TD AMERITRADE Holding Corporation (AMTD)
F4Q07 Earnings Call
October 23, 2007 9:00 am ET
Executives
Joe Moglia - CEO
Bill Gerber - CFO
Bill Murray – IR
Analysts
Prashant Bhatia - Citigroup
Howard Chen - Credit Suisse
Matthew Fischer - Deutsche Bank
Mike Vinciquerra - BMO Capital Markets
Rich Repetto - Sandler O'Neill
Matt Snowling - FBR
Michael Hecht - Banc of America Securities
Analyst for Roger Freeman - Lehman Brothers
Mike Carrier - UBS
Operator
Welcome to the TD AMERITRADE fourth quarter fiscal 2007 earnings results conference call. This call is being recorded. With us today are Chief Executive Officer Joe Moglia; Chief Financial Officer Bill Gerber; and Managing Director of Investor Relations, Communications and Public Affairs, Mr. Bill Murray.
At this time, I would like to turn the call over to Mr. Murray. Please go ahead, sir.
Bill Murray
Thank you, operator. Good morning, everyone and welcome to the TD AMERITRADE September quarter and full year ’07 earnings call. If you have not seen our press release yet, you can find it on our website at AMTD.com along with a copy of today's presentation.
Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Federal securities laws. These statements include risks, uncertainties and assumptions that may cause actual results to differ materially from those anticipated.
You're advised to review the risk factors contained in our most recent annual report on Form 10-K and quarterly report 10-Q for a description of risks, uncertainties and assumptions related to the forward-looking statements.
Management will be discussing some non-GAAP financial measures such as operating margins, EBITDA and liquid assets. You can find a reconciliation of these financial measures to the most comparable GAAP financial measures in the slide presentation and on our website at AMTD.com.
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.
At this point, I would like to turn the call over to TD AMERITRADE CEO Joe Moglia, who will be followed by CFO Bill Gerber.
Joe Moglia
Thank you very much, Bill. Good morning, everybody. Welcome to the call. 2007 was our fifth record year in a row. We were able to achieve a 35% compounded annual growth rate for our shareholders over that time period.
I'm going to ask you to bear with me for a couple of minutes. I promise I won't be long-winded on this, but I think we need to talk a little bit about probably the one thing that I have said the most over the span of the last two years plus. That is, we've talked again and again and again about our 2006 to 2008 philosophy.
In the summer of 2005, we announced that we were going to purchase TD Waterhouse. There were some excellent economic reasons for that but there were also some very important strategic reasons for that, which would advance what we were trying to accomplish pretty significantly; probably by a number of years. We said back then that every decision we were going to make -- and this is starting in 2005 -- was geared around laying a foundation, coming out of 2007 and 2008 so we could transition from a firm that has dominantly been transaction-oriented to one that would be far more of an asset gatherer.
In order to do that, we had to roll out our client segmentation strategy. If you recall in the long-term investor space, a year ago we didn't even have an offering. Today, we have cash management, we've got fixed income, a much better mutual fund platform, we've improved our portfolio allocation tool in Amerivest and we started to roll out products like TDAX. That long-term investor offering, just by itself, we believe then will also help us in the RIA segment as well as having already added scale to that segment.
Then in the active trader space, we regained our #1 position and we've got a better platform than we had a couple years ago, better overall risk management tools, and a better overall options platform.
We said back then if we were going to execute this plan, we were proud of the fact that we were an excellent marketing and service organization, but we were going to have to move to a marketing and a service and a sales organization. There is no question that this was an incredibly challenging integration for us, but we said we would deliver that entire integration in 18 months -- we did that. Back in 2005, we said the economic value from the acquisition would be around $578 million; in effect, we have delivered over $700 million. We said back then that we would ultimately get our pre-tax margins back over 50% for 2008. We have done that and we will do that for 2008.
We talked then about the relationship that we had with TD and we said that we actually from being a bank without actually being a bank. I think over the entire time period, we've been incredibly diligent with how we manage our balance sheet with regard to absolute transparency to the marketplace and very sensitive to what the risk/reward decisions we were making were.
Also, while we're in the middle of the integration, it was nice to get some recognition by Barron’s and Forbes.
Now aside from all that, a couple of months ago we announced our ninth acquisition over the span of the last five years. Once again, we will not hesitate to do an acquisition that we believe ultimately winds up making sense for us.
Now, why don't we focus on the numbers for 2007. In 2007 our earnings hit $1.06. If you exclude the one-time gain we took in 2006, our earnings are $1.06 and if you exclude the one-time gain we took in 2006, we are up 22% year over year. Our net revenues come in at a record, over $2.1 billion; 61% [of those are active base]. Our pre-tax income also a record, over $1 billion with a pre-tax margin for the year of 48%. Net income came in at a record $646 million; EBITDA, a record $1.2 billion and our ROE for the year is 34%.
If you look at the actual operating metrics for the year, average trades per day came in at a record 253,000. Now so far, we've seen incredible activity for October. We are averaging, as of last Friday, 326,000 trades a day for the month of October so far.
Average investable assets for '07, a record $30 billion. Net interest margins, around 3-5/8%. Client assets came in at a record $303 billion. Cash and money market funds came in at a record $45 billion. New accounts, about 554,000; one comment on that and that is if you look at the TD AMERITRADE brand and look at what we did in 2007 relative to the AMERITRADE brand or the TD Waterhouse brand prior to that, we like to say we've got 1+1= something greater than 2; our new accounts are up 30% year over year, we feel good about that.
Net new accounts, we give you two numbers here, the 341,000 and the 189,000. If you recall in the March quarter, there were 152,000 inactive accounts at TD Waterhouse that were part of the purchase that we had written off. So depending on what number you feel comfortable with, feel free to use whichever you like.
Qualified accounts are 3.272 million. It seems for the last three or four quarters, every time I have referenced the qualified accounts number, I also then follow up with “I don't like that number.” I still don't like that number, but frankly, as we talk about that more as a management team, I'm not quite sure either and we're not quite sure either that the qualified accounts is a good measure of whether or not we're being successful, or not being successful.
Here's what we do know. We do know that if we're going to get our organic growth and we’re going to grow our share of wallet and we are going to become more of an asset gatherer in the marketplace, we've got to be able to do a good job with our assets; that, we know.
If you look at our market share information for 2007, we continue to be the #1 broker dealer with regard to equity transactions with retail online in the entire world. We increased our market share from about 39% to about 40% over the span of the year. Gross new accounts, we increased market share there. Client assets, we were off over the span of the year.
Now if you recall what I said a minute ago – and all of you were well aware of this – a year ago we didn't even have a long-term investor offering. Today we do have one. We think that helps us with our retail clients with regard to share of wallet and we think it helps us in the RIA space as well. We feel pretty good about where we are again, coming out of 2007 and going into 2008, and we know client assets are going to be a real focus in 2008 and going forward.
When you consider the challenges that we've been faced with over the span of the last year plus, frankly, I've got to tell you that I feel pretty good about our overall market share numbers.
On the last call, there was an incredible amount of questions that were specifically associated with the $100 million incremental investments we were going to make and what we thought would be our organic growth. What I want to do is give you greater clarity on that topic today, but this is not going to be something that we are going to break out in the future.
To reiterate where we were, we were going to make incremental investments in the areas of our business that we believed would generate greater growth, retention and yield. These were investments that were supposed to help us roll out and actually deliver on our asset gathering strategy. There was $100 million earmarked for this. If you remember the process, each of the individual business leaders had the opportunity to make what decisions they wanted to make. They did not have to go to committee; they did not have to go to a consultant. If they felt good about it they came to me and we talked about it. If they liked it and I liked it, we approved it and we moved forward.
We spent around $20 million in this last quarter, and you should assume the entire $100 million is absolutely earmarked for 2008. This slide is a breakdown of where we actually spent that money, the bulk of which was to bring in people. We actually brought in an incremental 100 people in sales, another 15 people or so were brought in to help us in the sales area with regards to the RIA. We brought in another 120 people that are more sales-oriented that will help us with regard to our call center.
We spent $18 million on professional services. That's contracted support in general in the development of new products and functionalities across the three client segments. Things like planning tools, portfolio tools; in effect, how do we enhance our virtual client experience? Then we've got $22 million, about half of that is D&A and the rest would be internally developed products and functionality enhancements.
Now, that's everything on that $100 million. I would ask you to keep in mind – and we said this last time -- that we at TD AMERITRADE make investment or spending decisions, literally every day. We are incredibly disciplined in the management of those dollars and that's part of the reason why we've had 50% plus pre-tax margins. We will continue to do that.
Now as far as 2008 goes, we gave you some color on this on the last call. We expect the midpoint of our range to be about $1.27. That's up 20% from where we are in 2007. Trades per day, we're actually forecasting up about 2%. As you know traditionally, we tend to keep those about flat from year to year. I also think with what is going on with regard to the economic environment this is not the time to be aggressive with forecasting trades.
But we are being aggressive, I believe, with regard to our asset-based balances. We are forecasting those to be up about 16%. Now, that 16% equates to around $0.14 in the differential from where we were in 2007 -- the $1.06 -- to the midpoint of our range for 2008, $1.27. We think that -- for you as well as for us internally -- helps us focus on what we're trying to do with regard to asset gathering, organic growth and overall share of wallet.
Now, how should you look at us with regard to how we're doing?
Frankly, I think it's pretty simple and I think it's pretty transparent. I know that most of you know exactly how you should look at us. But it is something that gets asked relatively often, so we thought we would just take a minute and walk you through this.
The key metrics and key drivers for 2008 basically get broken down in two categories. You've got our transaction-based stuff with our trades per day, payment forward of flow, et cetera, and then asset based. The asset-based stuff is our interest earning assets; our margins; securities lending; our MMDA balances, or our sweep; and fee-based investment product balances: mutual funds, money market funds, concepts like Amerivest, et cetera.
Now, all of these are on our outlook and I think the bottom line, if we do a good job with these drivers, we will do a good job in 2008 and beyond.
With that, let me turn it over for more clarity around the quarter -- and in general -- to Bill.
Bill Gerber
Thanks, Joe. We've shattered all of our old earnings records this quarter, coming in at $0.33 per share, which is a 65% increase over what we earned in the same quarter last year and 27% higher than the second-best quarter in our history. As Joe mentioned earlier, we discuss all earnings, excluding investment gains.
We continue to deliver outstanding pre-tax margins, finishing this quarter at 54%. Our return on equity for the quarter was 39%, which is another record. Our EBITDA was a record $359 million or 62% of revenues, evidencing our cash generation abilities. Our revenue stream remains stable as our asset-based revenues accounted for approximately 60% of net revenues.
Let's now turn to the actual September results as they compare to the same quarter last year, on slide 11. Our net revenue was a record $575 million, up $86 million or 18% from last year. Transaction revenue of $226 million increased $61 million, almost entirely due to a boost in our trading activity of 74,000 trades per day, a whopping 36% increase. Trading activity was 278,000 trades per day or a 4.4% activity rate, versus last year's activity rate of 3.3%, or 204,000 trades per day. Our average commission per trade for the quarter came in at $13 even, up $0.11 from 2006, mostly due to increases in our option mix and payment for order flow.
Please note that we have made some reclassifications in the revenue section of our income statement, to better reflect our transaction and asset-based revenues. As a result, our commissions per trade numbers for prior periods have changed slightly.
Asset-based revenue of $342 million increased $25 million, primarily due to an increase in average balances of nearly $17 billion. Investable asset revenue was up $12 million on an increase in balances of over $3 billion, offset by a 31 basis point reduction in the net interest margin. This was primarily due to an increase in our stock loan conduit business, which earns approximately 15 to 20 basis points.
We also saw a $13 million increase in investment product fees. This is a new line item that includes money market funds, other mutual funds, and other fees we earn on assets through programs like Advisor Direct and Amerivest. These assets grew by $13 billion year over year.
Note that the money market funds and other mutual funds were historically reported as its own line item, and other fees had been included in other revenue. See the reconciliation at the bottom of the outlook statement for more details.
Expenses excluding advertising year over year are down $21 million to $234 million, as a result of the elimination of duplicate costs from the clearing conversion. This is slightly higher than our outlook midpoint for the quarter, as a result of the higher incentive compensation due to record results.
We also spent approximately $30 million in advertising this quarter, a reduction of $5 million from last year, and this was in line with our outlook.
Lastly, our tax rate came in at 35.6% this quarter, primarily as a result of a reversal of approximately $7.5 million of reserves for uncertain tax positions, as the statute of limitations expired during the quarter.
Now let's turn to liquid assets for the quarter. We continue to exhibit strength as a cash generator, which allows us to be flexible in making financial decisions that best impact the firm. We continue to hold liquid assets at a level that's a little higher than normal in preparation for our $225 million Fiserv acquisition, which we expect to close by the end of the calendar year.
We started the quarter at $431 million in liquid assets. We earned $200 million in net income, and had $21 million in depreciation and amortization. We are using working capital, regulatory capital and CapEx of approximately $23 million. We made $6 million in mandatory debt payments and we used $30 million to buy back 2 million shares of our stock, leaving us with $593 million in liquid assets.
On slide 13, let's look at the liquid assets for the fiscal year. Important to note here is that over the last 12 months, we have used 75% of our net income for share repurchases and debt payments. We started the year with $499 million in liquid assets, earned $646 million in net income, and had $81 million in D&A. We have used working capital, regulatory capital and CapEx of $150 million; made $225 million in mandatory and discretionary debt payments -- $200 million was discretionary, and $25 million was mandatory. We used $258 million to buy back 15 million shares of our stock.
As we have discussed in the past, we can use our cash in several ways, including debt repayment, stock buyback, acquisitions like Fiserv, or to fund additional organic growth. As always, we will continue to review our capital structure with our board, to determine the optimal uses of our free cash flow. We have great financial flexibility and will ensure that we are best utilizing our cash.
Now let's go to our 2008 guidance. As we suggested on our last call, our outlook midpoint for 2008 comes in at $1.27; a 20% increase year over year. Midpoint revenues are up about $160 million, with approximately 95% of the revenue increase coming from asset-based revenue.
We start with $1.06 we earn in 2007; we add $0.02 in transaction-based revenues, as a result of a slight increase in trades per day year over year to 258,000 trades per day, and three additional trading days. We also add $0.15 in asset-based revenues, primarily as a result of the increases in the underlying balances of our asset drivers by $13 billion. We add $0.07 as a result of a 6% decrease in expenses, thanks to the synergies realized through the TD Waterhouse integration. Finally, we expect a $0.03 reduction primarily for a higher effective tax rate in 2008 versus 2007. As a result, we arrive at the $1.27 midpoint.
An important aspect to note here is that all of our results are driven by a conservative balance sheet. We take prudent risk, which is a hallmark of our business model.
Just a quick comment about our outlook statement. We have streamlined the outlook statement for 2008. You can find a copy of the report at AMTD.com. The main changes are:
We're collapsing the detailed items that make up net interest revenue, so as to focus on those line items that truly matter.
Collapsing our expenses, excluding advertising, into one line item, as our expenses should be in a fairly tight range for 2008.
We created a new category, which I mentioned earlier called investment product fees. The investment product fees, again, include money market funds, other mutual funds, and other fees we earn on programs like Advisor Direct and Amerivest. We feel that this outlook structure better reflects how we manage and think about the company.
Let's go to slide 15 and talk briefly about some of the sensitivities. If we do an additional 10,000 trades per day annually, we will make $0.03 per share. For every 100,000 new accounts that we would bring in, we would make $0.04 per share annually. For every incremental $1 billion in investable assets, we would also make $0.04 annually. For every $2 billion in investment product balances, we would make $0.01. In the near term, we see virtually no short-term impact from a Fed move of 25 basis points.
On slide 16, as I mentioned earlier, we're forecasting that approximately 95% of our revenue growth in 2008 will come from asset-based revenues. This is just another step in the evolution we've seen at TD AMERITRADE, spanning the last five years. During that time, we've seen our business focus more on stable revenues and less on those that are more market dependent. Looking at this slide, you can see exactly how far we've come.
In 2003 we had revenues of about $700 million and a return on equity of 12%; 77% of our revenues were transaction-based, meaning only 23% of our revenues were asset-based. Clearly, trades and commissions were the bread and butter of the company. However, in 2008 -- a year in which we're forecasting $2.3 billion of revenues and a return on equity of 31% -- 63% of our revenues will come from asset-based revenues. As we've said in the past, this transition makes our revenue stream more stable and less susceptible to fluctuations in the market.
In summary, as Joe said, 2007 was a record year for the company; our fifth record in a row. We had multiple, multiple records of which we are very proud. Additionally, we completed the largest integration in our industry and clearly beat our synergy targets. Also in 2007, we launched our client segmentation strategy, which is integral to our future growth.
We're forecasting strong EPS growth for 2008, up 20% over the results we announced today, with pre-tax margins of 54% and a return on equity of 31%. We're focused on delivering organic growth, attracting more assets, and earning greater yields from our relationships.
Finally, we are forecasting $1.4 billion in EBITDA in 2008, which would be another record. As you know, we continue to demonstrate our ability to be a strong cash generator and will utilize our cash to buy back our stock, pay down our debt, or grow our company.
With that, I'll now turn the call over to the operator for Q&A.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Prashant Bhatia - Citigroup.
Prashant Bhatia - Citigroup
Joe, you talked about the move to the sales organization. I know it's still early days, but are you seeing any type of different behavior from the legacy AMERITRADE customer or the legacy TD customer that shows it is working early on?
Joe Moglia
Prashant, I think right now based in terms of what we've seen, I would say that we feel good that we're starting to get some reasonable traction on this. We have not yet really moved to a sales model in the call center, but we've certainly been able to be more aggressive with regard to our salesforce, whether they're in the branches themselves or our virtual branch in Omaha and in Fort Worth. So we're starting to see some progress. I would suggest though that we haven't really started to see legitimate traction there. I think that's something that we need to expect of ourselves in 2008.
So we're starting to see some progress; I'd say not great traction yet.
Prashant Bhatia - Citigroup
On the investment product side, we're seeing some pretty strong asset growth numbers there. I'm just wondering if you could give us a feel for how much of that is coming from mutual funds versus money market funds?
Joe Moglia
Prashant, we normally don't break that out, but we're actually relatively pleased to see progress there across the board.
Operator
Your next question comes from Howard Chen - Credit Suisse.
Howard Chen - Credit Suisse
Joe, I'm curious what management's outlook is on the consumer credit environment? I realize you aren't directly impacted by losses, per sae, but organically your business is clearly linked to the health of the consumer. From an acquisition standpoint, it would appear there are assets out there where valuations have been impaired by the current deterioration in the credit market.
Joe Moglia
Howard, 20% of the world economy is the United States; 60% of the U.S. economy is the consumer. There is no doubt in my mind that the consumer today has some anxiety about what is going on, in general, with regard to the real estate market and what's going on with the credit cycle that we happen to be in.
That, plus rising energy prices, I think at some point does have to have an impact on the consumer. So I'm sensitive to that as far as the economy goes and as far as the market goes, but it's our job to run our business through good times and bad, so we've got to be prepared for that.
With regard to assets in the marketplace that are certainly cheaper today than what they had been; eventually, at least as far as we're concerned, when we look at all those things, we look at those through the same eyes that we always have. There's a risk/reward perspective associated with anything that we do and at the end of the day, if we're looking at specific acquisitions, if we believe that makes sense for us long term, we'll be aggressive at it.
The fact that there happen to be assets in the marketplace that are going through a difficult time now doesn't change our philosophy in terms of how we approach it.
Howard Chen - Credit Suisse
In the past six months, a few of your major competitors have stepped up efforts on the high yield checking accounts. From your prepared remarks, it seems like you're pretty pleased with the way TD AMERITRADE's market share is trending. Any evolution of thinking here, in terms of tapping into the liability side of the consumer balance sheet?
Joe Moglia
That's something on a regular basis we re-evaluate, Howard, but we have not made that decision today, no.
Howard Chen - Credit Suisse
In the slides, you mentioned a 25 basis point Fed move would have a non-material impact in earnings. What are you assuming in terms of the shape of the yield curve if that happens? Are you assuming any increase in DARTS if the Fed moves?
Bill Gerber
Normally, there is an increase in DARTS historically when the Fed moves, but usually that is over the short term. We would assume that right now the curve would just move parallel, so everything would move.
Howard Chen - Credit Suisse
So no change in DARTS and parallel shift in the yield curve is what you are talking about?
Bill Gerber
That's right.
Operator
Our next question comes from Matthew Fischer - Deutsche Bank.
Matthew Fischer - Deutsche Bank
On qualified accounts, if you could maybe just provide a bit of clarity? What percent of revenue is generated from the qualified accounts and what's the dynamic there? You had 59,000 in new accounts during the quarter, but qualified accounts were roughly flat. Could you give that color?
Joe Moglia
In general, profitability of revenues generated from our qualified accounts is around 50%.
Qualified accounts are 50% of our numbers and that accounts for about 90% of our overall profitability in revenues.
Keep in mind that the line of demarcation for qualified accounts is $2,000. So in effect, while you may be opening more accounts, you may be bringing in more assets, while all those things may be happening, the actual amount of the individual accounts could easily go up and down with regard to what is going on with the market and whether or not people are transferring money in and out.
As I mentioned earlier, I certainly over the span of the last four quarters would have liked to have the qualified accounts number move up. I'm pleased with the progress we've seen and I know what we need to focus on going forward. If we are effective in those metrics that we had talked about and we outlined, and qualified accounts don't move significantly, we could still be very, very, very successful. So we're not sure to what extent that's an accurate metric or indication in terms of whether or not we're getting the job done as far as asset gathering goes.
Matthew Fischer - Deutsche Bank
Moving on to asset gathering, can you give us any color in terms of organic growth during the quarter? Net new assets?
Joe Moglia
No, not as far as net new assets go.
Matthew Fischer - Deutsche Bank
Were they positive?
Joe Moglia
Yes, they were positive.
Operator
Your next question comes from Mike Vinciquerra - BMO Capital Markets.
Mike Vinciquerra - BMO Capital Markets
On the Fiserv acquisition, I think when you originally announced that, you were going to close within four to six months which I think would have put it at the end of November. Is it just slow in terms of some of the approvals you need to get that business closed?
Joe Moglia
Yes, Mike.
Mike Vinciquerra - BMO Capital Markets
So by the end of the year, that should be in the fold?
Joe Moglia
We expect it to be.
Mike Vinciquerra - BMO Capital Markets
What was the impact, remind us again, on your 2008 outlook coming from that business?
Joe Moglia
We didn't build anything into that.
Mike Vinciquerra - BMO Capital Markets
I want to focus on the options side. Would you mind sharing with us what the option percentage of trades were during the quarter that was driving the higher commission?
Joe Moglia
It's about 11%.
Mike Vinciquerra - BMO Capital Markets
I presume when you talk about the commission rate being higher and payment order flow being higher, both of those related to option trading?
Joe Moglia
Yes.
Mike Vinciquerra - BMO Capital Markets
Finally the Market Gear acquisition from a couple of weeks ago, sounds like a pretty interesting tuck-in that should give you much better tools to offer your clients there. Can you talk a little bit about what that brings to the table?
Joe Moglia
Well, what we did was we bought the intellectual property, in effect, from Market Gear that would enhance our overall options platform. I think for the more aggressive and the more sophisticated option investors, it gives them greater sophistication, greater education, et cetera.
So I think as long as we are going to focus on the active trader -- which I don't frankly ever expect us not to do that -- then the option business has to be a critical component of that and it's something we are always looking at.
Mike Vinciquerra - BMO Capital Markets
When you wrap all this together then and you look at your commission rates going forward, I know in the outlook you've got it essentially flat for all of 2008. Is there some reason to be a little optimistic that as this percentage grows and then you add new tools like Market Gear brings to the table, that percentage could continue to grow and you could also see your average commission rate grow? Or, are there some offsetting factors?
Joe Moglia
I think that's fair, Mike.
Bill Gerber
I would agree with that.
Operator
Your next question comes from Rich Repetto - Sandler O'Neill.
Rich Repetto - Sandler O’Neill
A question for you, Bill. Interest rates, you said what would happen, that no effect with a 25 basis point move. How big of a move does it take to start impacting the net interest line materially?
Bill Gerber
Materially, certainly going towards 75 to 100 would probably start moving the number pretty good, but it really depends upon multiple factors, as you know, including the shape of the yield curve, including the competitive factors and what our competitors are doing, et cetera.
We look at all those things and it's not quite as easy as just saying 100 basis point move is going to have a major effect, but the margin compression would start kicking in, there's no doubt.
Rich Repetto - Sandler O’Neill
In the last Q, at least from the fiscal third quarter, it said something like a 100 basis point move would be $39 million. Is that probably your best guess? Again, it isn't all that simple, I agree.
Bill Gerber
Yes. That would be about $0.04 a share.
Rich Repetto - Sandler O’Neill
Joe, the DARTS up 23% in October month-to-date, I think a record level, 326. From your vantage point, can you talk about retail investor engagement and what your view is given there's certainly been a heightened level of activity here?
Joe Moglia
First, I think when the market talks about volatility they are often talking about the market going down. I think when we in the market talk about volatility we talk about market movements up and down. That type of volatility that we've seen over the span of the last month or so would certainly keep the individual investor involved.
With regard to the Fed having eased 50 basis points, I think they absolutely like that. That was one of the things that our clients had been telling us in prior quarters that, when is the Fed going to make a move? The fact that the Fed did that, I think they felt pretty good about that.
When you look at the individual sectors that they seem to have interest in, they like international, even with all the volatility; as well as technology; and they're invested in energy. On the negative side of the equation, they're certainly not crazy about what's going on now in the financial sector or in homebuilders in general.
I think the volatility in the market coupled with the Fed has made the individual investor relatively comfortable.
Having said all of that, do not underestimate what I was saying before about the pressure that might exist with regard to the economy a quarter or two down the road. If indeed that starts to happen, you'll see the individual investor back off. Right now they are certainly involved.
Rich Repetto - Sandler O’Neill
Just trying to get one layer below that, the increased activity, is it coming more from the active traders or accounts returning back to the market that really didn't trade before? Do you even have that info?
Joe Moglia
Rich, we do. It's absolutely across the board. People that are relatively active, frankly, are a little bit more active; but you are seeing people that are doing a small handful of trades a year do a couple more. So it's across the board.
Rich Repetto - Sandler O’Neill
On the consolidation front, certainly the rumors have picked up in the marketplace. You've always said you would do the deal that was in the best interest of shareholders. Has the opportunity set, the people that you're talking to, widened over the past quarter or six months?
Joe Moglia
Rich, are you talking about something specific? Because if you're talking about something specific, I can't talk about that.
If you're talk about though, literally, our approach, honest to God, it is the exact same thing. We'll evaluate things the way we have always in the past and if something makes sense, we'll be aggressive with it.
Rich Repetto - Sandler O’Neill
I think we will leave it at that. That's a good answer.
Operator
Your next question comes from Matt Snowling -FBR Capital Markets.
Matt Snowling - FBR
Joe, you said in your prepared remarks that you're expecting asset growth of 16%. Did that include Fiserv?
Joe Moglia
No.
Matt Snowling - FBR
How much are you really thinking coming from organic versus market participation?
Joe Moglia
I would say of the 16%, probably 5% would be market, 10% or 11% would be organic.
Matt Snowling - FBR
In your outlook statement, it appears if I am reading this correctly that you're expecting some spread compression in the net interest income line. Is that a pricing decision or is that expectations of lower rates?
Joe Moglia
Well, if you look at our anticipation with regard to commissions per trade, we were at $13 for 2007 and I think for 2008 it is $12.89 or so. That would be more a lower mix of business with regard to options and more of a conservative estimate on payment for order flow. I think for the most part on our net interest margins, they're reasonably flat.
Matt Snowling - FBR
I had it at 377 this quarter.
Joe Moglia
Versus the September quarter?
Matt Snowling - FBR
Yes.
Joe Moglia
We are looking at it. They're writing signs here for me. What does that say, Jeff? Asset base in total. The asset base in total, Matt, should be flat or close to that.
Operator
Your next question comes from Roger Freeman - Lehman Brothers.
Analyst for Roger Freeman - Lehman Brothers
What sources would you say you're gathering the most assets and accounts from? Like other discount brokers, full service brokers? Where are your sources of accounts these days?
Joe Moglia
Now you're talking about account transfers. The account transfers themselves are actually a very, very small part of the overall business or the overall numbers. So the majority of the assets that we see coming in, in effect, would be new and we wouldn't necessarily know for a fact where they come from as far as account transfers go.
But in general, we are starting to see a reasonable pickup in the mass affluent sector across full commission firms, in general.
Analyst for Roger Freeman - Lehman Brothers
Could you prioritize your uses of free cash flow going forward in terms of debt or stock buybacks, dividends, acquisitions?
Joe Moglia
There are a lot of firms, I think, that lock into this is what we do with our cash and then they move forward with that. I think we've always been, at TD AMERITRADE, very dynamic with looking at that. That's something we look at, I'm not going to say everyday, by certainly that becomes a discussion every month and it certainly comes up at every board meeting.
So it's difficult to prioritize. We look at all of those with regards to opportunity. Right now we've got a Fiserv close on the table. The priority is to have the $225 million that in effect covers that. So in that case, that would be an acquisition, i.e. growing our business.
In the other case of to what extent we want to buy back our stock, we are frankly in the market every day. To what extent do we want to pay down our debt? Frankly, we are looking at that on a regular basis. To what extent from a secondary perspective do other things make sense -- dividends, et cetera. So it is difficult to prioritize. Right now the priority would be to pay off the Fiserv deal.
Operator
Your next question comes from Michael Hecht - Banc of America Securities.
Michael Hecht - Banc of America Securities
I wanted to come back to the outlook statement again. It sounds like on the net interest revenue side you're baking in a little bit of spread compression, but if we look at the MMDAs, it looks like you're baking in about 9% growth in average balances and maybe 4%, 4.5% increase in spreads.
Can I get a little bit more color on what's driving that and can you remind us, what are the rates paid to clients on those balances and how competitive these dealers are relative to other places, to part cash?
Bill Gerber
We had an MMDA price change in September, so that's going to basically be the main reason for the change in the spread.
Michael Hecht - Banc of America Securities
Just flowing through the Fed decrease?
Bill Gerber
That's right. What was your question on the asset side, Michael? Say that again.
Michael Hecht - Banc of America Securities
What are the rates that people earn on those now and how do you feel that compares to rates people can earn on other forms of cash?
Bill Gerber
We believe it's very competitive rates. It's probably in the 150ish range. I'll get you more exact numbers as we're talking. But we think it is a very good rate. It is tiered and so that probably would be the higher end of the range of what people would be getting, but this is something we look at very much on the basis of the competitive nature of the business.
Michael Hecht - Banc of America Securities
A similar type of question, this time on investment product fee revenues. You have the realization rate there picking up 5.5%. On top of good asset growth, it seems like you're baking in higher fees. What's driving that?
Bill Gerber
It's basically more of the good stuff, so to speak. We're getting traction in the Advisor Direct and the Amerivest products and we are expecting that to continue. We have seen that consistently grow since the salesforce got in, so it's something that we are expecting to grow and we'll adjust the rate just a little bit.
Michael Hecht - Banc of America Securities
On the expense side, it looks like you've got add spend going up 5% or 6% again at the midpoint. What kind of account growth do you think that's going to drive and do you see your average add spend per new account rising next year?
Bill Gerber
We really don't. It is something we have always targeted about $300 as being the tolerable level, so to speak. I think if you put that into your model, you're going to come pretty close to what we would expect on cost per account.
Michael Hecht - Banc of America Securities
To double back on the outlook for pricing, it seems like within the guidance you're baking in a pretty benign environment. Two questions around that. One, still not seeing any impact from any of the free trade offers, but I guess it's incumbent upon me to ask. Is it basically saying you don't see pricing really as a tool that you need to stimulate growth here?
Joe Moglia
Mike, with regard to the impact that free trade has had against us, we still don't see any impact on that.
Secondly, with regard to pricing in general, the question is, pricing is not part of it. Pricing is absolutely a part of it. I know a couple of years ago when people were asking us questions all the time about pricing, are you going to adjust, are you going to come down, et cetera, we believe pricing is very, very important. But it's absolutely only one of the components of what you ultimately offer the client base.
Most of the time when a client goes, it's not because it's $1 cheaper someplace else, it's because they become dissatisfied or they feel you let them down for whatever reason. So I think for us, another big piece of the idea, consolidation for the client as far as their respective portfolios go. If we didn't have a legitimate long-term investor solution for them, it made sense that client might decide to go someplace else -- not because of our pricing, but because we didn't have a comprehensive enough offering.
So I do think it is part price, it is part products and offering service. That whole thing across the entire board, I think you've got to look at the entire client experience.
Michael Hecht - Banc of America Securities
Did you say where RIA assets ended the quarter and maybe if you can talk a little bit about over the course of the year, how much of your asset growth came from the RIA market versus the rest of the business, or the core retail side?
Joe Moglia
We did not say that and it's not our intent to do that. However, as you know, the Fiserv acquisition should add considerable scale to the RIA business. We'll give you a little bit more color once we get that closed.
Operator
Our final question comes from Mike Carrier - UBS.
Mike Carrier - UBS
When we're looking at '08 and trying to get our arms around the returns on the incremental $100 million in investment, if we're not going to be looking at qualified account growth as much anymore, what should we be looking at in order to gauge the return on this new investment spending? Is it really just investment product balance growth?
Joe Moglia
I think on the slide, Mike, that we had given you with regard to how you might want to look at this, remember that investment spend was focused on the share of wallet, long-term investor, organic growth part of the overall business strategy; but it was also spread across the three client segments: the active trader, the long-term investor, and the RIA.
When you look at this, frankly, how we're doing with regard to the active trader in the transaction segment, how we're doing with regard to our market share, I think that would be one of the things you look at. But the thing I think you really would need to concentrate on is what's going on with regard to our assets. The interest that we earn on the margins, security lending, et cetera, the MMDA balances, or in effect the sweeps, and the fee-based products that we're looking at because we want to try to do more in terms of annuitizing our revenue stream. So those would be the things I would look at.
Mike Carrier - UBS
Just on the outlook statement -- and you guys have touched on this already -- but given something in the range of $1.4 billion in EBITDA and I think you have about $500 million in debt paydown, there still appears to be a decent amount of cash available. It doesn't look like the outlook statement includes much on the buyback side.
I know you already said your thoughts, but you guys aren't assuming too much in the outlook statement on buybacks, but it's just another lever that you have. Is that correct?
Joe Moglia
That's exactly right, Mike. We'll look at that dynamically.
Operator
That concludes the question-and-answer session today. At this time, I would like to turn the conference back over to management for any additional or closing remarks.
Joe Moglia
Thank you, operator. I began the call by simply talking about this concept of the 2008 philosophy, but you know what? It goes back further than that. Over the span of the last six years, there truly has not been a time where there wasn't something that we didn't tell you that we ultimately didn't deliver on. We don't exist if it's not for the benefit of our clients and our shareholders and we recognize that the only way we can deliver to our shareholders and our clients is through our employees or associates. We really mean that and that's really our focus internally.
So we're proud of what we've accomplished over the span of the last year, the last several, but I think at the end of the day, we've been able to deliver to you what we have promised. We've been saying all along that everything we've done the last couple of years is geared for 2008 and beyond. Well, now it's 2008. We expect you to hold us accountable for what we do in 2008 and going forward.
Thanks very, very much for joining us this morning, everybody.
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