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TD Ameritrade Holding Corporation (NYSE:AMTD)

F2Q 2012 Earnings Conference Call

April 17, 2012 8:30 AM ET

Executives

Fred Tomczyk - President and CEO

Bill Gerber - EVP and CFO

Bill Murray - MD, IR

Analysts

Richard Repetto - Sandler O'Neill

William Katz - Citigroup

Christopher Harris - Wells Fargo Securities

Patrick O'Shaughnessy - Raymond James

Joel Jeffrey - KBW

Mac Sykes - Gabelli & Company

Howard Chen - Credit Suisse

Alex Kramm - UBS

Alexander Blostein - Goldman Sachs Group, Inc

Michael Carrier - Deutsche Bank

Keith Murray - Nomura Securities International, Inc

Operator

Good day everyone, and welcome to the TD Ameritrade Holding Corporation’s March Quarter Earnings Results Conference Call. This call is being recorded. With us today from the Company is President and Chief Executive Officer, Fred Tomczyk, and Chief Financial Officer, Bill Gerber.

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

Bill Murray

Thanks, operator. Good morning everyone, and welcome to our March quarter earnings call. In a minute, we’ll be hearing from Fred and Bill, but first hopefully you’ve had seen our press release and located today’s slide presentation, which can be found on amtd.com.

I’d also like to refer you to our Safe Harbor statement, which is on Slide 2 in the presentation and we will be referring to some forward-looking statements. We will also be discussing some non-GAAP financial measures such as EBITDA. Reconciliations of these financial measures to the most comparable GAAP financial measures are in the slide presentation. We'd also like you to review our description of risk factors contained in our most recent financial reports Forms 10-Q and 10-K.

As usual, the call is intended for the investors and analysts and may not be reproduced in the media in whole or in part without prior consent of TD Ameritrade. We have a large number of covering analysts as we normally do, please limit your questions to two, so we can cover as many analysts as possible within the allotted time.

With that, we have Fred Tomczyk, our CEO and Bill Gerber, our CFO, here to review our March quarter results and major accomplishments. Fred?

Fred Tomczyk

Thanks, Bill, and good morning everyone, and thanks for joining us today to discuss our March quarter results.

As we cross the half way point in our 2012 fiscal year, we see several things that are worth pointing out. First, organic growth at TD Ameritrade remained strong. We continued to outpace our peers with double-digit net new client asset growth with good momentum in both our retail and institutional channels.

Second, while organic growth is strong, there remains a sense of caution on the part of the retail investor, but despite the improvement in the markets over the course of the quarter. Third, we remain focused on tight operating expense management and we’re expanding initiatives to drive greater efficiency, productivity, and cost containment in order to handle our strong organic growth while keeping expenses in check.

And lastly we remained financially strong and sound. Our clean balance sheet and unique business model that drives strong cash generation gives us a great deal of flexibility in a strategic and financial decision making. And while we can’t predict how the environment will change from one quarter to the next, we do know that in uncertain times you have to prioritize. Identifying those things which you can control and are most important to position your firm for long-term growth and increased shareholder value. That’s what we’ve been doing and that’s what we will continue to do at TD Ameritrade.

So let’s take a look at our results on slide 3. We ended the March quarter with record client assets of $452 billion, double what we had in March of 2009, just three years ago. Earnings per share for the quarter was $0.25, down $0.02 from last quarter, due to increased marketing spend for the retirement season and the launch of our new advertising program.

It’s also down $0.05 from the March quarter last year, which was the best quarter for trading volumes in the history of our firm. Last year at this time we were looking at a number of positive economic indicators and there was a general sense that the economy was headed in the right direction. Retail investor sentiment was actually quite bullish. However, the tone in economic environment soon changed dramatically as we entered late spring and summer months.

A year later, in the aftermath of such widespread economic uncertainty and despite the strong market in the March quarter, today’s investor is much more cautious. With many remaining on the sidelines, waiting to see if the economy and the markets are for real this time.

We are net revenues of $673 million, up 3% from the December quarter. Our operating expenses excluding advertising were flat sequentially. Net new client assets for the quarter came in at $10.8 billion and 11% annualized growth rate. Our interest sensitive assets are a record $79 billion, a direct result of our strong asset gathering and increased margin balances.

Client trades came in at an average of 388,000 trades per day, up 5% from the December quarter. And we used our balance sheet to repurchase 775,000 shares of our common stock this quarter at an average price of $19.02. These buybacks combined with our $0.06 quarterly dividend totaled over – totaled return of 35% of earnings back to the shareholders during the quarter.

Fiscal year-to-date we have bought back 7.5 million shares at an average price of $16.23. And we’ve now returned 65% of our year-to-date earnings to our shareholders, just above our forecasted annual range of 40% to 60%.

And finally, Standard & Poor’s upgraded our credit rating to single A. Our third credit rating increase from them since the financial crisis began 3.5 years ago. In fact, TD Ameritrade has been upgraded more – by more notches than any financial company in the S&P 500 since the beginning of 2009.

Let’s now turn to slide 4, for a closer look on the progress against our growth strategy. We ended the quarter with 10.8 billion in net new client assets and we’re now half way through what we hoped will be our fourth consecutive year of double-digit asset gathering. At our busiest quarter of the year, both our retail and institutional channels performed well and continue to exhibit strong momentum, despite the cautions investor outlook.

We are now also announcing two key updates to our Management team. We asked Tom Bradley to make the move from the institutional side of our business to lead retail. As a 25-year industry veteran, Tom has earned the respect of our industry for his passion for the business, commitment to our clients and a track record of getting things done and driving results.

Replacing Tom at the helm of TD Ameritrade institutional is Tom Nally. Another industry veteran who has served as a member of Tom Bradley’s Management team for more than 12 years, the last four in charge of sales. We have a strong leadership bench and I couldn’t have asked for a smoother transition. Quite simply we haven’t skipped a beat.

Within our retail channel, we continue to gather assets well within our expectations. We once again featured our investment consultants and our retirement checkup program in our advertising, which performed well for us. Branch lead referrals continue to be a prime source of net new client asset opportunities in the branch network.

And this quarter we launched a new ad campaign, which features a different look and a fresh message for retail investors. We have new TV spots as well as print and digital pieces that are all performing well. In fact at 183,000 we had our best quarter for new accounts in two years.

This week we’re also launching some new advertising focused on Olympians and our sponsorship with the United States Olympic committee. Our institutional channel continued with a strong asset gathering momentum and the break away broker pipeline remained strong.

We had at 104 new breakaway brokers in the quarter, up almost 10% from the same quarter a year-ago. Year-to-date we’ve had a 204 new breakaway brokers in excess of one new broker being added each and everyday. Investors want more objective advice, investment choices and transparent fair fee structures. And as a result the independent RIA model continues to gain traction with both advisors and retail investors.

This optimum – optimism was well represented at our national conference in February where we hosted more than 2,100 independent advisors and other industry influences. Technology columnist at Morningstaradvisor.com made – named TD Ameritrade’s institutional veil platform, the best technology for advisors.

We are very proud of this award. It speaks to our unique open architecture approach, which helps make life easier and more productive of our advisor clients. RIAs use this offering to manage their business in ways that were best for them and their practices.

Now let’s turn to the trading side of our business on slide 5. Over the course of the quarter, the S&P 500 was up 12% from start to finish. Yet both implied an actual intraday volatility remained quite low. In fact, if you were going to compare this March quarter with last year’s record March quarter, you would see a lot of similar circumstances. However, as I have already mentioned, retail investor sentiment is much different to day.

Investors were disappointed a year-ago when the optimism in the markets turned on them in the late spring and summer months. This time around we believe they are waiting to see if this latest rally is actually for real. This is also evident in exchange volumes, which were at their lowest levels in the past five years and mutual fund flows which continue to favor bond funds over equity funds.

And we recently asked retail investors how they feel about the markets? And while a majority of them feel that now it’s a good time to invest nearly a quarter told us that their tolerance for risk has declined in the last six months.

Having said that, trading activity for the quarter was up 5% over the December quarter to 388,000 trades per day, a 6.8% activity rate. Trades for the month of April so far are running at an average of 370,000 trades per day. While we can’t control market or an investor sentiment, we continue to help our clients find ways in trade and invest regardless of market conditions. Clients derivative trading remains resilient at 35% of our daily trading volume. And we continue to see growth in the number of clients seeking approval to trade these products.

Mobile platform engagement continues to rise and we now believe that TD Ameritrade clients place more trades by a mobile devices than any other online broker. Mobile trades are 6.5% of our daily trading volume and we’re adding approximately 1,600 new mobile users each day. To give our clients another reason to engage with our apps, we launched Snapstock. This feature allows you to scan a products barcode and learn more about the maker of that product, if it’s a publicly traded company. If you’re ready, you can buy the security within a matter of seconds.

We also participated in the Annual Barron’s Online Broker Survey. Our total [composite] score was higher than any of our immediate peers. We received the top score of any company in both research amenities and customer service and education categories. And we were named among the best firms for frequent traders, option traders and personal service, long-term investing and novice traders, covering nearly every aspect of our value proposition.

Finally, we launched the Options Market Center for independent RIAs, providing them with options education, research and information and a dedicated strategy desk to help them incorporate these products into their client’s portfolios. The number of RIAs interested in options continues to grow. This combined with the February launch of thinkpipes, a version of thinkorswim for advisors has helped grow RIA option trades over the course of the last year.

Turning to slide 6, strong organic growth remains the highlight of our business strategy. We continue to gather net new client assets at a double-digit annualized growth rate despite the challenging environment for retail investor engagement.

We continue to deliver more tools and services aimed at helping our clients make more educated and confident trading and investing decisions. We also continue to focus on process and expense management. Our first wave of lean initiatives is focused on identifying efficiencies and enhancing productivity in four areas, our call centers, our new accounts group, and in our retail and institutional operations organizations.

We continue to identify efficiencies, increase productivity and find new ways to resolve issues and improve the client experience. It’s still early, but we’re pleased with our progress and we’re implementing changes along the way.

Quarterly expenses excluding advertising were flat through the December quarter, and we expect our operating expense run rate to be flat-to-down over the balance of the year. Now that we’re through the retirement season, and our lean initiatives continue to gain traction.

Our interest sensitive assets have reached a record $79 billion, up 13% over a year-ago, and up almost 50% from 2009. This moved well for future earning power in a more normal interest rate environment, and we’ll maintain our strong balance sheet and a disciplined active return of capital strategy. It’s one of the reasons why we continue to receive positive remarks from the credit rating agencies including our latest upgrade from Standard & Poor’s. Year-to-date, we’ve returned 65% of our earnings to shareholders and as I said, this is just above our target range of 40% to 60%.

And finally, after careful thought and consideration, we announced last week our intention to move the listing of our common stock to the New York Stock Exchange. We’ve partnered with the New York Stock Exchange at a number of initiatives over the years and we felt that it was the right time to make this move.

In closing, we finished our first six months of fiscal 2012, which included a very busy, yet productive tax and retirement season while maintaining our double-digit organic growth rate momentum.

Now we’re focused on the summer ahead, finishing the year well and getting organized for a strong start to fiscal 2013. Our strategy over the last 3.5 years in the phase of a difficult environment for our industry has worked well for us that I’m pleased with our executing against that strategy. While we make tweak at here and there, we’ll remain focused on executing that same core game plan and being discipline to take advantage of opportunities that fit within our strategy and make financial sense for our shareholders.

And with that, I’ll turn the call over to Bill.

Bill Gerber

Thanks, Fred, and a happy tax day to everyone. A year-ago we had our best trading quarter ever, but today we’re in a very different environment. Intraday volatility is low and we continue to see retail investors waiting on the sidelines. That said, as we looked back in the March quarter, we executed well on our strategy and remain focused on managing the items within our control. Once again despite the difficult market that focus has paid off.

We had four major accomplishments of note. First, our net new asset growth remained in double-digits. Second, expenses before advertising were flat sequentially. Third, the insured deposit account net yield improved. And fourth, we received a credit ratings upgrade to A by Standard & Poor’s.

For a closer look at our results, let’s begin with the financial overview on Slide 7. Before we get into the detail of this insider page, the easiest way to think about the changes in our results is that year-over-year the largest driver is lower trades as March 2011 was the highest quarter in company history in trades and total revenue.

Additionally, on a sequential quarter basis, the largest difference is our advertising spent being significantly higher in March versus December, primarily due to our seasonal advertising spending patterns.

So with that, we’ll start with the March-to-March comparisons on the left side of the page. Transaction-based revenues in the quarter seen on line 1 were down $46 million or 14% from last year’s result due principally to 51,000 less trades per day.

Commission rates were $12.15 in the quarter versus $12.42 last year. Payment for order flow actually increased, but this was offset by declines primarily in option-based rates as contracts per trade were down year-over-year. On line 2, asset-based growth – revenue, sorry, is up $13 million or 4% as balance growth once again offset rate compression. We’ll discuss this more in a bit.

Other revenue was down $11 million, principally due to lower education revenue, lower reorganization fees and some minor one-time items benefiting us last year.

On line 5, operating expenses before advertising were $370 million at the quarterly run rate we’ve been mentioning in the last couple of quarters. Of note, this quarter we incurred approximately $6 million of unusual asset write-offs related to software no longer planned to be used.

As Fred mentioned, we expect to keep our quarterly operating expense before advertising flat or below $370 million for the remainder of this fiscal year.

On line 6, advertising was up to $84 million in the March quarter as we had our normal seasonal increase in spending. On line 13, EPS was $0.25 per share down 17% year-over-year. EBITDA for the quarter was solid at $260 million or 39% of revenues.

We’re providing the sequential quarter comparisons on the right hand side of the page. In this environment we think sequential comparisons may represent a more meaningful understanding of how we’re doing.

On line 1, transaction-based revenue is up $19 million or 7% as trades per day increased 21,000 and commission rates increased $0.25 per trade from both payment for order flow and favorable mix. On line 2, asset-based revenue was up slightly due to balance growth. On line 5, operating expense before advertising was up slightly primarily due to the asset write-off I mentioned previously. On line 6, ad spend is at $27 million or 47% due to seasonality in our new ad campaign.

Of note on advertising, we ended a vendor relationship related to our education advertising model this quarter. As a result, other revenue related to education and advertising spend related to education partner commissions will likely decline in the second half of the fiscal year. As such remodeling purposes, our currently quarterly run rate for other revenue is a reasonable forecast for the next couple of quarters and ad spend should now be near the lower half of our outlook range. Moving on, earnings per share in line 13, was down $0.02 primarily due to the higher advertising spend.

Now, let’s turn to spread-based revenue on slide 8. On a year-over-year basis, balances are up $14 billion or 23%, which drove revenue up $7 million as IDA revenue increases offset declines in margin revenue. We’ll talk about the IDA on the next slide.

Margin lending averaged $9 billion in the March quarter last year, but approximately $8 billion in the current March quarter. Further, the margin rates declined 36 basis points year-over-year as there were a higher percentage of margin users on negotiated schedules this year.

Sequentially, balances were up 3% or 12% annualized, which helped revenue slightly increased primarily due to an increase in the IDA net yield. The net interest margin stabilized as margin lending and net stock lending compression were mitigated by IDA yield improvement.

Now, let’s look at the IDA on slide 9. We delivered another record quarter in IDA revenue of $209 million. On a year-over-year basis, balances are up $11 billion or 23% and revenue is up $22 million or 12% as the balance growth contributed $47 million of higher revenue, offset by lower rates driving $27 million less revenue. Sequentially, revenue was up $4 million on an increase in yield on balance – as balances declined by $400 million on average.

As I’ve been noting for some time, mix is a major factor in determining the net yield, both in terms of the amount of overnight balances, which we call floating rate balances versus extended rate balances as well as mix in terms of the source of the deposits from retail versus institutional.

First, on the amount of funds and float versus extended, floating rate balances in the March quarter was down significantly from last quarter as we did a good job in getting balances extended more timely.

Second, on the source of the deposits, RIAs took money out of cash and invested it in the market to participate in the bull rally. As such, institutional moneys are at lower percentage of the total IDA portfolio than they were last quarter.

The combination of lower floating rate balances as well as lower institutional balances drove a higher yield. As a remainder, we do have about $2 billion sitting on our broker dealer balance sheet and segregated cash that will be moved to the IDA in the June quarter. We plan to extend that in the three to seven year range. Given that we’re halfway through the year, we wanted to update you on our IDA net yield expectations as compared to our guidance.

Year-to-date the yield was about 1.40% at this point and we feel comfortable with our guidance range of 1.30% to 1.40% and believe we should be near the top-half of that range for the full-year given the current rate environment. Remember though balance growth could negatively impact yield but positively impact income and as you all know, our goal is income growth.

Let’s look at the interest rate sensitive assets on slide 10. We have set another record for interest rate sensitive assets. Balances are up 13% from last year, primarily due to organic growth. As a reminder we remain well positioned for rising interest rates as eventually all of this approximate $80 billion in balances will get the benefit of higher rates. We updated our rate sensitivity to reflect the tremendous balance growth in recent years particularly in our IDA portfolio.

As you can see with an assumed 100 basis point increase in the yield curve, the year one sensitivity is unchanged at $0.28 per share, but the year two and year three impacts have increased. As the year two benefit is now $0.39 versus $0.37 and the year three benefit is now $0.50 versus $0.46 previously. This reflects the increase in balances and extensions we have had over the past few years as we would now expect over $10 billion in balances to mature on average over each in the next three years.

Let’s now take a look at our liquid assets on slide 11. We have $918 million in liquid assets, and this is flat from last quarter as $1 billion increase in margin lending which translates into more required capital was offset by net income. We are currently planning to pay off 4the $250 million tranche of our debt in December. So netting out that planned outflow, liquid assets would still be at approximately $670 million still within our targeted $500 million to $1 billion range.

Let’s now move to the last slide. We are half-way through the year and there are a lot of accomplishments. Our net new asset growth rate remains in double-digits finishing at 11% this quarter. Year-to-date we have had $21 billion organic net new asset growth. We're very proud of our team for these results. We remain optimistic that the lean initiative will continue to find operational efficiencies and we have expanded that project accordingly.

Expenses have essentially – have held essentially flat in the last couple of quarters and we will continue to target those levels for at least the balance of this fiscal year. We remain well positioned for rising interest rates as our interest rate sensitive assets continue to break records quarterly. Our balance sheet remains strong and we have returned 65% of year-to-date earnings to shareholders and at $29 million shares remaining on our buyback authorization.

Despite the difficult market environment, we received yet another ratings upgrade from Standard & Poor’s. Since the financial crisis began, we have received six notches of increases in our S&P credit rating more than any financial company in the S&P 500 index. This ratings increase provides us even more flexibility to take advantage of opportunities as they present themselves.

And finally we are moving our listing next week to the New York Stock Exchange. Overall we had a strong quarter, growing revenues sequentially despite a difficult operating environment. We will continue our strategy to make progress on what we can control and build long-term earnings power to position ourselves to further enhance shareholder value.

And with that, I’ll turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question comes from Rich Repetto of Sandler O'Neill. Please go ahead.

Richard Repetto - Sandler O'Neill

Yeah. Good morning, Fred. Good morning, Bill.

Fred Tomczyk

Hi, Rich.

Richard Repetto - Sandler O'Neill

I guess the question first on capital return, I haven’t been able to – but if you look at estimates going forward its still $275 or around there net income for the last half. If the stock – I am sure the stock price mitigated the buyback this quarter, but would you consider other alternatives besides just buyback and the regular dividend to return capital to shareholders?

Fred Tomczyk

Rich, we look at all the various alternatives to return capital to shareholders and actually I have a preference to deploy it. And so we look at both whether its an acquisition, whether it’s to pay down debt, whether its to buyback share where we’ll have a recurring dividend or a different form of return, all those things, we look at all of those. And we consider them all the time.

During a fiscal year, we generally run a consistent strategy and once a year we basically do a much more robust review of where we’re at, where we see it will -- things go in the next couple of years, have that discussion with our Board and if we make any adjustments so, we’ll probably communicate those on the October call.

Richard Repetto - Sandler O'Neill

Okay. And then, my one follow-up would be; Bill you mentioned the rate on the margin loans dropping year-over-year. It seems like those are significant drop, well, there was a significant drop in the rate sequentially as well. So these – what do you call negotiated rates …

Bill Gerber

Right.

Richard Repetto - Sandler O'Neill

… did a lot occur in this calendar quarter? I guess is the question.

Bill Gerber

Well what happened Rich is that the people who continued to use margin were the – were predominantly the people who are more active and have a negotiated rate. So the drop in margin balances was really from – the shift I guess was more to the people who have negotiated rates.

Richard Repetto - Sandler O'Neill

Okay. And it happened sort of in this quarter – period?

Bill Gerber

Yes, yes.

Richard Repetto - Sandler O'Neill

Okay. That’s all I have. Go Bruins.

Operator

Our next question comes from William Katz of Citi. Please go ahead.

William Katz - Citigroup

Hey, thanks very much. Guys, it sounds like your sort of qualification of the retailers is a bit more subdued then maybe the last update or even intra quarter, some congresses et cetera. Just sort of curious what may have changed in that survey that you’re in, have you done prior surveys with benchmark that 25%?

Fred Tomczyk

Yes. Well, I don’t know about the 25%, but I think the way I look at it is, if you take the retail investor right now, the more active traders continue to be in the market and you’ve seen them go into the margin loans and that’s where the negotiator rates are, and they tend to be more engaged right now. But there has been very low volatility, both actual intraday volatility and low implied volatility is measured by the VIX and so that’s not the best trading environment, so their trades per day are [back] basically flat to just slightly up.

However, what’s increased quarter-over-quarter is more of the long-term or less active investor who has started to come in the market but, if you look at what they’re doing, they’re moving in the bond funds, they’re not moving into equities. And so you’re seeing that’s just different and we continue to see them being quite cautious and quite concerned to make sure that they want to see that the economy is actually for real this time. They remember this time last year and they got burned and they don’t want to get burned twice, maybe in their perspective three times during the last three years.

William Katz - Citigroup

And just a follow-up comes back to the growth in new assets, just sort of curious, I mean, I think I know but, can you sort of review why you’re seeing such good strength in both the retail and the institutional businesses?

Fred Tomczyk

We’ve been very focused on this as an overall strategy and our business model is to drive this, it’s designed to drive this. So we have been doing it now for three and half years and we have done it through up-markets and down-markets and so we just haven’t seen anything stopping it so to speak right now, even though they maybe more cautious we have broadened out our product suite and our offerings to be able to look after investors and traders needs regardless of market condition and that’s been working for us quite well.

William Katz - Citigroup

Okay. Thanks, guys.

Fred Tomczyk

Thank you, Bill.

Operator

Our next question comes from Chris Harris of Wells Fargo Securities. Please go ahead.

Christopher Harris - Wells Fargo Securities

Hi. Good morning, guys.

Fred Tomczyk

Hi, Chris.

Christopher Harris - Wells Fargo Securities

It’s a question here on the NIM, nice recovery in the IDA. I know this quarter and you kind of flushed that out a little bit. Just curious as to where you think kind of NIM goes from here if you get the IDA yield up towards the higher-end of your guidance, I know you’ve got a little pressure on the margin borrowing side. Is there any additional detail maybe you can give on the NIM for the balance of the year?

Bill Gerber

Yeah, we think the NIM for the – overall for the year, will probably still be in that high 130s range. So we will probably see a contraction in the rate over each of the next two quarters, but overall we’ll probably stay in the high – hopefully high 130s. I don’t see it going below 135 right now.

Christopher Harris - Wells Fargo Securities

Well, actually IDA, I mean the NIM overall …

Bill Gerber

No.

Christopher Harris - Wells Fargo Securities

… between the 170 and 185 range?

Bill Gerber

Oh, I see. Yeah, the NIM could be slightly higher prior, but I think we’ll see a little bit more in terms of product margin and the cash being invested. So I do think that we will see the NIM, I am sorry slightly increased.

Fred Tomczyk

Yeah, I mean the two things, there’s going to be the market. If the market goes up margin loans will drop, and if margin loan goes up in the mix and that should help the overall NIM.

Bill Gerber

Yeah.

Fred Tomczyk

And the other thing is we’ve got that $2 billion moving over from …

Bill Gerber

Seg cash.

Fred Tomczyk

… seg cash into the IDA which will also help.

Bill Gerber

Yeah.

Christopher Harris - Wells Fargo Securities

Okay, great. And then on the other revenue line item discussed in a little bit of detail here, you know down its kind of at a fairly low level, it sounds like prior periods maybe had some one-timers. But just kind of curious, with the strong growth you guys are getting in new accounts and new relationships, new assets, just wondering why we’re not seeing a little bit of stronger growth in the educational side of the business. Do you think its partly being driven by the cautiousness that the retail investors have and maybe as they start reengaging we’ll start seeing some growth there or is there something else really contributing to that?

Fred Tomczyk

Well, I mean, just in terms of new accounts and assets and whatnot, we’ve been using our education channel and a number of the programs to give education programs as incentives. That’s worked for us. So it doesn’t show up as education revenue, but it shows up in the general brokerage revenue. And we have been – making this shift for a period of time. We are less focused on growing education revenue as much as we are enquiring new accounts and new assets and growing our brokerage business. We use the education. I hesitate to even call it a business. We look it as a channel and we use the revenue from education business because people do appreciate it more and respect it more when there some fees involved and whether we wave them or discount them and they use it to help them to be better investors. That’s really what we’re trying to do with it. Its – the education revenue we looked at is to offset the cost of the education channel.

Christopher Harris - Wells Fargo Securities

Okay, guys. Thanks a lot.

Bill Gerber

Okay, Chris.

Operator

Our next question comes from Patrick O'Shaughnessy of Raymond James. Please go ahead.

Patrick O'Shaughnessy - Raymond James

Hey, good morning guys.

Bill Gerber

Hi, Patrick.

Patrick O'Shaughnessy - Raymond James

I think the discussion on the education revenue is interesting and it kind of brings me back to thinkorswim acquisition. So a few years, I think about three years now after that deal closed. How would you rate that acquisition, still do you feel like it’s a strong success in terms of trading activity in terms of education and the other things that have brought the TD Ameritrade?

Fred Tomczyk

That’s been - it’s worked really well for us. We’ve been extremely happy with that, just to give you a few pieces of data. We basically brought it in, we put down the three Tier platform what we’ve introduced trade architect. So now we have our standard website, Trade Architect and then we have thinkorswim, and that tiered strategy is working well for us. And we have been innovating at the top and driving down and retailizing some of the things that tossed us on to Trade Architect and in certain cases further on to our normal website. We've also been migrating plans up and that’s part of our growth and derivative trading.

Just to give you one statistic, we now have more legacy TD Ameritrade clients on the thinkorswim technology than we had legacy thinkorswim clients on thinkorswim technology. So its been sold pretty aggressively into our customer base, so its gone and our derivatives trading was maybe low-teens, three and half, four years ago, three years ago. Today it’s 35%, so it’s worked quite well for us and we've been very, very happy with that acquisition.

Patrick O'Shaughnessy - Raymond James

Okay, great. That’s very helpful. And then, I guess my follow-up question, you talked about how the clients are moving money into bonds. Do you feel like you have the trading tools, the capabilities to monetize that client interest and fixed income right now?

Fred Tomczyk

It’s less into bonds. Its much more if you watched the fund flow, whether it’s in the market or inside our customer base, there’s outflows out of equities, equity funds and into bond funds, its more about bond funds right now than it is bonds. And you have seen that in the market and we see that in our customer flows as well.

Patrick O'Shaughnessy - Raymond James

Okay, great. Thank you.

Operator

Our next question comes from Joel Jeffrey of KBW. Please go ahead.

Joel Jeffrey - KBW

Good morning, guys.

Fred Tomczyk

Hi, Joel.

Joel Jeffrey - KBW

I guess you mentioned that, you know part of the reason that the IDA yield win up was big. You did see RIAs move money out of cash and into the markets given the strong performance. Is that changed at all since the end of the quarter, how would RIAs think differently than sort of retail investors at this point?

Fred Tomczyk

And this is not an abnormal phenomenon. We would have expected this. The retail – historically, retail investors tend to wait to see the recovery and the uptick in the markets be real and so they missed a lot of the upside in the rally whereas advisors tend to buy into the rally’s and try to get in earlier and take advantage of it. We’ve seen this before, it’s nothing new. And the RIAs that’s why we keep the – sort of bond ladder there shorter and we keep more in floating because they move the money quicker out of cash and into the markets and our overall retail client base. And we saw that during the quarter as the market was up 12%. And the RIAs took their client cash and put it into the market and into the rally.

Joel Jeffrey - KBW

So just as a follow-up to that, I mean, if we were to get a pullback in the market, and you see RIAs sort of move money back into cash. What would be the impact on the yield on the IDA?

Fred Tomczyk

It would be probably a negative impact on the yield, but it probably helped with revenue.

Joel Jeffrey - KBW

So, overall it wouldn’t have much of an impact in terms of overall revenue?

Bill Gerber

Correct. That’s right.

Joel Jeffrey - KBW

Great. Thanks for taking my questions.

Fred Tomczyk

Okay, Joel.

Operator

Our next question comes from Mac Sykes of Gabelli & Company. Please go ahead.

Mac Sykes - Gabelli & Company

Good morning, gentlemen.

Fred Tomczyk

Hi, Mac.

Mac Sykes - Gabelli & Company

I have two questions. I apologize for my voice here. I have two questions to be answered I think in one response. All else equal in terms of macro factors, can we expect any change I think in retail behavior ahead of the U.S. election? And then secondly, without action in Washington, the Bush tax cuts are likely to expire in 2012. So how does the advisors, they can ask for direction input on how to position the client portfolios ahead of year-end and do you think this potential fiscal cliff could change investor savings habits in the longer term? Thanks.

Fred Tomczyk

Yeah, that’s a hard one to predict. I would say; right now the election is really not entered into their mind. I think it will start now that we’ve seen to be down to two players and we’re in election mode now and through the primaries, even though they’re not technically over I think people, the market and the news media is assuming its over.

Historically you would say that, in an election year you would expect more engagement in the market just because you got information. You’ve got change, you’ve got news and so it does have a tendency to cause some volatility in the market and some rotation of investing strategies. With respect to the expiration of tax cuts and changes like that, I think those are the same kinds of things that can cause investors, not necessarily get over the market but to adjust their investment strategies to basically, they may make a decision to be in one type of investment versus another more depending on their relative taxation of different options.

But I think that’s hard to predict right now, but if anything, if you ask me and I -- this is an educated guess right now and it is a guess is that, as we get into the latter part of the year in the election and expire the tax credits, where their tax rates I think that will just cause uncertainty and volatility in market which usually bodes well for trading. Thanks, Mac.

Operator

Our next question comes from Howard Chen of Credit Suisse. Please go ahead.

Howard Chen - Credit Suisse

Hi. Good morning, Fred. Good morning, Bill.

Fred Tomczyk

Hi, Howard.

Howard Chen - Credit Suisse

Hi. You continue to grow the net new assets at a great double-digit rate. Can you just speak to how you grade yourself on the quality assets you’re bringing in, are you satisfied and how is that evolving, three plus years into this Fred. Thanks.

Fred Tomczyk

Well, there is -- and I would say we’re quite happy with how the asset gatherings worked. We've had very good balance growth, you can see now that Howard that $452 billion of client assets, that’s double what it was three years ago. We’ve gathered in excess of $100 billion of new assets. Now when you go back to that people normally talk about quality, they talk about annuitize versus non-annuitized.

First point would be that if you look at our overall assets and you look at the revenue yield on what you would call annuitize versus non-annuitized, the yield on non-annuitized assets is actually quite strong for us. We have very strong yields there.

Second on annuitized assets, we do measure that internally. We do track it and we’ve been growing those rates well in excess of our annual organic growth rate, so we’ve been growing those as well; but we really don’t try to do one at the expense of the other, that well I understand people might like it as it has a higher PE and it’s more recurring in nature. The reality is if you do the math, it doesn’t work, it’s best just to continue to grow both. And we’ve been very focused on bringing those assets in, but also making sure there is much of them are as productive as they can and that we grow all sources of revenue that we can. And in the kind of environment we’re in, that’s the only way you’ll hold your earnings relatively flat in a phase of such low interest rates.

Howard Chen - Credit Suisse

Okay, thanks, Fred. That’s interesting. And then, Bill, there is a lot of dynamics impacting the IDA balances, new money coming into the firm, the impact of the transfers you’re doing and then client re-engagement, I know you touched a bit of this in your prepared remarks, but could you just breakout some of the ebb and flow of – like those items just to give us a better feel for that?

Bill Gerber

There are a lot of moving part here, you’re right about that. If we had in the quarter the biggest thing that happened was the reduction in float, two pieces there, one we extended a lot more and two which was planned and two, the institutional money is, as we talked earlier is more invested. So that reduced the float quite a bit. Obviously, new money is coming in at the same time and so it’s just it is an approval and the money keeps going. We would expect for the balance of the year excluding the $2 billion that’s going to come in from seg cash as I mentioned, we’d expect just normal growth in there and we’ll see how the institutional moneys react if they’re going to come out of the market and go back into IDA or if they’re going to stay in the markets, but those are probably the biggest drivers of what is going to move yield. All of being equal, new money comes in, as I mentioned in my remarks, the overall yield will come down as the percentage will come down, but we do expect our income to go up, some.

Howard Chen - Credit Suisse

Just a quick follow-up, Bill, if I may, just could you wrap a bit more number around just the new money into firm in the IDA and then in terms of the institutional client-base, are they now – where are they as a percentage of cash relative to where they were?

Bill Gerber

The overall -- let me put it in different way, the overall institutional money right now is 22% of the portfolio. So, that’s down from a 23% to 27%. So -- and the float balances right now are $6 billion. So it’s -- oh, 6%, sorry, 6% of the overall portfolio. And let’s say it’s probably -- that’s probably split by close to 50/50 retail institutional.

Howard Chen - Credit Suisse

Okay. Thanks so much.

Bill Gerber

Okay, Howard.

Operator

Our next question comes from Alex Kramm of UBS. Please go ahead.

Alex Kramm - UBS

Nice work on my name there. Anyways, good morning. Just to touch the -- it’s a follow-up on Howard’s and I apologize if I missed that, but you did just briefly say you extended it always more, can you just say exactly where you were, I remember in the fall, you said you wanted to extend a lot of the duration, then the environment obviously did not work in your favor and I think you stopped, that’s like $5 billion to $6 billion left, did you -- how much more did you actually do or how much is left and what does it take in terms of the environment for you to get more aggressive?

Bill Gerber

Yeah, the RIA balances are still not done, in terms we didn’t extend anymore of those. So we still have about $3 billion left to get to that, the 40% that we talked about in the past of the institutional monies that were more like retail. So that actually, none of that has moved yet this quarter. So we still have that to go. But the other extensions were, the normal extension as money was maturing we were able to get that back out in the yield curve more quickly. That was part of what happened in the quarter.

Alex Kramm - UBS

Okay, great. And then, coming back to may be ad spending more broadly speaking, I think when we look out and look at some of the competition it just appears like you hear more about the giving away -- free of trading and other things to get customers into the door. So, just wondering if you get the same sense that the competition to planned acquisition is just heating up a little bit and that might increase your ad spend little bit more or keep it at higher levels, and obviously you’re growing new accounts pretty nicely as it doesn’t seem like it’s hurting you, but just may be a general comment about where you’re relative to your competition? Thank you.

Fred Tomczyk

I – we’ve commented on this in the past, that we’ve seen everybody increased their advertising spending and the industry has definitely moved to much more aggressive promotional offers. I remind you that I mean it is -- this year is more aggressive than we’ve seen -- I’ve seen since I’ve been here, but it is retirement season, and so I wouldn’t assume that what goes on during the retirement season happens off-retirement season. So it tends to have a seasonal pattern to us. This tends to be the quarter where the ad spending is always the highest, and we see the most aggressive promotions and offers.

We’ve done and we try to be very discipline when it starts to get from our way of thinking a little too aggressive, we just – we don’t go there, we try to do other things that tended to work for us.

Bill Gerber

And Alex I’d expect that we’re going to be looking at the lower half of the range for -- as I said, in advertising spend for the year, so which would tell you that maybe we are going to be between 50 and 60 roughly each quarter for the next two quarters.

Alex Kramm - UBS

All right. It sounds good, thank you.

Bill Gerber

Okay, Alex.

Operator

Our next question comes from Alex Blostein of Goldman Sachs. Please go ahead.

Alexander Blostein - Goldman Sachs Group, Inc

Thanks, guys. Good morning. Just one more follow-up on the IDA block, I guess could you talk about the overall duration of the portfolio today and then outside of the $2 billion that you’ll transfer from the broker dealer, is there any more kind of duration extension that we could take because if you look at the guidance, 130 to 140, it feels like even the five-year swap curve right now has like a 120 or so yield, so just help us understand a little better current duration and where do you see the lower duration going over the next couple of years?

Fred Tomczyk

Well, right now, Alex we’re about 2.8 years in the overall portfolio. We’ve always said we wanted to be between two and three years. So we’re going to stay in that range probably for a while. I’d expect the extensions and to your point, as money is being turned out on the curve we’d expect that it will continue to compress rate for the next indefinite period, but all in for the year, we’d expect the total rate to be between -- in the 135 to 140.

Alexander Blostein - Goldman Sachs Group, Inc

Got you. Thanks. And then just a quick follow-up on the margin balances, you guys talked about the trading dynamics and so far enable, could you just talk a little bit about how the margin balances look so far in the quarter and if you’ve seen any sign of risk appetite for maybe some of the more actively traded investors in April?

Fred Tomczyk

Actually they were pretty stable from the -- end of the quarter, up slightly, but -- so there has been little bit more risk and I think again I would -- I think this is more from the skilled investors than the overall investors.

Alexander Blostein - Goldman Sachs Group, Inc

Okay, thanks.

Fred Tomczyk

Okay.

Operator

Our next question comes from Michael Carrier of Deutsche Bank. Please go ahead.

Michael Carrier - Deutsche Bank

Thanks, guys. First is a question on expenses, so in terms of the outlook, you’re saying flat-to-down from the current run rate, I guess if we do get into an environment where just during the summer you say we get more seasonality because of retail not being as engaged, when we think about the efficiencies that you’re generating from project lean and then that being reinvested in the business, where are some areas that you could pullback or based on the net new asset growth that you’re, is there less flexibility or less area that you would really want to, because you continue to organically grow the business?

Fred Tomczyk

Yeah, I mean, you made a comment that we reinvested in the business. Well, that’s not automatic. I think the first thing is that we’ve been growing at pretty strong rate. So, we want to keep the growth up, improve the client experience and be able to handle that growth without adding much expense. That’s really part of our core strategy. If we have additional savings then we sit down and make a decision whether we invest that or allocate that to another area that maybe growing faster or we see an opportunity to grow faster, and if we can’t – if we don’t see that then we will take it to the bottom line.

And we think we’re pretty good at managing that. I think the main thing is to handle the extra growth and also when we make investments in the future which we make on a regular basis and for the last three years as we’ve transitioned to the asset gathering strategy, we’ve been making those investments and they have been incremental to expense. We are trying to be much more disciplined now that as we make those continued investments in the future that we find ways to self-finance them as opposed to look at them as incremental.

Michael Carrier - Deutsche Bank

Okay, thanks. It’s helpful. And then just as a follow-up – just on the margin balances, so the yield on those products, you’re seeing across the peers some pressure there on the commission side. Now there are other things going on there, but not as much pressure. So, when you look at the industry trends, is there more pressure just throughout the industry on margin pricing versus commissions and is there anything more recent that really stepped that up just because it seems like the trend has been a little bit more severe recently and it’s not you guys; it’s throughout the industry?

Bill Gerber

Yeah. I don’t think that there has been any incremental pressure in terms of margin rates. I do think that what you’re seeing is people who are the more skilled investors who do have negotiated rates are the predominant users of margin these days. So, that’s I think really what’s going on, but I think there hasn’t been an unusual push or shift or – for negotiated rates from clients. It’s just what we are seeing is a mix shift between the everyday investor, if you will and the more skilled investors.

Michael Carrier - Deutsche Bank

Okay. Got it. Thanks a lot.

Bill Gerber

Okay.

Operator

Our next question comes from Keith Murray of Nomura. Please go ahead.

Keith Murray - Nomura Securities International, Inc

Good morning, guys.

Bill Gerber

Hi, Keith.

Keith Murray - Nomura Securities International, Inc

Just a question on the economics of the RIA business, as investors use more pass-through products with lower fees, competition remains intense. Can you just talk about sort of the return on assets of that business now maybe versus three, four years ago? Have you seen a change?

Fred Tomczyk

Yes, you have. I think you’ve seen it across both our retail and institutional businesses. We’ve always said that the retail business if everybody defines return differently, but if you take it, whether you want to take revenue or pre-tax, the reality is the retail business has a much higher return than the institutional business as a percentage of assets, it’s just – it’s significantly higher.

Having said that, what’s driven things down for the most part here is the industry makes a lot of money on client cash and lot of that economics is basically come away. We’ve held in pretty well on the retail side by using our client cash strategy and putting them into the IDA. But on the institutional side, because we use the five to seven-year ladder there, but if you come into the institutional side, we use the two-year ladder more in flow. So, while it’s better than money market funds, it’s not that much better, and so they have been hit pretty hard on the cash profits.

Unlike the retail side, you don’t have as many – you don’t have as much trading, you don’t have as much marginal loans and so you tend to have more trailing revenue, which is just lower margin. So, the return on assets in the institutional side has been hit harder than on the retail side on a relative [basis].

Keith Murray - Nomura Securities International, Inc

Okay. Just a follow-up, in the past you’ve talked about looking at scale deals or product deals as acquisitions. I’m just curious are you looking your product lineup today, are there areas that you look at it and say, well, we need to get bigger here and which are those areas?

Fred Tomczyk

I think on the trading side of the business, we’re pretty comfortable with our product range here. I don’t see us – we haven’t seen in quite a while anything on the trading side from a capability point of view that we think we either can’t build or don’t already have or have built that we want or need. So, on that side, it’s much more about consolidation, cost synergies, and economics and just establishing your position in the industry.

If you look at the other side on the long-term investor, we really – again, we haven’t seen much that would make a lot of interest to what we looked at or thought about asset management, we just don’t see that making sense for us. We think we capture most of the economics of retail money management versus institutional money management to some of programs that we run like Amerivest and whatnot. And so – we really don’t see the advantage to doing that and we – the open architecture strategies worked quite well for us. There is adjacent businesses that we continue to look at, but we just haven’t seen anything that is really compelling to us at this point.

Keith Murray - Nomura Securities International, Inc

Thank you.

Operator

I’m showing no further questions at this time. I’d like to turn the conference back over to Mr. Fred Tomczyk for any closing remarks.

Fred Tomczyk

Well, thank you for joining us today. As you can see for the quarter, we were pretty much on street expectations. We continue to deliver double-digit asset gathering and we’re well on our way to what we hope will be the fourth year in a row of double-digit asset gathering and that’s despite what I’d consider to be a cautious retail investor and we will hope to see you next quarter. Take care.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may all disconnect and have a wonderful day.

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