more opportunities than we ever have before. We do not see the trend towards the RIA model slowing down and advisors remain optimistic about their outlook for the future as well.

Now, let’s move on to trading on slide 5. Our second quarter was a record for trading with an average 509,000 trades per day, a 7.6% activity rate. The calendar year started with a heavy increase in volatility. During the quarter, we saw 42 days, two-thirds of our trading days with intraday volatility of 1% or more and 16 days with 2% or more. As we’ve said before, this is the kind of environment that drives increased client trading activity. April trades to date are currently averaging 454,000 per day. Those who are trading remain quite active. Clients placed a record, 222,000 derivative trades per day; and futures were a record 12% of DARTS. Futures trading approvals were up 18% from the same quarter a year ago. Mobile was a record 18% of trades, up 31% year-over-year. Daily and average, and weekly client logins by mobile devices were each up 15% from last year, and we averaged more than 2,300 new users per day in the quarter.

Now, let’s turn to investment product fees on slide six. Investment product fees totaled $88 million for the quarter or 10% of net revenues. As we said earlier, fee-based investment balances ended the quarter at a record $161 billion. Average investment product fee balances were $153 billion for the quarter; this is down slightly from last year, driven primarily by lower mutual fund balances, which reflects the pullback in the markets in January and February that later recovered in March.

Net flows into Amerivest and AdvisorDirect did slow during the quarter in light of the market environment similar to what we saw from our existing RIAs.

Now, let’s turn to slide seven. While we’re halfway through 2016 fiscal year and the story for us remains one of strong execution, the markets started the calendar year with a technical correction amid fears surrounding the global economy. I’ll also remind you that we said volatility would return once the Fed started to pull back on its stimulus, and that has played out. And yet, despite this tough environment, we delivered strong earnings growth. Trading showed strength in light of the volatile markets. Client interest and options and futures continued to increase as does mobile adoption, trends that aid an ongoing investor engagement. Our sales opportunities and pipelines remained strong. And we remain focused on growing our third revenue stream. Efforts continue to redesign the Amerivest sale and post sale experience based on feedback from our clients.

We returned approximately $322 million to our shareholders during the quarter through a combination of cash dividends and the repurchase of 8 million shares. Expenses have remained in check for the first six months of the year, as we took a more conservative, disciplined stance given the uncertainty in the market. As a result, operating expenses were down 1% year-over-year. We expect to remain disciplined on that front, although expenses will increase a bit in the second half of the year due to some project spend and work necessary to comply with the Department of Labor’s fiduciary rule. The final rule will usher in the biggest change to the brokers industry in many years. It is a long complex document with many areas open to interpretation.

At the outset, it appears as though the DOL has addressed many of the concerns raised through public comments. For example, we were happy to see that they eliminated the list of permitted assets in the best interest contract exemption, which now allows investors to trade options and IRAs as appropriate. However, the details around the application of the fiduciary standard and its associated obligations still need to be more fully analyzed and understood. IRA rollovers and education are two areas that we’re focused on and we’re investigating the best ways for us to sell to and to service IRA clients in light of the new rule.

For now, we’re engaged in the process to review and analyze this 1,000-plus-page rule, how it impacts our business model and how it impacts our clients. We continue to believe that our business model is in a relatively good position, not only to comply but to identify opportunities in this new environment. We remain supportive of the DOL’s intent to creating -- in creating this rule that advisors act in the best interest of their clients when giving investment advice in retirement accounts. We’ll update you on the next quarter on our progress.

Now, in closing, now that we’ve entered the second half of our fiscal year, it’s time to start looking ahead. We’ll remain focused on executing our strategy to deliver strong organic growth and continuing to grow our long-term earnings power and we’ll also to begin our annual planning process for fiscal 2017. Tim Hockey and our executive leadership team will be engaged this quarter in reviewing where we are and what we need to do to allocate resources and focus for 2017 and beyond. Aligning our business model with the DOL rule will be part of that process. But as we do in other years, we’ll also consider our current organic growth strategy and how we can best position TD Ameritrade for long-term growth and success.

With that I’ll turn the call over to Steve.

Steve Boyle

Thank you, Fred and good morning everyone. As Fred has already noted, the March quarter was a volatile and uncertain one for the market. We remained focused on what we control and delivered good results. Record trades per day, strong net new assets, particularly from retail, benefits from the December interest rate increase, and continued expense discipline drove a 15% increase year-over-year in pre-tax income. So with that, let’s begin with the financial overview on slide eight.

We’ll start with the year-over-year comparison. Overall revenue was up $43 million or 5% to $846 million. On line one, transaction based revenue was $360 million, up $10 million or 3% due to higher trades per day. Average trades per day were up 33,000 or 7% due to higher volatility but average commissions per trade were lower due to mix. Oil and off hours events drove higher futures volumes. The number of retail clients trading futures and ForEx increased 23% year-over-year, which led to a 34% increase in futures trades per day. We also saw lower options contracts per trade and a higher percentage of institutional trades, which carry a lower average commission rate.

On line two, asset based revenue was up $31 million or 7%, primarily due to net balance growth offset by overall NIM compression, as the benefit of the Fed hike was more than offset by mix, principally lower stock lending revenue and lower margin balances. Both have begun to recover but remained below peak levels.

On line five, operating expenses excluding advertising totaled $422 million for the quarter, down 1%. We will continue to manage expenses closely. We would expect quarterly total operating expenses would be relatively level with the March quarter, as seasonal declines in marketing will be offset by increased investments in the business and DOL related expenses.

On line 10, pre-tax income was $330 million, up 15% year-over-year with pre-tax margins at the strong 39%. The effective tax rate for the quarter was 38%, up somewhat due to favorable prior year settlement. All of this resulted in earnings per share of $0.38, up $0.03 or 9% from last year. Key ratios remained strong. On line 14, return on equity was 17% for the quarter and on line 17 and 18 our EBITDA was $387 million or 46% of revenue.

Now, I’ll move to year-to-date comparisons. On line four, revenue was up $38 million or 2%. Transaction based revenue was down 3% due to lower commission rates. Asset based revenue increased 6% due to IDA, both balances and rates, and investment product fees.

On line seven, operating expenses were down $9 million or 1% due to continued expense discipline. On line 10, pre-tax income was up 6%. The effective tax rate was 37% versus 36% last year. On line 13 earnings per share was up $0.05 or 7% to $0.78.

Let’s now take a more detailed look at our spread based revenue, starting with slide nine. Spread based revenue was 382 million, up 8% year-over-year. However for the fourth consecutive quarter, we experienced the sequential increase in spread based revenue, primarily due to IDA balance growth and the benefits of December rate move. Net stock lending revenue declined $9 million sequentially to $32 million for the quarter. As we have noted several times, predicting stock lending is very difficult but higher volatility and fewer IPOs are two factors.

Average margin balances declined sequentially from $12.3 billion to $11.6 billion, primarily due to the market’s impact on buying power and investor sentiment. Margin balances ended the quarter at $11.3 billion. Net interest margin declined sequentially which may be a surprise given the Fed’s rate increase in December. We realized the anticipated benefits from margin loan pricing and IDA float yields, but those benefits were mitigated by lower stock lending revenue and lower margin balances, which are high spread products. Said another way, had stock lending revenue and margin balances been flat sequentially, overall spread based NIM would have been approximately 1.49%, up from the 1.45% in the December quarter and revenue would have been in line with our $50 million to $80 million annualized guidance.

Now, let’s take a closer look at the IDA on slide 10. Year-over-year average IDA balances were up $9 billion or 12% to $84 billion and net yields increased as well, driving revenue up 15%. Sequentially, average balances increased 5%, driven primarily by the institutional channel, as RIAs moved clients out of the market into cash, although we are now seeing institutional coming down partially replaced by retail increases.

Net yields increased slightly as floating balances realized the benefits of December rate move as expected. Of the 25 basis-point move, 12.5 basis points were paid to TD Bank with a management fee and floating rate balances now at 20 basis points, as a result of the move. This is important to note as we will only have to share five basis points on further moves, since we are nearing the 25 basis-point management fee cap on floating balances.

Strong institutional floating growth in the quarter resulted in the slightly lower duration and lower average yield plus however revenue positive. Finally on March 15, the FDIC issued a press release announcing their final rule to increase the deposit insurance fund. This will impact our IDA net yield beginning in July of this year and will last for eight quarters. The additional FDIC fee to us will be 2.25 basis points or $4 million to $5 million pre-tax per quarter, dampening expected IDA yield growth.

Now, let’s turn to the next slide to discuss interest rate sensitive assets. Interest rate sensitive balances were at a record 112 billion, up $11 billion or 11% from last year. This increase is primarily due to growth in the IDA. Cash as a percentage of total client assets ended the period at 15%.

Now, let’s turn to the final slide. We continue focus on what we can control. We produced good results as our strong profit margins and disciplined expense control meant that the revenue growth we experienced in the quarter all resulted in improved pre-tax income. Operating expenses declined 1% versus the prior year. Net new assets were solid in the quarter, driven by record retail asset gathering, while the institutional sales pipeline remained strong. We reported record trading as a result of high intraday volatility and our ability to provide our clients with ongoing investor education and reliable and diverse trading platforms to execute their individual strategies in a variety of market conditions.

Investment product fees declined a bit overall during the quarter as compared to the prior quarter, driven by market uncertainty but we remain committed to growing this third revenue stream. We have teams in place analyzing the new fiduciary rule and its related exemptions. We are considering how its many details and requirements will impact our business. We will keep you updated as we move from assessing to effecting changes in line with the rule.

We returned $322 million to shareholders this quarter through cash dividends and share repurchases, which we pay $28.78 per share on average. Year-to-date, we have returned 101% of our cash earnings, which is above our annual target of 60% to 80%. We will likely end up near the high end of that range for the full year as share repurchases are expected to slow.

In conclusion, we’ve had a good quarter and strong first half of the year, driven by focusing on what we can control. We’re pleased with what we have done and expect to deliver solid second half of the year, positioning us well as we move into fiscal 2017, but we still have a lot of work to do.

And now, I will turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Mike Carrier of Bank of America. Please go ahead.

Mike Carrier

Maybe, I guess it’s either Fred or Steve, just your comments on the DOL, I just wanted to get some sense, Fred, I think when you mentioned that expense level, we typically see the normal moderation in advertising but there is some investment spend to prepare for DOL. Just wanted to get a sense on what that’s going to be focused on, maybe what expense lines. And then probably more importantly is what’s the duration or how long do you expect that investment spend to be in there versus it starting to moderate? And then, I am sure it’s too early, but any, like revenue impact, on the positive or negative side, given the DOL?

Fred Tomczyk

I think you’re right, Mike. It’s a little early to get a revenue impact. I just think there is too many areas open to interpretation in such a long complex document. Having said that, we do think our business model is in a relatively good position inside the overall brokerage industry to adjust to this, and we do see opportunity relative to other players in the market. So, we see opportunity here as much as anything in the long-term, but it will take a bit of time for that to show up in our numbers. I’ll let Steve answer the expense and investment question.

Steve Boyle

So, we’ve incorporated the increased level of DOL spend in our 2016 guidance that we just gave. We think the initial impact of DOL is going to be ramping up some internal staffing and some small consulting expense to get the scope of the rule; any major implementation efforts would be in 2017 and we’d be gearing up as we get towards the implementation date. And as you know, we’ll be giving 2017 guidance later in the year.

Mike Carrier

And then just as a follow-up, on the IEA, just given the pressure on maybe the spread, just given the margin loan trends and stock borrow, I know these are tough to predict, but I guess just any trend in both of those balances or activity rates when you look at, say January, February versus what we’re seeing in March and April. I guess just trying to get a sense of how much of that pressure was during the period of kind of chaos versus how much is maybe normalized somewhat?

Steve Boyle

So, I would say three points. So, on the IDA, we largely saw the increase in revenue that we expected. We’re seeing a little bit of pressure on the IDA yield, simply because we had a big increase in balances that pretty much all went into floating rate. So that brings the margins or the IDA yield percentage down a little bit from what you might have expected. But we largely got the revenue that we expected in the IDA yield.

The two key items as you mentioned really are stock lending revenue and margin revenue. And so, if you think about stock lending, that tends to move up and down inversely with volatility. And so, we did see a big dip early in the quarter, and we’ve seen that start to come back, not quite the peak levels that we saw last year, but pretty good a bounce back. Margin balances, you can see dropped and were down on average, ended period and during the quarter. Our expectation is those will tend to come back as client balance has come back. And so, our expectation is we’ll see that later in the year, but we haven’t quite seen that yet. So that’s something that we’ll have to watch for.

Fred Tomczyk

There tends to be about a 30-day lag in that number.

Operator

The next question comes from Rich Repetto of Sandler O’Neill. Please go ahead.

Rich Repetto

Good morning, Fred. Good morning, Steve. I guess following up on the expenses, and you did mention that there is DOL investment in there but when you look at the normal drop in advertising, somewhere being $20 million to $25 million off the run rate of this quarter. And I am just trying to see whether the combined -- just a little bit more detail on the increase in expenses because if your guidance is flat, it seems like -- are you saying that the combined investment in the advice products and DOL is $20 million to $25 million per quarter?

Steve Boyle

Yes. So, essentially, we saw some really positive timing items in the early part of the quarter. We do have some additional incremental investments that we’re going to do in the second half of the year. But I think if you sort of step back and look at it, will -- even with adding in the DOL which wasn’t in our original guidance and making some of these incremental investments will be still at that low end of our range for guidance for the year. So, I think maybe looking at 2% year-over-year increase in expense, so still fairly modest, but definitely a ramp up in the second half on the non-marketing piece versus what we’ve seen previously.

Rich Repetto

Okay. So, what we’re saying is that it is going to incorporate $20 million to $25 million?

Steve Boyle

Yes.

Rich Repetto

Okay. And then, the other question would be on the revenue capture. We understand the increased mix of futures. Do you expect, with the trading activity the levels we’re seeing now that could materially rebound back to levels, or any color on I guess revenue capture so far or what do you expect?

Steve Boyle

Yes. So, as you mentioned, the commission per trade is largely a mix item. We would expect it, if we don’t have the elevated levels of trading that we will see some bounce back in the commissions per trade, as we look forward during the year.

Fred Tomczyk

And the mix has come down, Rich, which also will increase -- have a tendency to increase option contracts per trade, which helps with the $0.75 a contract commission and the order flow running revenue.

Operator

The next question comes from Devin Ryan of JMP Securities. Please go ahead.

Devin Ryan

Just a question on the RIA pipeline, just wanted to get a little bit more perspective there. And really as it relates to DOL and just curious, do you guys have the sense that we could see a pause in movement from independent firms, just as people are trying to get a better perspective around how the DOL is going to impact their business and how much trying to figure that out right now. So, I am just curious if you’re expecting any kind of timing delays or are you hearing anything on that front?

Fred Tomczyk

I think in the longer term, we would expect increased migration to the RIA [ph] model because that’s clearly, I think the world is moving to much more of a fiduciary rule. We’ve now got that on IRAs. The SEC continues to study this whole topic, acknowledges that it’s complicated. So, I don’t expect anything in the short-term. But I think all the uncertainty in how different firms deal with it, may cause in the long term a shift. Keep in mind, in the short-term, I think this all creates uncertainty. So, I don’t disagree with you on the short-term; it may slow a few things down.

Devin Ryan

And then just with respect to capital management, I appreciate the significant buyback. I am just curious, I mean is that -- should we just view that more as a function of opportunity this quarter and where the stock was or just some other view around alternatives for capital?

Fred Tomczyk

I think you should look at that as basically us just executing the strategy we’ve been running for quite awhile. We said when we started the year we were going to return 60% to 80%. I think if you look at our track record over history, we’ve been opportunistic on pullbacks and I think that’s what you saw in the quarter. But we would expect to be probably between 70% and 80% return for the year, barring an unusual situation happening between now and the end of the fiscal year.

Operator

The next question comes from Conor Fitzgerald of Goldman Sachs. Please go ahead.

Conor Fitzgerald

Thanks for taking my questions. First just on the IDA yields. The yield curve is under a bit of pressure here. I guess how low would reinvestment yields have to get for you to kind of change your duration expense and strategy?

Steve Boyle

So, Conor, I think there’s two things really to think about there. One is that we want to continue to be consistent over time. We don’t want to be pulling [ph] dramatically in and out of the market. I think as the yield curve flattens, we are looking at the sort of incremental lift that you’re getting from going out longer on the curve and are potentially looking at moving a little bit shorter in terms of our duration whether that’s higher float or extending a little bit shorter on the curve. But we haven’t made any decisions at this point.

Conor Fitzgerald

That’s helpful, thanks. And then just on IRA rollovers, can you give us a sense of how important those are for you in terms of net new asset growth?

Fred Tomczyk

We don’t disclose that number. But I think if you look at our overall IRA assets, they’re about $225 billion with over half of that being in the IRA [ph] channel; and net new assets, it’s about 30% as well.

Conor Fitzgerald

Okay, that’s very helpful. Thank you.

Operator

The next question comes from Ken Hill of Barclays. Please go ahead.

Ken Hill

Hi, good morning guys. My first question here is on investment products, as you guys had some give and takes here for the quarter between money market fee waivers kind of coming off and some of the market headwinds. I was wondering if you could size each one of those, I mean in particular the money market fee waivers, how we can think about that from a revenue impact as Fed fund plan new higher.

Steve Boyle

Yes, money market fee waivers are pretty modest number of us.

Fred Tomczyk

I think we only have was it $5 billion in money market funds.

Ken Hill

Okay. Any color there on the impact on the market might it have on the quarter?

Steve Boyle

Yes. So it was pretty significant and that’s the big driver in the quarter that the -- just the average money market balances dipped during the quarter. If you look from 12/31 to 3/31, money market balances were essentially flat. So, -- I’m sorry, mutual funds were essentially flat. And so that I think you’ll see those fees recover over time.

Ken Hill

Okay, I just had one on acquisitions. So, the FA Insight transaction you guys did back in February, I don’t know if that’s closed just yet but just wondering if you could talk about that from how that’s going to impact the advisors going forward, maybe how they’re going to -- they might use the type of platform and maybe what benefits they could see from it.

Fred Tomczyk

That was a pretty minor transaction. And we just saw it as an opportunity to add some data and analytics to RIAs to help them be more successful in their business. So, there was much more of a capability acquisition around data and analytics and helping them be more successful at what they do. But it was very small.

Ken Hill

Okay, thanks for taking my question.

Operator

The next question comes from Dan Fannon of Jefferies. Please go ahead.

Dan Fannon

Thanks, good morning. Steve, I guess one more question on expenses. With the DOL, just thinking about your original guidance and what you’re saying today, did the rule come in earlier than expected or is there changes in the rule than what you thought that you weren’t incorporating I guess in your full year guidance earlier?

Steve Boyle

Yes. When we issued the guidance back in October, we weren’t really sure what the impact of DOL would be. And so, I think we mentioned on a couple of calls that we had not included anything for that. And so now that we have a good idea of the size and we’ve updated that in our guidance.

Dan Fannon

Okay. And then another comment on the call, you mentioned reduced retail attrition in the quarter, I guess anything you can point to competitively or any changes that you guys are doing to kind of reduce that rate?

Fred Tomczyk

We continue to roll out revised distribution model on the retail side. We’ve introduced what we call PCS ICs, [ph] which basically are targeted at our more higher-end clients. And the increased touch and relationship from those people has definitely improved attrition. Attrition now on the retail side has -- goes low as I’ve seen it in my tenure from being here. So, we made very good progress on that compared to where we start, we’re down over half in terms of percentage of client assets leaving each quarter divided by beginning assets.

Dan Fannon

Great, thanks.

Operator

The next question comes from Chris Harris with Wells Fargo. Please go ahead.

Chris Harris

Thanks guys, another follow-up question on IDA yields. Putting the FDIC charges aside for a minute, if we don’t get another raise out of the Fed and rates kind of stay where they are, is there a lot of downside in that yield at this point or is it pretty firm around here around 110 basis points?

Steve Boyle

Yes, I think it’s pretty firm. I wouldn’t expect a big increase but I wouldn’t expect a big decrease either.

Chris Harris

Okay, great. And just one follow-up on Amerivest; are there any pent-up fee deferrals that we should know about; if there are, can you help us with the magnitude of that?

Steve Boyle

So, despite a choppy quarter, all the Amerivest portfolio has ended up positive for the quarter. So, we’re essentially starting the six months or the two-consecutive-quarter clock all over again, so there is nothing can pent-up.

Operator

The next question comes from Brian Bedell of Deutsche Bank. Please go ahead.

Brian Bedell

Good morning, folks. Fred, just a little bit more on the DOL. Can you talk a little bit more about -- I know it’s early, but how your call center employee, your composition of practices might change? Maybe just talk about to the degree that you’d license more of those employees and then may be just talk a little bit about the self directed nature of the retail client base and whether you see any change in how -- aside from the active traders, how the retail client base would be impacted from the DOL and how you service that from the -- again from the retail on the Ameritrade site?

Fred Tomczyk

So first off, all of our call center people that interact with clients are licensed. So that is -- we made that change probably seven or eight years ago and have stuck to that. In fact when you start in our call centers today, you have six months to get license. So, they all have Series 7 license, that’s the first point. With respect to anything we might do, and while it’s still very early, I think the easiest way to deal with it, at least in the early stages is basically to have a separate call center that deals with IRA clients but we haven’t made that decision yet. I think you’re right, it’s a risk of sort of stepping into this a little more than I probably should at this point given the uncertainty is I think if you look at the world in three pockets, see self directed clients, the advise clients and then the 40 Act fiduciary clients, and so I think we look at that in the three buckets here. And I think it’s a little early. But I think on existing book, it’s largely self-directed. And we don’t see a big change, although I think once we go through it all what we present to them and how we present it to them, I think needs to be thought through.

Brian Bedell

Okay, great. And maybe just one more on that from the advisor side, maybe just to get your opinion longer term. Do you think the wirehouses because of DOL shift their model more towards a fiduciary model and that impacts the breakaway broker trends over the long term?

Fred Tomczyk

I really don’t know the answer to that question. I think that’s a complicated subject. I’m not going to try to guess where the wirehouses go here. I think it’s between capital formation and IPOs and all that kind of stuff, fixed income. I think that’s a hard decision for them. And I wouldn’t offer sort of a prediction on what they do or don’t do at this point. I think on a relative basis, we are in a very good position to deal with it. And I think for them they have much more difficult decisions to make.

Operator

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

Chris Shutler

On the expenses, on one hand with the DOL, I think you are saying that you are going to ramping internal staffing and some small consulting expense any major implementation efforts to be in ‘17 but. And we know the new advisory offering. I think you have been spending on that for a while. So, I’m still not quite clear why there would be a -- let’s call it $30 million, $40 million drop or increase rather in expense, rather -- relatively to what you have seen in second half of last couple of years?

Steve Boyle

I think it is the timing of project spend over the year and some incremental project spend to try to ramp up some efforts, both in investments and new people as well as technology and software.

Chris Shutler

And then on the sec lending balances, could you give us the quarter end balance or give us an updated number there?

Steve Boyle

Yes. It’s really more on the rate than the balance. And so, I don’t think we give out a daily balance on that. But we have seen that daily revenue in stock lending bounce back significantly.

Operator

The next question comes from Mac Sykes of Gabelli. Please go ahead.

Mac Sykes

Good morning and thank you taking my question. It’s two parts, first not to go back to the DOL but just a little more insight, first more of a macro question and more micro, Fred. So, under the DOL rules, could you see your open architecture gaining further competitive advantage against competitors that may have more of a proprietary, rely more on proprietary products? And then secondarily, as this thing phases in over time, you do have an open architecture; do you see the industry in general and perhaps limiting the amount of managed products on the platforms, whether relates to higher fees, less competitive performance or maybe a liquid asset class?

Fred Tomczyk

On the first question, we do see that as one of the reasons why our business model is easier to adjust to, with having the open architecture of loss because there clearly in the DOL the sort of a bias against conflicts of interest, particularly with respect to how you compensate your people. So, anybody that’s got differential compensation or advantageous compensation, the presentation of proprietary products versus non-proprietary products, I think that’s an adjustment they’re going to have to make but we don’t have to make that adjustment. So, I think you’re right. On a relative basis, we think we’re in an advantageous position. With respect to the industry, I think if you look over time, there has been, years ago, a shift to much more open architecture model, in fact you’ve seen some asset managers that you see today that are big in the market used to be part of a wire house or a bank and they’re no longer that way. So I think some of those firms may start to think about that in a different way.

Having said that, people that are good asset managers and have good proprietary product on their shelf and are relatively neutral, I think they’ll be relatively fine as long as you’re costs are reasonable and your performance is good. But I think you’ve got to be able to defend why you’re selling that in an IRA. But in a roundabout way, one of the reasons why we would say on a relative basis our business model is in a good position to deal with the DOL.

Operator

The next question comes from Doug Mewhirter of SunTrust. Please go ahead.

Doug Mewhirter

One quick numbers question and one bigger picture question. First, with the business mix, your average revenue per transaction has gone down, as you said. It looks like I guess your clearing costs per transaction also go down. Is there a correlation there, or those two unrelated and it was a coincidence?

Steve Boyle

So, there is a correlation that clearing costs on some of the products that we saw in this quarter would be a bit lower, particularly futures. And maybe while I’ve got the microphone, skip a little bit of clarification, it seems we have a lot of questions on expenses. So, we would expect the expenses in the last two quarters of the year to be somewhere in the range between -- and this is excluding advertising, somewhere in the range of 435 to 445, so hope that clears up the modeling a little bit. I am sorry, what was your second question?

Doug Mewhirter

The second question, you talked about organic growth with your existing RAA [ph] clients stagnating a little bit the quarter, maybe because -- possibly because of the market volatility. Now that S&P 500 is hitting new highs on a total return basis and volatility has dropped, are you seeing a return to RAAs getting traction again now that their clients are little bit calm down going to the second half of the year?

Fred Tomczyk

I think we’re seeing very early signs of that. I think the main thing that caused people to pause in the quarter was the technical correction in the market. So, in January and February, we saw the market go down about 10%. When that happens, basically people and the advice money tend to call up and make sure that they wonder what’s going on, should they pull their money out. So, the RAA [ph] tends to have more time on defending why I should stick with their investment strategy for the long-term and so less time goes into selling.

With the comeback in March, we’re starting to see in April and May, April so far anyway that early signs of that coming back but I think it’s a little early to call it a victory just yet. But we would expect that would come back depending on market conditions.

Operator

And we have a question from Patrick O’Shaughnessy of Raymond James. Please go ahead.

Patrick O’Shaughnessy

Good morning, guys. I think your futures franchise I think is relatively distinct amongst your competitors. It seems to be a fair amount larger than most of the other big online brokerages futures business. To what extent do you have pricing power there, because obviously it’s a lower average commission per trade than your other products? Is that something where you have room to increase pricing, given the value that you’re providing?

Fred Tomczyk

Early on when -- and keep in mind when we started this business, we probably started it four years ago, so that has been built from scratch. When we set the pricing and we’ve reviewed it about two or three years ago, we’re at the high end of the market here. Keep in mind, most people that offers futures trading are more institutional type firms. So, we saw an opportunity to bring it to our retail clients and people that trade options in particular will have a tendency to weight into futures.

With respect to pricing power, I am not convinced we have pricing power there. We did make one change a few years ago, basically to pass through the clearing expenses and have the price be straight price as opposed to them having to net off the clearing expense we passed them through. But other than that, it’s not something that we will look at us having a lot of pricing power right now.

Steve Boyle

And I think we look at it as largely incremental. So, this is mostly trading that probably wouldn’t be happening if we didn’t have that futures prowess, so that people are doing off hours trading and more energy trading. So, we look at it as an incremental benefit.

Fred Tomczyk

I think the product is right for the market environment, think about the price of energy and what’s happened there and then how much of the market is moving overnight based on events happening in other parts of the world. And so just during the quarter roughly two-thirds of the futures trades were on stock index futures.

Operator

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

Bill Katz

I just want to go back to the expenses question yet again. I apologize for that. How much -- and maybe I missed this and apologize again. How much of the sequential change in guidance reflects just timing of expenditures that was delayed in Q -- calendar first quarter into the second half of the year versus DOL? And I guess the second part of the question is, as you look out to next year, are you anticipating another step up of expenses do deal with the implementation of DOL or would it level out at this point?

Steve Boyle

Yes, so couple of things. I’d say that within the project expenses, there is both the timing element that that started slow in the beginning of the year and is ramping up towards the end of the year, as well as some incremental things that we’re taking on. And then, on the DOL, I would expect probably that the ‘17 level of spend will be higher than ‘16 but we haven’t made that assessment or given any guidance on that yet.

Bill Katz

And then just to step back, I think one of your peers recently linked up with one of the asset managers to outsource online asset allocation model. What is your latest thinking as you work through robo-advisor and so just that whole technology opportunity?

Fred Tomczyk

Well, we continue to believe that Amerivest is core of our money management strategy. When you think about what we’re building out, we’re building out an enhanced experience including goal setting and goal planning, performance tracking against that goal, embedding education, portfolio allocation systems, account linking and live person and chats. So, we’re building on a lot of functionality inside Amerivest. And so that will be the core engine. We continue to believe that for the broadest part of the market, it’s the combination of the technology and with some human help that is the right model. Having said that the engine itself is built in a way and we’ll be built in a way that basically allows us to scale up and down the market whether you want to use the human being or you don’t want to use human being. We’ll continue to assess the situation, look at the competitive trends, look at what our clients are telling us. And if we think we need to make an adjustment and large robo, then we’ll make that decision at the appropriate time. But right now, we’re very focused on the hybrid model; we think that’s the model. And in fact some of ones that are being called robos in the market today, they’re having the most success; we would call hybrids as a very different from the true robo.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Fred Tomczyk, Chief Executive Officer, for any closing remarks.

Fred Tomczyk

Thank you. And thank you everyone for joining us today. Clearly we felt we had a pretty good quarter. We had good expense discipline. I think we’re trying to tell you we’re going to increase our expenses a bit from here. We have some things we want to invest in; one of them is the Department of Labor. It is what we would say is the biggest change in the brokerage industry in many years, some would say since the deregulation of commissions which is over 40 years. So, we want to think that seriously and make sure that we’re adjusting our business model, not to just comply but also take advantage of it and I think that’s starting to be reflected in some of our views about the balance of the year. With that, I will see you in July. Thank you and take care.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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