TD Ameritrade Holding (AMTD) Fredric John Tomczyk on Q3 2016 Results - Earnings Call Transcript

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TD Ameritrade Holding Corp. (NASDAQ:AMTD)

Q3 2016 Earnings Call

July 19, 2016 8:30 am ET

Executives

William Murray - Managing Director, Investor Relations

Fredric John Tomczyk - Chief Executive Officer & Director

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Analysts

Richard Henry Repetto - Sandler O'Neill & Partners LP

Alex Kramm - UBS Securities LLC

Chris C. Shutler - William Blair & Co. LLC

Conor Fitzgerald - Goldman Sachs & Co.

Michael Roger Carrier - Bank of America Merrill Lynch

Devin P. Ryan - JMP Securities LLC

William Raymond Katz - Citigroup Global Markets, Inc. (Broker)

Brian Bedell - Deutsche Bank Securities, Inc.

Kenneth Hill - Barclays Capital, Inc.

Macrae Sykes - Gabelli & Co.

Daniel Thomas Fannon - Jefferies LLC

Doug R. Mewhirter - SunTrust Robinson Humphrey, Inc.

Chris Allen - The Buckingham Research Group, Inc.

Operator

Good day, everyone, and welcome to the TD Ameritrade Holding Corporation's June Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company, our Chief Executive Officer, Fred Tomczyk; President, Tim Hockey, 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.

William Murray - Managing Director, Investor Relations

Thanks, operator and good morning, everyone, and welcome to our June quarter earnings call. Hopefully, you've had a chance to look at our press release and our earnings presentation which can be found on our website.

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 them as possible.

And for the 30 second and last time, I'd like to turn the call over to Mr. Fred Tomczyk, CEO. Fred?

Fredric John Tomczyk - Chief Executive Officer & Director

Thank you, Bill. Good morning and welcome, everyone. Well, today is bittersweet for me. After eight years of joining this quarterly calls with you, today will be my last earnings call. Our CEO, transition has gone well. As of July 1, Tim Hockey has assumed oversight of all business and functional units, and has been engaged in lending our planning for 2017.

You will hear from him, and our CFO Steve Boyle this morning. Then the three of us will take your questions. But as is always case on this third quarter call, remember that we will not discuss our outlook for 2017 until next quarter. With that let's get started.

Well, after a volatile start to the calendar year, the markets in the June quarter were relatively toughened. That was of course until the historic Brexit poll at the end of June, which assured an about a volatility to close the quarter. This is a trend we would expect to continue. With heavy monetary stimulus from central banks and much of the world, we have record levels for both the equity and the fixed income markets at the same time, which is unusual. That said, the U.S. economy continues to progress, UK's decision to exit their relationship with European Union, does have the potential to influence future Fed policy regarding rates.

But as I said before, if I could predict interest rates, I would have retired a longtime ago and be just become a trader. So where does that leave us at TD Ameritrade. As usual we stuck to our netting and remain focused on what we can control. The result was continued growth in each core area of focus.

We'll begin with a review of our third quarter highlights on slide three. Average client trades per day were 462,000 in the June quarter, up 6% from last year and an activity rate of 6.8%. Net new client assets were $13.6 billion, an 8% annualized growth rate and up 16% year-over-year. Total client assets ended the quarter at a record $736 billion, up 5% from last year. Fee-based investment balances ended the quarter at a record $164 billion, up 3% year-over-year.

We've grown interest sensitive assets to a record $113 billion, up 10% from last year, and we earned net revenues of $838 million, up 6% year-over-year. We also had a favorable $33 million tax adjustment, or $0.06 per share. The result was a record $0.45 in diluted earnings per share, which is up 25% year-over-year.

Now, for a closer look on how we executed in each of our area of our growth strategy, I'm going to turn the call over to Tim.

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Thanks, Fred. It's great to be here and speaking to you for the first time today. It's been a busy seven months for me, I've learned a great deal about our industry and our company, where we compete and where we have room to grow. And, I've taken a close look at our corporate culture. Its healthy cultures that separate great performing companies from the mediocre ones, and the good news is that TD Ameritrade is very healthy. Can we get better? The answer is always, and you should expect to hear more about that from me in the future.

Today, we're talking about our third quarter results, and as Fred has already mentioned, our strong organic growth continues. We'll start with asset gatherings on slide four. As Fred said, we gathered nearly $14 billion in net new client assets in the quarter, that's up 16% from the same quarter last year.

Year-to-date, we have gathered $45.2 billion and 9% growth rate. With the exception of the volatility resulting from the historic Brexit vote, the markets were calm throughout the quarter compared to what we saw on January and February.

Retail investors' sentiment was mixed with long-term investors expressing some reticence to invest new money, and yet our teams delivered a solid performance. Retail net new client assets were down slightly compared to last year's June quarter, but year-to-date, our results are outpacing last year's record growth by 5%.

Asset retention remains strong as we continue to enhance our client experience with more education, information, and human interaction to help deepen relationships. Within the institutional channel, asset gathering rebounded. Net new client assets were up 25% over the same quarter a year ago, largely due to strong inflows and retention rates. RIAs continue to grow, they're upbeat about the future, and our sales pipeline remain strong.

Now, let's take a look at trading on slide five. In the June quarter, we averaged 462,000 client trades per day. Client trades in July, month-to-date, are averaging 467,000 per day. With just one day in the quarter, where intraday volatility eclipsed 2%, the markets were much quieter than they were in the March quarter, which had 16 such days.

Traders increased their equity exposure throughout the period. For example on June 24, the day following the Brexit vote, was one of our strongest trading days ever. In advance of the vote, we prepared content and education to help investors understand its impact on the markets, which was helpful as request for education and guidance outpaced any other service need that day. The news also promoted an elevated interest in derivatives, which for the quarter were 44% of DARTs. A record 95,000 DARTs came from mobile devices in the quarter, comprising 21% of total DARTs.

On June 24, that number was at even higher 172,000. Mobile volumes for futures and forex on that day were each more than double what we typically see. We believe we will continue to see more of these days, where news and events drive significant market activity. This trend underscores the importance of our value proposition. We must continue to innovate and provide our clients with powerful trading tools, a variety of products to trade, and mobility through cutting edge apps to help them take advantage of opportunities in 24 hour markets.

Now, let's turn to investment product fees on slide six. Average balances for investment products grew to a record $162 billion, up 1% from last year, and up 6% sequentially. Amerivest average balance of $11.7 billion for the quarter, up 6% from the prior year. And AdvisorDirect average balances of $32 billion for the quarter, up 3% from the prior year. Investment product revenue was up 13% from last year to a record $96 million. This growth was partially aided by money market fund balances benefiting from the December Fed funds increase, as well as a $4 million revenue deferral for the Amerivest rebate that we logged in the same quarter a year ago.

In June, we launched our Amerivest Digital Upgrade, an improved client experience with a redesigned platform that includes: goal setting, performance tracking and live person chat. We're very excited about this launch for three reasons. One, it addresses the client need for a simpler, more intuitive online experience. Two, it gives us a flexible platform that we can leverage to offer multiple value propositions along the long-term investing continuum. And three, it enables our people to create deeper relationships with our clients.

Today we have self-directed solutions and fee based offerings like Amerivest and AdvisorDirect, but we have more work to do what we want to do address the variety on long-term investor needs that exist today. So, now that Amerivest has been upgraded, we have the flexibility to broaden our value proposition. We have decided not to renew the Amerivest rebate at the end of its current term, which concludes on September 30, 2016. And we will launch a fully digital or robo version of Amerivest in the first part of fiscal 2017. We'll have more to share in October.

Executing on an overall guidance strategy will be important for us in 2017 and beyond, not only as it means to provide more solutions to our clients, but in the interest of asset gathering in general. Ongoing innovation and investment will remain a point of focus.

Now let's turn to slide seven. We've completed our initial assessment of Department of Labor's retirement rule and we still believe we are well positioned.

IRA is the chief area of concern heading into the release of the rule, make up approximately one-third of our assets, but more than 80% of our retail IRA business is self-directed, and the RIA channel is already operating under a fiduciary standard.

So what areas of the business will be most impacted. We will need to modify some marketing messages and disable access to certain pre-selected fund lists for IRA accounts, relatively minor changes. And we expect to consider the best interest contract exemption or another exemption for rollovers, specifically to service clients looking for rollover advice. We will also consider exemptions for sales of Amerivest and AdvisorDirect as well as fixed income. We believe the cost to address these will be manageable. Primary areas of investment are likely to be technology and compliance.

We still believe our business model positions us well to capitalize on opportunities to grow our business as some firms move lower revenue clients to channels where compliance is cheaper and easier. And we believe a greater share of the annual retirement, money and motion in a post DOL world will go to self-directed players like us, and to independent RIAs. This will likely induce more brokers to move to an independent RIA model, but the size of those opportunities is difficult to gauge right now as the competitive landscape is still shaping up.

Now, I'd like to turn the call over to Steve for the financial overview on slide eight.

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Thank you, Tim, and good morning, everyone. Much has changed from when we started the June quarter. In April, trading was slow and many expected another Fed move this calendar year. Now after trading levels increased and burst of volatility at the end of the quarter, the next Fed move appears further out in the future and retail engagement is more mixed.

Despite this environment, we remain focused on what we can control and had a good quarter. Our core business is well-positioned for the future.

So with that, let's begin with a financial overview on slide eight. We'll start with the year-over-year comparisons. Overall revenue was up $44 million or 6% to $838 million. On line one, transaction-based revenue was $347 million, up $19 million or 6% due to higher trades per day. Our average trades per day were 28,000 or 6%, average commissions per trade is down 2% year-over-year due to trade mix, lower options contracts per trade, and continued price competition.

However, our average commissions per trade increased sequentially by $0.12, due to order routing revenue increases, resulting from higher equity shares per trade and slightly higher option contracts per trade.

On line two, asset based revenue was up $23 million or 5% due to net balance growth. On line five, operating expenses excluding advertising totaled $432 million for the quarter, up 4%. This was $10 million higher than the March quarter, primarily due to increases in professional services, which includes investments in technology.

Based on current head count as well as staffing plans and projects in sight we expect core OpEx, less advertising to increase by 1% to 2% next quarter to approximately $440 million. Furthermore, we expect advertising expense to be relatively flat next quarter compared to this quarter.

On line 10, pre-tax income was $334 million, up 5% year-over-year, with pre-tax margins at a strong 40%. The effective tax rate for the quarter was 28% due to a favorable state court ruling, that resulted in a $33 million tax liability adjustment, representing a $0.06 earnings per share benefit in this quarter's results. All of this resulted in record earnings per share of $0.45, up $0.09 or 25% from last year. Key ratios remain strong. On line 14, return on equity was 19% for the quarter. And on lines 17 and 18, our EBITDA was $393 million or 47% of revenue.

Now, I'll move to the year-to-date comparisons. On line four, revenue was up $82 million or 3%. Asset-based revenue increased $76 million or 6% primarily due to IDA fees, which I'll discuss in a bit. On line seven, operating expenses were up $13 million or 1%, reflecting our continued expense discipline. As a result, on line 10, pre-tax income was up 6%, reflecting positive operating leverage and a strong profit margin. The effective tax rate was 34% versus 36.6% last year. And on line 13, earnings per share was up $0.14 or 13% to $1.23.

Now, let's take a more detailed look at our spread-based revenue, starting with slide nine. Revenue for the quarter was $377 million, up $12 million or 3% year-over-year, as revenue growth from the IDA was partially offset by declines in stock lending. Stock lending was $30 million in the quarter on lighter demand, especially in the top 10 hard to borrow names, partly due to a relative quiet IPO market.

Although, we did see some increase in stock lending activity towards the end of the quarter with certain hard to borrow names, the environment remained tepid for the majority of the quarter. This area continues to be a difficult item to predict. Spread-based balances averaged $106 billion for the quarter, consistent with last quarter, but up $11 billion or 11% year-over-year. The IDA has grown to record levels up $9 billion year-over-year. Average margin balances are down $1 billion year-over-year, but relatively flat sequentially. Balances were trending up near the end of the quarter, and ended at $12 billion versus $11.3 billion at March 31. The mix of balances resulted in a lower net interest margin both year-over-year and sequentially. Our consolidated duration was 2.1 years down slightly from last June.

Now, let's take a closer look at the IDA on slide 10. IDA revenue was $234 million, up $25 million or 12% year-over-year due to both balance growth and a slight increase in net yields. Average balances were up $9 billion or 11% year-over-year. Net yields remain consistent, as extensions were reinvested at levels at or above maturing yields. However, that will be more difficult to realize in the next quarter, as we have $1.5 billion in balances, maturing at yields higher than the current yield curve.

As a reminder, the additional FDIC fee began in July, which translates to $5 million less revenue per quarter for the next two years.

Now, let's turn to the next slide to discuss interest rate sensitive assets. Interest rate sensitive asset balances were at a record $113 billion, up $11 billion or 10% from last year. The increase is primarily due to growth in the IDA. Cash as a percentage of total client assets ended the period at slightly under 15%. As a remainder, over 90% of our benefit from rate increases in the first year is due to short-term rates. Please see our sensitivity disclosure in the appendix for the impact of each 25 basis point move. As we normally do, we will update our sensitivity disclosure as well as our guidance for next quarter at our October call.

And now, I'll turn the call back to Tim for the business update.

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Thanks, Steve. So, after a solid quarter, the focus for us remains on organic growth and trading. Our sales teams continue to find opportunities to gather new assets despite reticence from a cautious long-term investor.

Trading remains healthy, thanks to growth in derivatives and the convenience and flexibility afforded by mobile engagement. And investment product fees will remain a key strategic focus for us as we continue work to expand and enhance our menu of guidance and advice solutions for retail investors.

These investments include the Amerivest Digital Upgrade, and as we said earlier, a fully digital version of the platform to come in early fiscal 2017. Our teams are adopting agile methods to power our innovation and bring these enhancements and other initiatives to market.

We continue to believe that the Department of Labor retirement rule will usher in a new era in financial services, and we believe that we and our independent advisor clients remain well positioned to comply and benefit from growth opportunities as the industry adapts to the new regulations. We're on track for implementation and we expect investments to support these efforts to remain manageable.

And as always, we strive to be good stewards of our shareholders' capital. In the quarter, we utilized $19 million to pay out our quarterly dividend of $0.17 per share and we bought back 1.7 million shares of company's stock.

So with just one quarter left, our focus is shifting ahead to 2017 and the years that will follow. But before we turn the call over to Q&A, Steve and I'd like to take a minute just to recognize Fred's leadership over the last 10 years – the last eight of which he spent as TD Ameritrade's CEO, so Steve do you want to start off.

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Sure. Thanks, Tim. Fred has been a tremendous leader during a very challenging time for financial services. The financial crisis hit days after he took charge and the rate environment remained difficult throughout his tenure. Despite this, he emphasized growth, shifting our strategy, and taking advantage of dislocation to grow the business.

Our clients, shareholders, and associates are fortunate to have had him at the helm. And on a personal level, I want to thank you, Fred, for welcoming me on to your team last year, showing me the ropes and being a mentor to me. I wish you all the best. Back to you Tim.

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Thanks. So, I've known and worked with Fred for almost 20 years, and I can tell you, he is a tough act to follow. So consider a few of these facts. When he took over a client assets in – on October 2008, were $278 billion and now it's $736 billion, they're nearly three times that amount. Took over as CEO upon the completion of a tough fiscal year 2008, a year in which derivatives made up just 12% of total client DARTs, today they make up 44%.

Mobile trading in 2008 was practically nonexistent, today 21% of all trades, and more than a third of our client logins all come from a mobile device. And net new client assets in fiscal 2008, were $23 billion, in 2015, they were $63 billion. We had seven consecutive years of double digit net new client asset growth, no one else in this industry has done that.

We have delivered industry leading shareholder returns. And I know something that Fred's probably most proud of, we have the highest, best in class employee engagement scores across pretty much any industry in North America, it's a great place to work. He said and I've said that a good CEO leaves the company better than he or she found it and Fred has certainly done that for me.

Fred, we thank you, and we'd like to turn a call over now on the phone for Q&A.

Question-and-Answer Session

Operator

Thank you. And our first question today is from Rich Repetto from Sandler O'Neill. Your line is open.

Richard Henry Repetto - Sandler O'Neill & Partners LP

Yeah. Hi, Fred and Tim and Steve. I guess, first thing is I got to congratulate Fred too. And one thing, it is on the slide that I think we calculated if it's – I think it's accurate, but $350 billion of net new assets during the time as well. So, congrats Fred.

Fredric John Tomczyk - Chief Executive Officer & Director

Thanks, Rich.

Richard Henry Repetto - Sandler O'Neill & Partners LP

Anyway. First question is on the yield curve with a flattening. And I'm just trying to see Steve, whether – you did shorten the duration a bit, but how do you cope with, I guess the yield curve or are you looking at further adjustments on duration?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yeah. So we have a pretty consistent asset liability management strategy. We don't expect any major changes here. I think as you mentioned that the curve has flattened a bit, I think we did anything we'd probably shorten a bit, but I wouldn't expect any dramatic changes.

Richard Henry Repetto - Sandler O'Neill & Partners LP

Okay. Thanks. And then the one follow-up is for Tim. You mentioned and since you've brought up this subject, but broadening the – I thought you said, broadening the product set or offering a relationship with clients and could you elaborate on what you're talking about there?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Well, we'll give you more details in October, Rich, as to our go forward strategy. But essentially we see ourselves as offering – a pretty broad continuum all the way from self-directed, all the way to advisory platforms, and obviously, with our Amerivest Digital Upgrade and the launch of the robo next year than we expect to be able to broaden that over time.

Richard Henry Repetto - Sandler O'Neill & Partners LP

Okay. Thanks again and Fred congrats one hockey fan to another.

Fredric John Tomczyk - Chief Executive Officer & Director

Thanks, Rich. I hope you'll still be a hockey fan.

Richard Henry Repetto - Sandler O'Neill & Partners LP

I still will be.

Operator

Your next question comes from Alex Kramm from UBS. Your line is open.

Alex Kramm - UBS Securities LLC

Yeah, hey, good morning, everyone. I guess just following up on the interest rates, IDA questions that Rich just asked. Steve, I think you talked about $1.5 billion rolling off and having to be reinvested. Could you give a little bit more detail in terms of the rates for those that are rolling off and coming on, I mean obviously we can look at the five-year and seven-year rates, but maybe a little bit more detail from your end would be helpful? Thanks.

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yeah. So I don't want to get into giving exact rates, but there is a modest amount of compression that we'll see in this quarter, it shouldn't have a big impact on 2017 and obviously the yield curves keeps bumping around. So we don't think it's a major impact as we move into next year and concurrently we'll give you more guidance in October.

Alex Kramm - UBS Securities LLC

Okay. And then secondly, I guess on the margin lending, not sure you addressed this, but obviously you got a nice bump in the last quarter with the Fed hike, but now those rates have been coming down again. Is this primarily a competition that you're seeing now already again or is it the environment with maybe a little bit more active traders. Anything that you could give us and then obviously how that will be looking going forward in particular if it's coming from competition already again?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Sure. So as we mentioned last quarter, we were able to pass on pretty much the whole 25 basis points. We haven't had a lot of issues with that. The compression that you're seeing this quarter is entirely based upon mix. So we had both a higher percentage of institutional margin versus retail, and then within retail, we saw more large balance customers created a part – a larger part of the outstanding, and they're generally at lower rates. And so it's completely mix in the quarter, not really any differences on a customer-by-customer basis.

Alex Kramm - UBS Securities LLC

All right. Fair enough. Thank you.

Operator

Your next question comes from Chris Shutler from William Blair. Your line is open.

Chris C. Shutler - William Blair & Co. LLC

Hey guys, good morning. Fred best wishes as you move on. A quick question for Tim. Tim, you mentioned that there are areas where Ameritrade has its room to grow, and I guess a lot of this probably revolves around the guidance side of the business. But can you just speak at a high level of some of the things that you're thinking about?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Well, certainly. Thanks for the question, Chris. As I said, more guidance later, we're going into our planning process now as a management team, so we'll talk about it more in the fall. Well, it's – from my point of view, it's a great time to join the firm for a bunch of reasons. Obviously, there is a lot of growth momentum already and a great strategy that's strong, but frankly there is also some pretty interesting disruptions going on, technology is one, and the capabilities that offers for all companies and wealth management, and also the DOL changes that are happening, will create we think more money and movement, and we generally capture a good share of that.

Chris C. Shutler - William Blair & Co. LLC

Okay. And then a couple of questions on Amerivest, so you did rollout the new Amerivest, as you noted. How are you marketing that new service is it different at all versus how you were marketing the service previously. And I guess I'm just curious what kind of metrics you are using internally to measure the progress that you're making? Thanks.

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

No fundamental changes in the Amerivest Digital Upgrade that we just launched last month. It is still mostly a combination of a digital as well as a person enhanced if you will, offering. So, not a true robo. The metrics that we use generally are that we're looking for asset growth to accelerate as a result of that and for client experience to improve.

Chris C. Shutler - William Blair & Co. LLC

Okay. Fair enough. Thank you.

Operator

Your next question comes from Conor Fitzgerald from Goldman Sachs. Your line is open.

Conor Fitzgerald - Goldman Sachs & Co.

First, best wishes, Fred. Congratulations.

Fredric John Tomczyk - Chief Executive Officer & Director

Thank you.

Conor Fitzgerald - Goldman Sachs & Co.

And then I think Fred's been – a question for Tim. But Fred's been pretty clearly that or at least hinted I think that he views kind of the DOL as a pretty big market dislocation opportunity. And Tim I know you just touched on that. But Fred's talked about it might make sense to kind of invest to gain some of that share? I mean can you just philosophically maybe, Tim, give us your thoughts on that opportunity?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Again, we also – we still believe that it has got a great upside opportunity. The question is, we're not exactly sure how? Because frankly, the entire competitive landscape is assessing what they might do to react to it. Having said that when you have these type of – once in a generation type potential opportunities then, yes, you must invest to take advantage of it, so that would clearly be our event.

Conor Fitzgerald - Goldman Sachs & Co.

Got it. And then the SEC recently proposed a broker scorecard. I was just wondering if I could get your thoughts on one, what you kind of thought of the proposal? And two, what you think the potential impact could be on your business?

Fredric John Tomczyk - Chief Executive Officer & Director

Well, we actually don't see much of an impact. And in fact, we've been involved in drafting the disclosures. And we're all for disclosure and more consistent disclosure on operations and (29:26) we really don't expect much of an impact from the disclosure.

Conor Fitzgerald - Goldman Sachs & Co.

Very helpful. Thanks and congrats again Fred.

Fredric John Tomczyk - Chief Executive Officer & Director

Thanks, Conor.

Operator

Your next question comes from Michael Carrier with Bank of America Merrill Lynch. Your line is open.

Michael Roger Carrier - Bank of America Merrill Lynch

Right, thanks a lot, guys. Steve, maybe just – I guess two questions just on the spread part of the business. I think when we look at the interest earning assets, I'm just trying to get a sense, I know it's hard to predict in terms of the activity level and tech learning and stuff. But when you look at maybe the level that we're at versus the historical, I don't know if you have any like norm, but I'm just trying to try to gauge, is this somewhat nearing like a trough level or a bottom or if there is any way to gauge that just because obviously it's been more volatile over the past couple of quarters?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yeah, I'd say – if you sort of broke it down, I'd say securities lending is at a low ebb – certainly was in a low ebb during the quarter. And so again, hard to predict, but if you revert it to the norm, you might expect to see some increases there. Margin balance is – we've had pretty good margin balance growth over time. We hit a high towards the end of last year. So I think we'll see that come back and forth. Generally that aligns with our margin clients' buying power. So we certainly continue to see good levels in the market here. I think you should expect to see some good growth there as we continue to bring clients in and that continues to be a good product for us.

Michael Roger Carrier - Bank of America Merrill Lynch

Okay. Thanks. And then just a follow-up. Just on the fee based revenues. So when I look at sequentially, there was a pretty good path and I know you got the money markets, but then just on actually the non-money market balances. Just wanted to make sure, it sounds like that was pretty much as core, meaning stronger asset balances, stronger average markets. But, just want to make sure there was nothing else there, because there was just a pretty strong growth rate?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yeah. Sequentially, which I think is what you're talking about, it was a good quarter for advised assets, whether that was in the RIA business or in the retail business. And so we can see a nice core uptick there.

Michael Roger Carrier - Bank of America Merrill Lynch

Okay. Thanks a lot.

Operator

Your next question comes from the Devin Ryan from JMP Securities. Your line is open.

Devin P. Ryan - JMP Securities LLC

Hey, thanks. Good morning. Want to echo the comments, Fred best wishes, and welcome Tim. Just a couple of quick ones here. First on institutional business, you talk a lot about the DOL opportunity. But it seems like the revenue model for many the subscale custodians, is just more challenged by the year with the rate curve pressure, revenue share compression, trading pressure. I'm just trying to think about, as you guys are growing and gaining share, what can you think about doing to maybe further disrupt that business, I don't know it's offering trading incentives or do anything on pricing. How are you thinking about that, it just seems like it's becoming more challenge for others. And are you willing to maybe take a little bit of pricing pressure to increase market share?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Thanks, Devin. Interesting question. Don't know that I want to amuse online, but what the competitive strategy might be. But your point is right, which is, there're a lot of forces here that are compressing margins generally. And the RIAs aren't immune to that. I can tell you that there is a lot of interest in how they can react and continue to offer great client experiences and grow in a post DOL world. And for example, our referrals for breakaway brokers were up 75% year-over-year, so we think there is lots of upside. But there are – like I said earlier, we're all trying to figure out what's the best to do in this new world as well.

Devin P. Ryan - JMP Securities LLC

Okay. Helpful. And maybe similar topic here. I mean, RIAs, as you highlighted already fiduciaries. Is there anything else that you'll be implementing for RIAs with the DOL rule? I know, there are some questions around level fee fiduciary exemption for example. And I'm not sure if there is anything else from kind of the final rule language that you still think needs to be clarified that you think could have some impact on the RIA piece of the business?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Yeah. Nothing that we've – that we're ready to talk about at this stage as we say, we're still sort of assessing. We've done our initial assessment, but there is quite a lot of detail still to work through. So nothing further to announce notably on this institutional business at this time.

Devin P. Ryan - JMP Securities LLC

Got it. Okay. All right. Thanks, everyone.

Operator

Your next question comes from William Katz from Citigroup. Your line is open.

William Raymond Katz - Citigroup Global Markets, Inc. (Broker)

Okay. Thanks very much. Fred, I'd like to pitch on page 13 and wish you the best luck as well. Tim, thanks for your comments for this morning. Couple of questions. Just on the DOL, could you talk about potentially some of the revenue pressure, if any, that might occur in the investment product line perhaps as you work through different product sales, et cetera under the new environment?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Nothing specific other than the fact that there will be a continued pressure as everybody figures out how to actually act in the best interest of clients and that often has a real effect on what products you put clients into. And as a result, that will have margin pressure, but I wouldn't be more specific than that at this stage.

William Raymond Katz - Citigroup Global Markets, Inc. (Broker)

Okay. Just a follow-up, can you just sort of remind me or remind us, what the differences on revenue capture opportunity between some of our retail net new asset coming in versus institutional oriented net new asset?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Sorry, I think we might have missed that.

William Raymond Katz - Citigroup Global Markets, Inc. (Broker)

Just want to understand the different revenue capture dynamics of a one revenue dollar of retail, self-directed revenues to assets coming in the door versus institutional (35:51)

Fredric John Tomczyk - Chief Executive Officer & Director

They are a fair bit different and obviously in one case, we're directly to the consumer or the investor where we're taking both the – sort of the broker plus of a sort of frontend fees and so, in that business, we do much better revenue on assets than the institutional side where we're purely a custodian and the RIA is charging the fees of the frontend. Do you follow me, if I – like I think overall from the propositions, they're are very – our retail side, if you put our cost plus the institutional, the RIA fees, the assets for – from the clients' perspective, they are not that different, but the reality is, the RIA has taken more of the fees because we are purely a custodian. I think – does that answer your question?

William Raymond Katz - Citigroup Global Markets, Inc. (Broker)

Yes. Exactly. Thank you, both.

Operator

Your next question comes from Brian Bedell from Deutsche Bank. Your line is open.

Brian Bedell - Deutsche Bank Securities, Inc.

Hi. Good morning, folks. Also wish – best wishes for Fred and congrats, and welcome Tim. Let me just start off with the – another way to look at the IDA question for Steve and the investment strategy. And maybe if you could just talk a little bit about the average maturity of the fixed portion of the book, the $62 billion? I know you've said $1.5 billion is rolling off at higher rates, just trying to get a sense of that overall?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yeah. It's about a 3.4 year duration on that.

Brian Bedell - Deutsche Bank Securities, Inc.

Okay.

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

We're talking extended balances.

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yeah. I think that's (37:19) Brian, right.

Brian Bedell - Deutsche Bank Securities, Inc.

Yeah. On the extended balances, yeah. That's the whole $62 billion?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yeah.

Brian Bedell - Deutsche Bank Securities, Inc.

Yeah. Okay. Got it. Thanks. And then maybe question for Tim on the – maybe the pricing dynamics, as you rolled out the future versions of Amerivest, you got a pretty widely tiered pricing structure of Amerivest right now, and you're seeing another – other products coming at fairly low price points. What's your thought about changing the pricing of Amerivest probably for the overall revenue capture rate in that dynamic?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Well constantly – we are constantly reviewing our competitive prices, and as we continue to put more pieces on that continuum and measured against what the competitive forces are, that we'll – we will look to make adjustments if they make sense, because we think that the – there is still a lot of growth upside that will obviously help counteract any margin compression you might see.

Brian Bedell - Deutsche Bank Securities, Inc.

And then the – just sort of the average weighted rate of Amerivest right now, is that in 50 basis, 60 basis points range, do I have that right?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

It's in the 80% range, but we expect that – we think that – that has value obviously over and above just the technology, but it's also with an investment consultant relationship as well.

Brian Bedell - Deutsche Bank Securities, Inc.

Great. Okay. So maybe even more granular tiering of that for different levels of advice I would think going forward?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Right, as we said, there is a real continuum here that we're looking to build out, and that will also come with a continuum of pricing as well.

Brian Bedell - Deutsche Bank Securities, Inc.

Got it. Okay. Thanks so much.

Operator

Your next question is from Ken Hill from Barclays. Your line is open.

Kenneth Hill - Barclays Capital, Inc.

Hi, good morning, everyone. Just wanted to follow-up again on Amerivest here. So, this upgrade I know is one of many you guys spoke to a robo advisor coming, but I know also you guys look at a lot of the attrition data and it drives what you guys do. So I'm just wondering the most recent upgrade you did and what you guys have coming over the course of the next year or so, what types of gaps or holes are you guys looking to fill with functionality here, I guess as you roll these products out?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

For the new product?

Kenneth Hill - Barclays Capital, Inc.

With – well what you've rolled out here in June and then what you're going to be rolling out going forward as well?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Got it. So, some of the enhancements on the June upgraded that just went out were goal planning as well as a higher degree of reporting out both against actuals as well as the goals that we've set out. Most of the components that we've built into the digital upgrade are also transferable into the full robo, so that's one of the reasons why we did the sequence we did. And so we expect, as I said earlier, it also has things like simpler and cleaner client interface, more usable and a higher degree of functionality.

So we think that was the right sequence to do. Amerivest, frankly being around for about 10 years was pretty much almost the original robo, so it was time for a pretty significant overhaul, which we've just done, and then we take those component parts and we apply them to the newer generation of robos that have come out in the last little while.

Fredric John Tomczyk - Chief Executive Officer & Director

And just to add to that. I'd say, when we look at attrition statics in Amerivest, I mean when people leave Amerivest is because they want more hand-holding and more advice, not because they're leaving because they want a digital experience and a cheaper price. And so most of our attrition is people wanting more help, but particularly after the initial sale. And so I think what we've launched here is actually sets that all up to have an ongoing conversation with the client about their goals and how they're tracking towards their goals over time. And I think that's an important upgrade and I was trying to get at what the clients were telling us.

Kenneth Hill - Barclays Capital, Inc.

Okay. I appreciate the color there. My other question is on M&A, I know you guys, in the past, you've framed it on consolidation plays and you've talked about how rates might factor into those type of decisions, but you've also looked at some areas in the fintech space and maybe even doing some build versus buy analysis there. I'm just wondering if anything striking you as more attractive right now either from a functionality or evaluation standpoint that might make that more attractive to do more M&A right now?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

It's Tim. Nothing specific, but if it makes good strategic and financial sense, we'll look at all opportunities. Obviously from a technology enhancement point of view, those are interesting, but certainly not the only reason why we might do M&A activity, but I'm open.

Kenneth Hill - Barclays Capital, Inc.

Okay. Thanks very much.

Operator

Your next question is from Mac Sykes from Gabelli. Your line is open.

Macrae Sykes - Gabelli & Co.

Thank you. Fred, I appreciate your leadership over these last few years and best wishes. Not to beat a dead horse, but just on DOL, can you talk a little bit about your current communication with institutional now? What have you been focusing on? And around what aspects of the changes in DOL, are you getting the most questions from the RIAs?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Good question. Again, they've been looking to us for help in how do they think about this particular issue. One of our offerings to our institutional clients is a high degree of advice to them about how they can grow their businesses in the future. So it's still relatively early days, but I can tell you that the sessions we've had, webinars and et cetera for our institutional clients have been hugely well attended as they're trying to figure this out for themselves as well.

Macrae Sykes - Gabelli & Co.

Thank you.

Operator

Your next question comes from Daniel Fannon from Jefferies. Your line is open

Daniel Thomas Fannon - Jefferies LLC

Thanks, good morning. In terms of net new assets in the quarter, obviously institutional was a driver, can you talk about the sources within that the wire houses versus independent broker dealers, and kind of how that sits today in terms of backlog going forward?

Fredric John Tomczyk - Chief Executive Officer & Director

There hasn't been any significant change in the mix of where we're getting the business from. We continue to do well from the independent broker dealers and the wire houses, but we continue to do well. There hasn't been a big shift in the mix of where it's coming from. It's been pretty consistent trend. I just think this quarter institutional came back strong and it was a little bit softer for retail.

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Yeah. And we had a conference back in February and coming out of that we had probably the largest sales pipeline we've had ever. So it's a question of closing on those sales and making good on those client promises.

Daniel Thomas Fannon - Jefferies LLC

Great. And then just a follow-up on Amerivest, in the context of the DOL, I think in your prepared comments you highlighted the BIC as a potential workaround for that product, can you explain that and how that might work?

Timothy D. Hockey - President and Director, TD Ameritrade Holding Corp

Well, at this point, we have to assess the pros and cons of using the exemption for what purpose. There is a few particular examples, notably around advice for a rollover. There is a few other exemptions that are allowed under a risk that we might also do, but it's a pros and cons to try and figure out when best to apply it.

Fredric John Tomczyk - Chief Executive Officer & Director

I think you try and to always make sure you can meet the customers' need, that's our primary focus.

Daniel Thomas Fannon - Jefferies LLC

Great. Thank you.

Operator

Your final question today comes from Doug Mewhirter from SunTrust. Your line is open.

Doug R. Mewhirter - SunTrust Robinson Humphrey, Inc.

Hi, good morning. First, Steve I just wanted to clarify statement you made in the opening remarks about the cost. You said the – did you say your operating cost x advertising would be up 1% to 2% sequentially next quarter, did I hear that correctly?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yes.

Doug R. Mewhirter - SunTrust Robinson Humphrey, Inc.

Okay. Great. And advertising you said would be relatively flat or did I hear that wrong?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

No. That's correct, relatively flat.

Doug R. Mewhirter - SunTrust Robinson Humphrey, Inc.

Okay. Great. And the second question on the revenue side. It looks like your average revenue per trade held up fairly well during the quarter. And just wanted to review in terms of mix, if you take options, future stocks, what generally is the most profitable type of trade and the least profitable and did you see a favorable mix towards those type of products in the quarter?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yeah. Sure. The revenue per trade on options tends to be a bit higher and on futures would tend to be on the low end. And we did see a bit of a mix shift in the quarter that was favorable. Typically, quarter-to-quarter you'll see the numbers bounce around a little bit because of mix.

Doug R. Mewhirter - SunTrust Robinson Humphrey, Inc.

Okay. Great. Thanks. That's all my questions.

Operator

And next we have Chris Allen from Buckingham Research. Your line is open.

Chris Allen - The Buckingham Research Group, Inc.

Morning guys. Congrats, Fred and both Tim. Couple of questions. I guess just first, it's a quick numbers question. Other revenues were $18 million, up from $16 million in the prior quarter. And if I recall correctly, last quarter there was a seasonal impact. So I'm just wondering what drove the sequential increase this quarter and what's a good run rate to think about going forward?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yeah. We have some miscellaneous fee income we get on reorganizations and that was the biggest item.

Chris Allen - The Buckingham Research Group, Inc.

Any color on magnitude there?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

No, it was the biggest item and that's changed.

Chris Allen - The Buckingham Research Group, Inc.

Got it. And then just a kind of a little bit more of a structural question. We kind of look at rate per trade and margin lending rates over the last year and a half and margin lending rates little bit longer. We see this continuous kind of decline there. I mean obviously this quarter rate per trade was up a little bit sequentially. You guys have attributed a lot of this to mix, and I mean is it just being driven by higher growth in the institutional channel?

And should be thinking about this continually being under pressure of longer-term, as long as institutional growth outpaces retailers or something else structural going on here? From a competitive standpoint, I know there's been some competitive pressure on margin lending rates. I don't think we've seen any rack rate changes within the rate per trade cards for most players, although there could be negotiated differential. So, just trying to think about that structurally and kind of the long-term outlook there?

Stephen J. Boyle - Executive Vice President & Chief Financial Officer

Yeah. Sure. So I think if you look at the whole environment, it's a pretty competitive environment and we would expect some modest compression that we've seen over time in the rate per trade. I think we've done a good job on our margin lending rates. We've seen really pretty good spreads there, although certainly a lot of our customers are on negotiated rates. But – so, any given quarters, it's usually a mix change, but there is a slight trend towards lower rate per trade over time, but we're seeing that more than offset by growth in volumes and some of that is just a factor – the types of trades or smaller trades in general. So we really like to focus on the revenue and we've seen very good revenue growth in that business.

Chris Allen - The Buckingham Research Group, Inc.

Got it. Thanks a lot, guys.

Fredric John Tomczyk - Chief Executive Officer & Director

Okay. I think that's it. So, let me just close the call. First off, I'd like to thank everyone for their kind words and best wishes for next phase of my life. Working at TD Ameritrade has truly been the highlight of my carrier. It's a great company with great people, strong leadership team and a great culture as Tim has mentioned. We have built something really special here at TD Ameritrade.

I'm proud of what we've accomplished, where we're at, and I have full confidence that we're headed in the right direction. A last task of any retiring CEO is to leave the organization in good shape and hand it over to someone who will take the organization to the next level. I feel very good about turning the company over to Tim at this point.

As he said, we've known and worked with each other for close to 20 years and I believe he has the capabilities and the experience that TD Ameritrade needs right now. He is the right person for the right time to take this company to the next level. I have a few more months before I hang up my skate so to speak, so I still be hanging around and – but is everything perfect? No, not, it's never perfect, but we're different and a much better company today than we were eight years ago and TD Ameritrade will continue to get better at everything we do.

It's in our DNA and it's part of our vision statement. It's in my DNA, it's in Tim's DNA, and I look forward to watching the company progress going forward. Keep in mind, I still own a lot of shares Tim. So, thank you. It's been a great journey and a great ride.

Operator

This concludes today's conference. You may now disconnect.

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