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TD Ameritrade Holding Corporation (NYSE:AMTD)

F3Q12 Earnings Call

July 17, 2012 08:30 AM ET

Executives

Bill Murray - Director, IR

Fred Tomczyk - President and CEO

Bill Gerber - EVP and CFO

Analysts

Rich Repetto - Sandler O’Neill

Michael Carrier - Deutsche Bank

Bill Katz - Citigroup

Chris Harris - Wells Fargo Securities

Alex Kramm - UBS Keith Murray - Nomura

Howard Chen - Credit Suisse

Roger Freeman - Barclays

Chris Allen - Evercore

Matt Fischer - CLSA

Brian Bedell - ISI Group

Alex Blostein - Goldman Sachs

Mac Sykes - Gabelli & Company

Operator

Good day everyone and welcome to the TD Ameritrade Holding Corporation’s June quarter earnings results conference call. This call is being recorded. With us today from the company is President and Chief Executive Officer, Fred Tomczyk and Chief Financial Officer Bill Gerber. At this time I would like to turn the call over to Bill Murray, Managing Director of Investor Relations. Please go ahead sir.

Bill Murray

Thank you operator and good morning everyone and welcome to the TD Ameritrade June quarter earnings call. In a minute we'll be hearing from Fred and Bill, but first, hopefully you've seen our press release in today's slide presentation which can be found on www.AMTD.com. I’d like to refer to rephrase our Safe Harbor Statement which is on slide two of the presentation as we will be referring to forward-looking statements. We will also be discussing some non-GAAP financial measures such as EBITDA. Reconciliation of these financial measures to the most comparable GAAP financial measures are in the slide presentation.

We would also like 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 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 in the allocated time.

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

Fred Tomczyk

Thanks Bill, and good morning every and welcome to our third quarter earnings call. Well, we've now reached the half way part of the summer and so far it appears to look very similar to last year and the year before. We had an early run up in the markets and as a result in client engagement in the spring, followed by a drop off in the summer as a certainty to get into way on the minds of investors. As job growth well appears to be slowing, Europe seems to go from crisis to crisis with no permanent solution in place and we're now seeing some slowing in China, in India. we can't predict how any of these issues will be resolved, but if this summer is anything like last summer or the summer before, it will likely take some kind of an event or asked by our leaders to bring investors back into the market. But as we look at the operating challenges we face this quarter, we feel very good about our strategy, how we're executing against that strategy and as a result of our operating results. We continue to execute our game plan and perform to the best of our ability in those areas within our control. In the early aforementioned growth, we continue to gather assets at an industry leading pace. We're keeping our expenses in check and keeping greater operational efficiencies to the utilization of lean methods. And we continue to maintain our strong financial position and clean balance sheet. We remain in a difficult and uncertain economic environment, we're keeping our (inaudible) and protecting our liquidity as important. We have dealt the position that protects us from adverse events and maintains our ability to take advantage of opportunities as they present themselves.

And with that, let's turn to slide three for a look at the quarter in review. Client assets as a quarter are 445 billion. Earnings per share for the quarter was $0.28 up one penny from the same quarter a year ago thanks to our strong organic growth, solid expense management and relatively stable net interest margins. We earned net revenues of 667 million, down 3% from the June quarter in 2011 due entirely to some lower trading volumes. Our operating expenses excluding advertising were down 3% from the same quarter a year ago as we continue to tighten our focus on expense management.

Net new client assets for the quarter came in at 9.7 billion, a 9% annualized growth rate. Our interest sensitive assets were 79 billion, up 5 billion or 7% from June 2011. Client trades came in at an average of 355,000 trades per day, down 4% from the June 2011, quarter.

And we repurchased 2.5 million shares of our common stock this quarter at an average price of $17.77. These buybacks combined with our subset quarterly dividend, total of return of 50% of earnings back to our shareholders during the quarter. Fiscal year to date, we have now returned 60% of our earnings to shareholders at the high-end of our annual target range of 40 to 60%.

Let's now turn to slide four for a closer look at our progress on our asset gathering strategy. We entered the quarter with almost 10 billion in net new client assets. Up 23% from the same quarter last year and more than 150 million each business days throughout the quarter. This was the most assets we have gathered in the June quarter in our history. We're quite happy with these results given that April is usually a challenging month for net new client assets due to cash payments.

Year-to-date, we have gathered almost 31 billion, net new client assets and annualized growth rate of 11% and we're well on our way towards our fourth consecutive year of double digit organic asset growth. We remain pleased with the growth coming from both our retail and our institutional channels as we have maintained our momentum.

Within our retail channels, we continue to gather assets well within our expectations. We're seeing very strong retention as our client satisfaction and net advocate scores remain very strong. (Inaudible) paying TV spots and are beginning to (inaudible) underway. These spots focus on the importance of teamwork, guidance and help along the way, the various things we value and provide for our clients. Our institutional channel continue with a strong asset gathering momentum and the breakaway throughout their pipeline remains strong. We added 120 new breakaway brokers in the quarter, up nearly 50% from the same quarter a year ago. And year-to-date, we've now added 324 new breakaway brokers, up 23% over 2011.

Now let's turn to the trading side of our business on slide five. The sluggish retail engagement we're seeing is happening throughout the industry. Exchanges are seeing some of the lowest equity trading volumes in five years. And we continue to see low volatility relative to the uncertainty we see in the markets with a trade that’s below 22 for most of the quarter. We average 325,000 trades per day in the quarter and activity rate of 6.2% down from an average of 370,000 a year ago. Year-to-date, we're averaging 370,000 trades per day, an activity rate of 6.5% which is at the low end of our annual guidance range and the lowest activity rates we've had in five years. So far in July, we're averaging 319,000 trades per day as the retail investor remains very cautious. But in spite of that caution, we're pleased with many trends that speaks well for our future once investors reengage.

First, mobile DARTs continue to climb and now account for a full 7% of our daily trade volumes. We average approximately 1,500 new mobile users each day throughout the quarter. We're upgrading our long-term investor mobile application to create an easier and more productive client experience and we've updated our data lab for advisors to include mobile trading functionality.

Second, derivatives training remains strong and growing at now 37% of our daily trades. Our option DARTs continue to grow faster than equities, up 7% year-over-year while equities are down 10% over the same period. More investors continue to request approval to trade derivatives and they are drawn to our rating technology platforms.

Third, we continue to see healthy adoption of our trading platforms. We're snow seeing more legacy TD Ameritrade trade clients using their focus from platform and legacy thinkorswim clients using their thinkorswim platform. And after one year, Trade Architect has proven to be our most successful product lines ever based on its option rates. If you recall, last year we had essentially the same environment and on a dead ceiling resolution that just bought inventories back into the markets, resulting in the best trading month ever we ever had in the month of August. I'm not saying that’s going to happen again. My point is that while you can't predict the future, we do know that eventually an event or a series of events will bring investors back into the markets.

Turning to slide six. Strong organic growth remains the highlight of our business strategy and we remain on track to deliver yet another year of industry leading, double digit annualized net new client asset growth. We will continue to focus on our sales channels, client service and enhancements to our product offering to future build the relationships we have with our client and attract new investors.

Process and expense management is an increasingly important part of our strategy as we operate in this environment. Operating expenses excluding advertising are down 3% from the June quarter last year, and down 2% from the March quarter. We will continue to take a close look at areas for greater efficiency, helping associates from the top down and the bottom up, think about what we do and how we do it in a different way. Supporting these efforts is our ongoing implementation of lean, which we are now beginning to expand throughout the organization. We have cross functional teams focused on specific business processes with associates from all levels of the organization begin daily. Associates are identifying improvement opportunities and the teams are implementing solutions. In general, we're seeing that our associates are feeling more empowered to speak up and drive change to improve the clients and associate experience and to eliminate waste.

Growing our interest sensitive assets will continue to help strengthen our position to arising interest rate environment and mitigate the impact of the current interest rate environment. Let me remind you that it's both net interest revenue not just about net interest margin.

While trading was not as robust as it's been in the past quarters, clients did take advantage of buying opportunities to move cash into the markets which has had an impact on our interest earning asset growth. It reflects the (inaudible) nature of our client base.

We continue to deal with a flattened yield curve and execute on our basic strategy of reinvesting through all environments. In the absence of an increase in the yield curve, we would expect some net interest margin compression going forward.

When we look at the current environment for our industry, it is definitely challenging and once resolved; we'll all be battling the interest rate environment for another couple of years. As a result, we will sharpen our focus on the things we can control, maintaining our strong organic growth, and increasing our focus on expense containment to the implementation of lean methods throughout the organization. Both contribute to our success today and will aid in our growth in the future.

And finally, we will maintain our strong balance sheet and be a good steward of shareholder capital. Year-to-date we've returned 60% of our earnings to shareholders which as I mentioned earlier is at the high end of our annual target range of 40 to 60%.

In closing, we are now three quarters of the way through our 2012 fiscal year and we have many things to be proud of. Assets gathered in particular, continues to be strong and we're well on our way to another year of double digit growth. No other firm in our industry can say the same. We'll take that momentum as we finish the year and put in place plans and actions to begin fiscal 2013 just as strong. We've seen no reason to make any significant changes to our strategy. Its working and we're succeeding in those areas that we can control in the face of a challenging macroeconomic environment. So we remain focused on executing that core game plan and we'll remain disciplined and patient while staying focused on delivering a superior client and associate experience and delivering good value to our shareholders over the longer term.

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

Bill Gerber

Ty Fred and good morning everyone. The environment has definitely been challenging for everyone in our industry, but we are running a long-term strategy and therefore we remain focused on what we can control, delivering net new assets, managing our expenses, maintaining a strong balance sheet and returning capital to our shareholders. As I said multiple times with variability in our earnings results is going to be primarily driven by trading activity this year. This quarter was no different. However despite the relatively low trading levels, we were still able to deliver strong results.

For a closer look, let's begin with the financial overview on slide seven. Before diving into the details of this page, the headlines are as follows. Year-over-year, earnings per share is up a penny, as lower trading revenue was more than offset by lower average shares and lower expenses. Sequentially, earnings per share is up $0.03 as higher asset based revenue and lower expenses more than offset the lower trading revenue.

With that, we'll start with the June quarter to June quarter comparisons on the left side of the page. Transaction based revenues for the quarter seen on line one, were down 16 million or 6% from last year's result, principally due to 15,000 less trades per day. Asset based revenue on line two was up 7 million to 379 million as higher IDACs and investment product fees more than offset lower margin loan income. More on margin loans in a bit. All in net revenues on line four were 667 million down 18 million versus last year. On line five, operating expenses before advertising came in at 363 million. This was down 11 million from last year, primarily due to unusual expenses which occurred in 2011 quarter, which did not occur again in this quarter and fewer consultants and contractors this year which lowered our professional services line item.

We are pleased with how we manage expenses and plan to stay at or below 365 million quarterly for the new few quarters. On line 12, net income was about flat at 154 million. On line 13, earnings per share was $0.28 up $0.01 from last year as we had about 25 million fewer shares due to our stock buyback programs. EBITDA for the quarter was strong at 295 million or 44% of revenues as seen on line 15 and 16.

Moving to the sequential porter comparisons on the right side of the page. Please note that there was one more trading day this quarter. On line one, transaction based revenue is down 26 million or 9% primarily due to trades decreasing 33,000 per day. On line two, asset based revenues increased 17 million, principally due to our margin lending business growing 10% to an average of 8.7 billion from an average of 7.9 billion in the March quarter.

On line five, operating expenses before advertising was down 7 million mostly due to the exact same reasons as the year-over-year differences, mainly unusual items last year did not occur this quarter and fewer consultants and contractors.

On line six, ad spend is down 34 million or 40% due to seasonality. Remember we spend the majority of our ad budget in the first six months of the fiscal year. That being said, we still believe our ad spend will be near the lower half of our outlook range.

Earnings per share on line 13, was up $0.03 primarily due to the asset based revenue and lower expenses mitigating the pressure of lower trading revenues. Year-to-date we have earned $0.80 per share as compared to $0.82 last year. This is down only $0.02 while trading volumes alone has driven $0.06 of decline.

Now let's turn to spread based revenue on slide eight. On a year-over-year basis, please keep in mind that last year was a record quarter for spread based revenue. This quarter we finished at 325 million, a decrease of 3 million from last year. Balances are 74 billion, up 11 billion or $17% from last year which drove a 36 million increase to revenue, offset by 33 basis points of rate compression driving 39 million less revenue.

Margin lending revenue was down 12 million, while IDA revenue was up 9 million, more on IDA in the next slide.

Margin lending averaged a record 9.5 billion in the June quarter last year for approximately 8.7 billion in the current June quarter. Further, the margin rates declined 19 basis points year-over-year as there were a higher percentage of margin users and negotiated schedule this year. Sequentially this story is nearly the opposite. Revenue is up 9 million due to margin lending increases from March to June. Average margin balances increased 800 million from last quarter and rate likely increased as well as the overall mix of margin users benefited.

Now let's take a look at the IDA on slide nine. On a year-over-year basis, balances are up 10 billion or 21% and revenue is up 9 million or 5% as the balance growth contributed 42 million of higher revenue, offset by lower rates driving 33 million less revenue. Sequentially, revenue was down 3 million on a decreasing yield, slightly offset by a 600 million increase in average balances. Near the end of May, we moved 2 billion from segregated cash on our broker dealer balance sheet to the IDA portfolio. This (inaudible) the average balance for one month of a quarter. Besides this, we had more clients participating in the market which lowered IDA balances. Along with this movement of money, the yield curve worsened during the quarter. All of these factors contributed to the slight decrease in yield. Year-to-date, the yield is about 1.39% and at this point, we feel comfortable the full year yield will be between 1.35 to 1.40% at the top half of our guidance range. We will provide more on next year's expectations on our October call.

Now let's look at rate sense to assets on the next slide. Balances are up 5 billion or 7% from last year, primarily due to organic growth. As a reminder, eventually all of this 80 billion in balance will get the benefit of higher rates positioning us well for a rising rate environment. At this time our rate sense activity for 100 basis point increase in rates is unchanged.

Let's now take a look at liquid assets on slide 11. We now have 993 million in liquid assets. This is up 75 million from last quarter primarily due to net income. We still expect to pay off the $250 million tranche of our debt in December, so netting that essential outflow, liquid assets would still be within our targeted 500 million to 1 billion range.

Now let's move onto the last slide. The environment has certainly been challenging, but we've seen these markets before and they don’t last. At some point the headwinds will turn into tailwinds. In the mean time we've continued to execute on our strategy and focus on the items within our control. We are on track for our fourth consecutive year of double digit, net new asset growth, a major accomplishment in any environment and more so amidst these difficult conditions. This is a testament to both our strategy and our team who is executing this strategy. Their dedication has enabled us to growing net new assets at remarkable rates.

Expenses declined this quarter as we continue to make progress on process improvements. This will continue to be a focus for the entire team in 2013. Further, our interest sensitive assets remain strong and we remain well positioned for rising interest rates. Our balance sheet also remains solid and we have returned 60% of year-to-date earnings to shareholders. Overall despite a difficult macroeconomic environment, we had a strong quarter with higher earnings per share despite lower trading volumes, an indicator that our strategy of staying focused on what we can control is paying on. And with that, I'll turn the call back over to the operator for Q&A.

Question-and-Answer Session

Operator

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

Rich Repetto - Sandler O’Neill

I guess the first question is on net new assets and we just had a look while during the call, swap number was only 16 billion of net new assets here, 60% of swap. So I guess the question is, where are you seeing the growth? You mentioned the breakaway broke of 120, if that seems higher, just how are maintaining this growth rate compared to your larger peer?

Fred Tomczyk

I think the first point is, we (inaudible) early stage assets that are not late stage assets. So we have lots of run rate to do things and those continue to work for us. When we started on this journey, it was obvious to us the things we had to do. And we just continued to execute on that. And our client service (inaudible), I can tell you are very high and I know I went to the most recent regional advisor of the conference out in Laguna beach about a month ago, and I would say that the attitude and the advocacy for TD Ameritrade inside the RA community is actually very healthy. So I feel very good about that. And on the retail side, as I said on the call, we're seeing client retention rates that we've never seen before. So people are definitely, some of it maybe they are sitting on their hands here in this market and just about tracking down the hatches. We've also seen good growth in the accounts, we've seen an increase in the size of the account. So we just continue to push on every button and we remain very focused on this and right now it's both just keeping the momentum up.

Rich Repetto - Sandler O’Neill

And then Bill, the question is on the idea you spread. I know you've given the guidance, I believe that was for the year, the 135 to 140. Are there any other more aggressive measures that you can take, that if the seven year swap rate is a 120 and less the TDC and FDIC fees. If the interest rate environment stayed like this, are there more aggressive measures you can take to combat that, that reinvestment rate?

Bill Gerber

Well Fred won't let me buy European debts, so that’s out. Essentially our strategy is to stay where we are in order to, we don’t think being aggressive in an environment like this makes sense and we don’t want to reinvent ourselves here so, we're going to continue to work at what the market is giving us and we just don’t think being aggressive in the long term, although it might have a short term pop, but the long-term would not be a viable strategy for us.

Operator

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

Michael Carrier - Deutsche Bank

Just maybe on the expenses, it came in low in this quarter. You guys had mentioned just on the project lean initiative, the efficiency opportunities that you see over time. Just given in this environment both in terms of rates and repo activity being weak, when you think about maybe what NEUR in that project lean and how much further can you go versus that near term guidance that I think you said below that 365 for the quarter. Just trying to get some expectation on, are there further opportunities over time versus the current run rate.

Fred Tomczyk

We believe so. Regarding we sit on the lean (inaudible) and we look at benchmarks that we actually measure what I call a new sell against an old sell and just see what the improvements are. We're seeing very strong efficiency. So actually it looks very promising.

So there are opportunities beyond what you’re seeing right now. I think it's still early in terms of its impact on our quarterly expense run rate. But having said that I’m not going to get into, we’ll play our hand on the fourth quarter call and when we give our guidance for 2013 we’ll give more color on where we think those expenses will be over the next year but we’re not going to do it just yet.

Michael Carrier - Deutsche Bank

Okay, and then maybe on the NIM, just given where the rate environment is currently you guys always give that sensitivity on if you get 100 basis point improvement, what the upside is and I guess relative to where we were at like a 2% tenure, at 150, is there any type of sensitivity that you guys can give and then maybe on the offset is you have transitioned some assets from the broker to the IDA. So are there further opportunities to do that to try to offset any of the rate pressures.

Bill Gerber

I think the key here is we’re trying to offset the right pressure at growth and then we’ve been successful doing it for the last couple of years and you’re point is exactly right. If net interest margin contracts and spreads in his script as well we’re obviously focused on revenue and so we’ve been able to mitigate most of that very difficult rate compression over the past couple of years with growth. So we’re certainly hopeful that we’ll be able to continue that into 2013. And we will reassess the 100 basis points up and what that means in terms of sensitivity. The nice thing of course is as we have grown the balances so although the rates have come down balances have gone up. So they do obviously offset each other a bit. But we will give you more in ’13 in October but that’s really where we’re at right now.

Operator

Our next question comes from Bill Katz of Citigroup. Please go ahead.

Bill Katz - Citigroup

I wondered if you could just sort of walk through the margin balances dynamic this quarter, I guess a bit of a pleasant surprise to InfoGenesis pop sequentially. What might have been some of the drivers behind that?

Bill Gerber

This is all about the market and buying power. So what we saw was obviously in the spring the market went up and that carried into the early part of the quarter. So the balances, the market was actually pretty healthy and through April, it really was in May that it started to crack and so we had good margin loans up through all the month of April and probably half of May before they started to come down as the market came off and so when you look at the averaging that’s really what drove the average to be that much higher than I think people are expecting. You have to remember where the market was at the beginning of the quarter, not just at the end of the quarter.

Bill Katz - Citigroup

And so second question is just, you mentioned some advertising during the low end of sort of $50 million to $60 million range. You’ve given I guess an outlook for the expenses of that. How long can you say the low end of the range without effecting some of the top line growth and would you have to re-visit more normalized levels next year?

Bill Gerber

Well this is more about seasonality than anything else. We always tool down in the summer. So I'm not going to make a commitment beyond the fourth quarter. In fact this would be, we bring our advertising down, particularly in the summer and I would also say that in this market we don’t think it’s wise to sort of up your marketing age in the summer but also in this type of market environment but we have no plans. We will ramp things back up going in the September and October and we’ll continue to do so unless we see it’s not working but we continue to see all of a sudden people come back after Labor Day and their more engaged and more interested in the markets and we took advantage of that.

Operator

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

Chris Harris - Wells Fargo Securities

So I want to come back to the IDA yield for a minute here. Just kind of curious given how flat the curve is now, whether it really makes sense for you guys to be extending. Where on the curve you’re actually putting your dollars to work and maybe you can help us out a little bit giving us the yield you actually invested in the quarter would be helpful as well.

Bill Gerber

I could give you the first part of your question Chris. So it certainly is disheartening sometimes so see the yield where it is but we continue to look at that expense, we have to execute the strategy and we can't sit back and market time and wait for interest rates to start to increase. So we’re continuing to put the money down the four to 7ish part of the curve. We have not extended those additional monies relative to the IAs that we had talked about last quarter that are still at the short end of the curve. So every the retail money turns over we are putting it back out, we’re in that part of the curve right now.

Fred Tomczyk

Yes, I think it’s so hard to predict interest rates, we would have said the same thing three months ago that while it can't go any longer but it did and I think we just have to, the whole point of the ladder is actually to mitigate the impact of the interest rate environment and give us time to adjust and so I think the important thing for you to mind is you’re not getting 160th to 180th of that portfolio rolling at any given month and that all just helps that when the yield curve moves it takes time for it to come down and it takes time for it to go up. But we have lots of flexibility on short term rates through all the other interest earning assets and the floating balances we have.

Bill Gerber

And the duration is still 2.8 years. So we’re staying right at that low.

Chris Harris - Wells Fargo Securities

Okay, and then a follow up here on the asset growth. I know you guys have continually evolved your sales process particularly on the retail side of the business. Is that evolution really playing a pretty big component of driving the net new asset growth and do you see those efforts continuing to maybe improve to help drive further growth in the business going forward?

Unidentified Company Analyst

Yes, I would say definitely we’re not getting down to the efficiency of the sales process of certain types of products. One thing we haven’t talked about a lot but we continue to see very good growth in our fee based balances. When you look at the revenues, our fee based revenues are up 24% year-over-year and so we definitely have done a lot of work on that side. But we still see lots of opportunities through the efficiencies and laying when our sales person, what they do, how they do it, the things that are getting in the way, that they could be more effective and more efficient and more productive and so we’re seeing lots of opportunities still on that front in terms of defining the sales process, the fulfillment processes and helping them with leads. We have sort of tightened down or actually put in some new approaches on lead generation and what we call next best call or next best action and we’re seeing good lists on that. So a lot of the things we’re doing in terms of putting good opportunities in front of the sales people and across sales and making the sales process much more efficient we still have things to do.

Operator

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

Alex Kramm - UBS

I apologize in advance for asking on the IDA again but one more time I know that you will give us more guidance in October but maybe you can help us just a little bit in terms of giving us an early look into next year in terms of what happens for the long term portfolio, maybe just a couple of numbers. You have a $60 billion portfolio? How much of that on the long end is going to roll off and maybe what’s the average that’s currently at, I guess we can make what’s going to come on our sales?

Bill Gerber

We’re not going to into that level of detail as we haven’t before and we aren’t going to start it now. Keep in mind that of the $60 billion you’ve got $15 billion in the institutional side which is much shorter duration and then the other $45 billion is in the retail side which is a longer duration. So you have to understand the mix. So that’s there and any outlook we’re going to give you for next year or the year after is highly dependent on what the yield curve is going to look like at that time which we’re not good at and we sort of acknowledge quite candidly that we don’t know what’s going to happen to that and so I think you know, at this point you’d like say that you don’t want to annualize the yield curve the way it is right now but who knows what it’s going to look like three months from now, six months from now, a year from now. So we’ll give that greater color on the October call but you might as well take that, the $15 billion is actually relatively short and in this environment it doesn’t make sense to expand on the two year point so it’s actually going to be sitting more and more, floating and then the, when you get into the $45 billion it’s all on a long ladder so I think you guys can do the math assuming it’s a relatively constant ladder than has even maturation schedule.

Alex Kramm - UBS

I think he one thing, either I missed it or on the investment product fees, those picked up nicely. I think it was 25 bips versus 23 in the last quarter. So what kind of mix shift is driving that? Is it a mix shift that’s driving that or what else is going on there and then maybe related to that as you look for opportunities to maybe grow the topline more or react to this environment are there opportunities to maybe increase some of these fees slightly or maybe start charging for things that you’ve been giving away or you just don’t want to go there given the customer experience?

Bill Gerber

Sure, the two drivers are primarily as we’ve been doing a lot of negotiations with the mutual fund families and so that, that has been yielding great results and so that has been beneficial and additionally our advisor direct program has been very strong and so we, we expect that our hope of course that those will continue to grow, et cetera. We have not ruled it out but we have not decided to change any fees, I think competitively that becomes much more problematic.

Operator

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

Keith Murray - Nomura

Can you just spend a minute on the demographics picture? What’s the average age of the client today versus call it five years ago and on the net new money what’s the demographic split or the mix of what’s coming in?

Bill Gerber

We don’t get into that level of specificity but you should assume that our client base which skewed younger than the traditional asset managers or wealth managers, it’s not to say it’s not up in the 40s or whatever but we definitely would skew younger than a traditional asset gathering or asset manager and I think that reflects the nature of our offer, the heavy use of technology, those types of things. But we continue to do quite well and it will vary between our age, which will be older and the typical of what you would see is a wealth manager because RAA’s definitely won’t queue to wealth and wealth tends to co-relate with age. On the retail side we would definitely skew younger.

Keith Murray - Nomura

And the on the revenue per trade for the quarter, you mentioned how derivatives is a bigger percentage this quarter, what was the pressure on the revenue per trade?

Bill Gerber

Mostly that comes through futures and foreign exchange that if those increase they have a lower ticket charge and so the increases there were then only absolute but relative allowance and so that really (inaudible) a little bit and then the number of contracts per trade in the options, although the trades were strong, a number of contracts was down. That nicked it a little bit as well.

Operator

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

Howard Chen - Credit Suisse

Bill just on the RAA extension are you waiting for a specific swap rate or yield curve shape or is this just your patience more of a function of the duration characteristics of that portfolio?

Bill Gerber

If you recall what we did was we had decided to put I think it was 40% longer on the advisor book but at that time the spread between two and five year rates was over 100 basis points. So we started to execute it, that collapsed. It’s now down 150. And so we just don’t see that, we’re not going to actually lock our money in for four to seven years for that much without some good reason and some real thought about it.

Howard Chen - Credit Suisse

Okay, so what’s the level that you would lock in the four to seven?

Fred Tomczyk

I think that depends on the environment. We’d like to see a closer to 75 to 100 but I think you have to be dynamic about this and if you all of a sudden get worried enough about the road, just say to heck with it, I'm just going to protect my earnings in the short term and live with the consequences over the longer term.

Howard Chen - Credit Suisse

And then my follow up, just a follow up on the margin balances. Fred, you mentioned the market characteristics and I know sometimes retail has got a bit of a lag. Bill you spoke to some of the structural things and new customer growth that could continue to buoy margin balances. So I guess what’s going on in real time? We had a big kind of drop off in the back half of the June quarter with the equity markets in the little rally back. So I was just curious, what’s going on with margin balances today, say versus the average of the second quarter or how the quarter ended?

Bill Gerber

I think the margin balances right now are classified as steady and certainly we saw an increase in margin balances as Fred mentioned in the early part of the quarter and then they eased a little bit. I would classify them as steady right now.

Operator

Our next question comes from Roger Freeman of Barclays. Please go ahead.

Roger Freeman - Barclays

If you’ve answered this let me know, I was curious if you increase your efforts to go after groups of brokers or RAAs within the wire houses, a lead broker that’s got maybe 3, 4 or 5 that work with him to bring in larger pools of assets?

Fred Tomczyk

The breakaway broker side, we definitely had success with bringing in, forget the actual percentage but a fair number of them actually today in this market and you know, since the beginning of the crisis actually will join another RAA. So we will bring in the recruiting in the RAAs that are happy to take them on and so as opposed to starting cold you can actually just jump right into it with an existing RAA which makes the transition a whole lot easier.

The second thing is we’ve had more recently the independent brokers versus the wire houses we’ve had. We’re getting them from both. I don’t want to mislead you on that but we’ve noticed some good trends on the independent broker dealers right now.

Roger Freeman - Barclays

I guess the other question is how do you assess where you are and you’re educational efforts to get your customers to use options more to hedge portfolios or enhance portfolio returns and if there is a significant different between the RAA side and your online customer base. Can you comment on that?

Fred Tomczyk

On the retail side we’ve done quite well with that and that really is they’ve been a big part of our strategy and really starts with introducing them to Trade Architect and also to thinkorswim and then the education side as well. So that’s done pretty well. I’d say those efforts have been pretty advanced and we’ve been doing and working at those for a good 2 or 3 years but that’s not the same, we don’t have continued opportunities in our customer base that we see on a daily basis.

On The RAA side it is still early. Since we set up that strategy desk concept and some education programs for the RAA community, I could tell you the guys in Chicago that run that side of that in Chicago are extremely busy. They are run off their feet right now and we’ve found a lot of success in that but we’ve still got a lot of work to do there and there’s a lot of interest, there is a lot of runway left there.

Operator

Our next question comes from Chris Allen of Evercore. Please go ahead.

Chris Allen - Evercore

You’ve given the end of period margin balances before. So I was wondering if you could provide that for the quarter.

Bill Gerber

$8.7 billion.

Chris Allen - Evercore

And then obviously the buyback sort of picked up a little bit this quarter. I'm just wondering what the current appetite is given the pull back in the share price.

Fred Tomczyk

We’re right along where we wanted to be at the end of the quarter. We are 60% (inaudible) year-to-date. As we come out of units and go and I will be sitting down later this week or early next week and making those decisions at that time. We continue to like and we get good feedback on our return of capital strategy which prioritizes first investing in growth and acquisitions provided they make strategic and financial sense followed by a combination of a recurring dividend and buybacks and we’ll go from there. So we’re not going to tell you what we’re going to do next quarter. You’ll find that out on our October call. And if you anything further to say about return of capital strategy beyond the October call.

Operator

Our next question comes from Matt Fischer of CLSA. Please go ahead.

Matt Fischer - CLSA

So regarding the breakaway brokers how long from the point where you consider them acquired accounts or till they actually start to generate revenue for TD Ameritrade and is it at the point that the assets actually hit your books or could you explain that and how long does it take?

Bill Gerber

Well you’re not going to get revenues until it starts to hit your books. The assets hit your books and the clients hit your books and it varies but it can take them a good three, six, nine months, even up to a year to start to build their book. That’s one of the reasons why they find it attractive to go into an existing RAA which is, keeps a lot of the building of the business, the infrastructure, the hiring of support staff, the technology and everything. It’s looked after for them. So it allows them to get their business up quicker but it takes a good, I would say six to 12 months for them to get up to where it is starting show up more.

Matt Fischer - CLSA

And I guess usually or traditionally the broker that comes away to your platform, he takes with him a great majority of their book. Is that still the case?

Bill Gerber

Yes only they take 100% but they take a good majority of the ones that they want, no question.

Matt Fischer - CLSA

Okay, and then also just, I don’t know if you could tell us, the average assets per breakaway broker or how it compares to your existing RAA platform?

Bill Gerber

I think we are very careful of that statistic because it could be misleading so we just provide the number and the current quarter. It’s going to depend on how many new versus you know, six months and, so we just don’t provide that because it can be very misleading if you don’t understand the details behind it.

Operator

Our next question comes from Brian Bedell of the ISI Group. Please go ahead.

Brian Bedell - ISI Group

Just going back to the IDA again, Bill I guess, if we stay in this type of rate environment, let's say through your fiscal 2013 and you don’t change your strategy at all on yield extension and you continue to see the same types of flows that you’re seeing, what type of range would the IDA bottom out at, at say the end of the next fiscal year and then on top of that to what extent does new flows into IDA from the online banking strategy play into how much you can potentially extend the overall duration if you’ve got a lot of liquidity moving in.

Bill Gerber

We’re not ready to talk about 2013 yet. The hardest part is we said and as you know, just the fluidity of the interest rate environment and certainly if you took the assumption rates are not moving for the next 12 months, obviously we can all look at the swap yield curve and like where we’re talking about to reinvest and you would see a pressure on the net interest margin rate, our IDA rate. There is no doubt about that. As I said earlier we’re trying to mitigate any of that. We obviously focus on rate but we really focus on revenue and so we’re trying to make sure you mitigate any of that compression with growing the base and so that with is the thing that we think is more within our control. So, as I mentioned to an earlier question, I don’t think now would be the time for us to say geez, why don’t extend our duration from 2.8 to 3.8 or pick a number greater, something to protect maybe 2013 earnings but really penalize when the economy does rebound and become better. So it’s a strategic decision for us and then that’s where we’ve come down. So I think that that’s really where we’re at right now Brian.

Brian Bedell - ISI Group

And do you see the flows coming in from the online banking strategy over the several quarters, I guess the momentum of that, significantly improving the idea of balances or is that still pretty much a very slow start to the program.

Fred Tomczyk

For a variety of reasons it’s been very helpful to fill our product gap that we’ve had. That’s been on the list of our existing clients, no question and so it’s been well received and we’ve had good adoption rates. Having said that we have not been and deliberately as a matter of strategy continue to be, we are an investment firm that happens to give you the functionality and the cash management account. We’re not going out trying to be a bank per say because we just don’t think that makes sense, given the nature of the offer, a number of things we do for the (inaudible) in there and the kind of yields you can pick up, we just don’t see that as an attractive use of our marketing dollars and our resources.

Operator

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

Alex Blostein - Goldman Sachs

Another one on IDA if you can believe it. So just curious about the balances. If you look at the last three quarters, it feels like they have been kind of flat. You guys clearly benefited from pretty robust growth prior to that. Just curious if there is anything structural going on why the growth in the IDA balances slow down as much as it did and then maybe your outlook for growth there for the next couple of quarters?

Fred Tomczyk

Over the long term we have very much believed and it’s been consistent and nothing structural has changed that will more or less co-relate to our asset gathering rate overtime. However what you’ve seen here, the fourth quarter, say December and March and now is you’ve seen every version to the meeting. In terms of client assets, client cash as a percentage of client assets, if you went back over the last five years, our average client assets as a percentage, our client cash as a percentage of client assets is 17.1%. It normally was December at 19.5% and at that time we said they are high. Then they were at 19% in the quarter and we would acknowledge they were high. They are now at 17%. So they are reverted to the mean and that’s what you see going on and the first quarter was the RAA’s that went into the market and started to buy early into the uptick. In this quarter what you’re seeing is a retail client move in as the market came off as an example and if it was last $1.5 billion or net buys and so our resale clients are contraring on their behavior but where we are right now is actually back to the mean of client cash a percentage of client assets with the average in the last five years.

Operator

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

Mac Sykes - Gabelli & Company

On acquisitions, do you think the continued outlook for low interest rates will put more pressure on the industry management teams to generate growth either through major or minor acquisitions?

Fred Tomczyk

I think that’s a fair conclusion Mac. I do think in this type of environment it’s difficult for everybody in our industry, they will look for growth, they will look for expense. They may look, I could make a strong case that the industry is underpricing their offering right now but I don’t think anybody has the courage to lead it up but the rally [ph] is in this environment it’s hard for everybody. I think we’ve fought through that about as well as anybody in our view but it does put pressure on all the players in the industry and I do have a view that in the long term, we’re in the seventh inning, the nine inning ballgame and it is one of those environments, I think if you are one of the smaller guys and trying to keep up with the marketing spend, the technology investments and everything, it’s just hard. So yeah, I think it is one of those environments where I think everybody is looking at or at least they should be looking at all their options and just like we are looking at pulling all of our levers and make sure we’re not missing any opportunities.

Operator

I'm not showing no further questions at this time and I’d like to turn the conference back over to Mr. Fred Tomczyk for any closing remarks.

Fred Tomczyk

Thank you and thank you everyone for joining us this morning. I know it’s a busy morning with other announcements in the market. We had at our view, a very good quarter based on the strong asset gathering, good expense control and relatively stable net interest margin. We’re happy with our performance and amidst of which, what is a pretty difficult environment. We’ve been through these environments before. The one thing we all know is it won’t last forever and we’re going to stay very focused on what we can control, continue to execute our game plan and we’ll talk to you next quarter. Thank you.

Operator

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

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