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Edited Transcript of AMTD earnings conference call or presentation 19-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 TD Ameritrade Holding Corp Earnings Call

OMAHA Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of TD Ameritrade Holding Corp earnings conference call or presentation Wednesday, April 19, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey Goeser

TD Ameritrade Holding Corporation - Director of Finance & IR

* Stephen J. Boyle

TD Ameritrade Holding Corporation - CFO and EVP

* Timothy D. Hockey

TD Ameritrade Holding Corporation - CEO, President and Director

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Conference Call Participants

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* Brian Bertram Bedell

Deutsche Bank AG, Research Division - Director in Equity Research

* Christopher John Allen

The Buckingham Research Group Incorporated - Analyst

* Christopher Meo Harris

Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst

* Christopher Shutler

William Blair & Company L.L.C., Research Division - Research Analyst

* Conor Burke Fitzgerald

Goldman Sachs Group Inc., Research Division - VP

* Douglas Robert Mewhirter

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Gerald Edward O'Hara

Jefferies LLC, Research Division - Equity Analyst

* Richard Henry Repetto

Sandler O'Neill + Partners, L.P., Research Division - Principal, Equity Research

* Sharon Leung

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the TD Ameritrade Holding Corporation's March Quarter Earnings Results Conference Call. This call is being recorded.

With us today from the company is President and Chief Executive Officer, Tim Hockey; and Chief Financial Officer, Steve Boyle.

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

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Jeffrey Goeser, TD Ameritrade Holding Corporation - Director of Finance & IR [2]

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Good morning, everyone, and welcome to our Second Quarter Fiscal 2017 Conference Call. You can find everything related to this morning's announcement on our corporate website, amtd.com, including our press release and the related presentation slides. Just click on Investor Relation.

These slides include our safe harbor statement and the reconciliation of certain non-GAAP financial measures to our most comparable GAAP financial measures. Information about relevant risk factors can be found in our forms 10-Q and 10-K, which are also available online.

This call is intended for investors and analysts. Questions from reporters can be directed to our media relations team or you can follow our Twitter handle @TDAmeritradePR, which will be live tweeting this morning's call. (Operator Instructions)

And now I'd like to turn the call over to TD Ameritrade President and CEO, Tim Hockey. Tim?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [3]

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Thanks, Jeff. Well good morning, everybody. What a quarter. It was a strong quarter with multiple records across our business. From asset gathering and client satisfaction to our core financial fundamentals, nearly every benchmark is indicating improvement over the same quarter a year ago.

It was the quarter of the investor as investor confidence soared and engagement continued following November's presidential election. While the markets themselves were relatively calm, the sheer volume of news coming from companies, policymakers and the White House itself was enough to encourage investors to revisit their portfolios and consider how to best position themselves for the future.

The Dow surpassed 20,000 for the first time, an incredible milestone. Job numbers remained strong, and the Fed followed up December's interest rate hike with another move in March.

With investors engaged and asset-based revenue finally realizing some much-needed tailwinds, the competitive environment intensified. The result was an industry-wide effort to redefine value via lower commission prices for our clients. More on that out in a few minutes.

We had a strong quarter, one that is traditionally one of if not the busiest of the year. Our net revenues exceeded $900 million for the first time. Record asset gathering helped push total client assets to another record high. There was indeed money in motion in this quarter. We tapped our marketing team to capitalize, making incremental investment to drive organic growth, and they delivered.

So let's jump right into the results with a look at our quarterly financial highlights on Slide 6.

Each of our core financial metrics are up from last year. EPS was up 5% from the same quarter last year to $0.40 per share. Trading activity was a record 517,000 trades per day, up 2% from last year. Net revenues were a record $904 million, up 7%, and our net new client assets were a record $19.5 billion, up 38% from last year. That's a 10% annualized growth rate. Total client assets ended the quarter at a record $847 billion, up 19% from last year. Fee-based investment balances were also a record at $185 billion, up 15% from last year. And interest rate-sensitive assets were at $124 billion, up 11% from last year.

For more about how we got here, let's start with asset gathering on Slide 7. Our sales team had another strong quarter, with net new client assets closing in on $20 million. The quarterly split this quarter was roughly 75% to 25% institutional to retail. Net asset flows remain positive and in fact improved by nearly 60% year-over-year.

Within the retail channel specifically, strong investor engagement presented an opportunity to mobilize and drive new money into the firm. Calls into our service centers were up as were the number of clients logging into their accounts and placing trades. We ramped up hiring and shifted marketing media to spend to attract the money in motion. The result was a record quarter for asset inflows and gross branch sales versus last year.

Retail asset outflows were up as well but the attrition rate remained well within historic norms. We started the quarter with the launch of a new advertising campaign, The Green Room. I hope you've all had a chance to see the work. Our marketing team has created a strong visual representation of our brand that is already changing the way clients, and prospects alike, view TD Ameritrade. The message that TD Ameritrade is a place where it's okay and even encourage to talk about your financial goals no matter what they are is resonating with consumers more than any other campaign we've launched in recent years.

We also formally launched Essential Portfolios, our robo-adviser. We offered it as a companion to a more robust, selective portfolio experience of what was formerly known as Amerivest, and our clients bought in. Sales of both Essential and Selective Portfolios were strong in the quarter, with Selective sales up 17% alone and inflows for both products largely comprised of new money from existing clients. The average account size of an Essentials Portfolio client is about half that of a Selective Portfolios client, so the 2 offers are not really competing with each other. They complement each other and demonstrate the logic of our continuum approach, a commitment to offer multiple solutions that fit however the client chooses to interact with us.

So work continues to build out that continuum even further. Once complete, we expect to have a strong lineup that can follow an investor seamlessly from a completely self-directed offering to a relationship with an independent adviser. We'll continue to update you on our progress.

On the institutional side, momentum continues in all channels of the business. New advisers, breakaway brokers and existing RIAs continue to grow and bring in new assets, and the pipeline for Q3 and beyond looks quite healthy. Differentiation remains our focus, and we're delivering value for RIAs by helping them run smarter, more efficient practices.

Further automating our operations is key. RIAs today want everything at their fingertips, and we want to be one step ahead of them, anticipating what they need and serving it up before they can even think to ask for it.

From automating check deposits and account opening processes, we're encouraging advisers to go paperless. We're building in more efficiencies that help make us and our adviser clients more scalable. In fact, if we were doing things the same way we did in 2011, we would need 50% more people in our institutional business to do them. This transformation, now several years in the making, allows us to do more and to do it more efficiently than ever before. This is the journey that we expect will continue given ongoing enhancements in modern technology. You should expect efficiency to remain a top priority for us.

We're also looking at ways to further monetize our asset base. Our scale puts us in a great position to get creative and try new things. Product distribution, as we have discussed on past calls, is one area of focus, but there are others as well. For example, we recently joined forces with Dimensional Funds, the largest mutual fund family in our platform, in a strategic relationship that allows us to leverage each other's vast distribution networks. It also makes DFA's funds available to advisers for a reduced rate and introduces new educational and practice management resources. We're evaluating other opportunities as well and we'll share more once details have been finalized.

Let's take a look at trading now on Slide 8. Our 517,000 DARTs were a new quarterly record and April trades to date remain a healthy 485,000 per day. Our Investor Movement Index, which measures client trading behavior, rose each month of the quarter, ending March at an all-time high. Clients were net buyers, selling positions approaching highs and reinvesting their proceeds into new opportunities as they gradually increased their equity exposure.

Engagement remained high as investors continued what they started last quarter, aligning their portfolios with the sectors they think will best benefit from the new administration. The high frequency of news and information coming out of Washington has helped prolong that activity, although market dynamics in general have been relatively tamed. Intraday volatility has been historically low. The VIX, for example, had its lowest quarterly average in more than 10 years. And yet, the number of accounts trading was up 10% from last year.

Strong investor engagement, coupled with low volatility, tends to influence our trade mix. Equities comprised the larger piece of the pie, but derivatives were still strong at 41% of the quarter's DARTs.

Clients also continue to embrace the mobile trading experience. We saw a record 111,000 trades per day come to us via mobile devices. With 37% of logins and more than 1 in 5 trades coming into our mobile platforms, we cannot stress enough the importance of continuing to invest in that experience.

It's no longer acceptable to simply offer a mobile platform that complements what the client can do on the web or desktop-based platform. It has to stand alone. That's why we're investing to create uniformity throughout our entire trading ecosystem. After all, it's our ability to deliver the utmost flexibility and choice, coupled with outstanding education and service, that drives so many investors to choose us for their trading needs. And we are committed to giving them a value-rich experience.

For more on that, let's move to Slide 9. Now this quarter, we had a unique opportunity to offer even more value to our clients, decreasing our commission rate to $6.95 per equity trade.

The strong organic growth we've experienced over the last 10 years has helped position TD Ameritrade as a firm with tremendous scale. We expect that scale to only improve once we close on our acquisition of Scottrade, a company that has long been known as of value-conscious player in the industry. In fact, the additional scale we achieve is a hedge against a lower-commission environment. Our combination, plus the economic advantages we are realizing in a rising interest rate environment, will further enhance our competitive position and strategic possibility.

We believe the industry is large enough to accommodate multiple business models, just as we believe the breadth of our trading offering justifies a reasonable premium. We were comfortable of that premium when we were at $9.99, and we're comfortable today at $6.95. For that reason, a reduction of 30% on our base commission rates was a relatively easy decision to make on behalf of our clients. The move will likely reduce our fiscal 2017 revenue by $80 million to $90 million, but that impact is more than offset by the impact of the rising rate environment on our asset-based revenue. Steve will explain it further in a few minutes.

We don't believe trading should be cost-prohibitive for investors. That's the very essence of why we were founded 42 years ago and it remains an important part of our client-first focus today.

We have long negotiated with clients, and while retail negotiations and account transfers did pick upward as other firms announced their own pricing moves, the trend has since stabilized. Today, we feel quite good about the competitiveness of our offering. And given the trends we've seen since announcing the change, we believe our clients and prospects feel good about it, too. We had record net new assets, record trades per day and record new funded accounts this quarter, all signs of healthy organic growth.

Now let's cover off on some of the other things we did for our clients on Slide 10. Our work continues company-wide to enhance the TD Ameritrade client experience. From a functionality perspective, the big launch was of course Essential Portfolios. But we also launched an app in the quarter to support the entire TD Ameritrade Investment Management services continuum. Whether you have an Essential Portfolio or a Selective Portfolio, clients can view their goals and keep tabs on their progress and updates are already in the works to add more interactivity and bring greater parity with the web-based experience.

We are piloting a new branch relationship model, expanding the effort into several regions across the country. And more and more of our clients are taking advantage of the free goal-planning services offer to our financial consultants. Refining that goal plans are driving larger conversions, a greater likelihood of adopting guidance solutions and greater net new client assets.

For our institutional clients, we hosted our annual National LINC Conference in February, sharing news, practice management advice, technology and networking opportunities with thousands of independent registered investment advisers. It's a key sales event where our teams make many of the connections that help drive our pipeline for quarters to come.

At the conference, we introduced advisers to the Model Market Center, a one-of-a-kind supermarket of plug-and-play investment model powered by our iRebal technology. The Market Center helps advisers utilize the models of other asset managers and investment strategies while still retaining trading discretion over their clients' accounts. Advisers can utilize to models at a lower cost than traditional outsourced investment solutions, and there's no investment minimum for assets held at TD Ameritrade Institutional. It really brings the concepts of flexibility and choice to life for our clients in a unique way.

Internally, we continue to deploy more agile technology development teams to streamline processes and drive greater operational efficiencies, that in turn bring greater value to the client experience. Agile teams this quarter launched a new platform that centralized market and credit risk management functionality across the company. They introduced updates to our Veo One adviser platform. And they developed a new process to help further improve and automate client account openings and money movement, among other things.

Our people have really been the difference makers here. Throughput has been a rallying cry, something we said we need to get better at, if we want to deliver a superior client experience, and our people have answered to call, delivering a nearly twofold improvement in throughput versus the same quarter last year. It's truly impressive, and because of that, we hope to be sharing even more wins with you in the quarters to come.

In addition, we continue to see progress in our client experience benchmarks. Net advocate scores within our retail and institutional channels continuing to increase. And we were pleased to see many of our platforms and client offerings honored by third parties in annual broker rankings. We were named the #1 overall broker by StockBrokers.com, which also named as #1 in 6 other categories, including: Customer service, mobile trading and platforms and tools. StockBrokers.com also ranked our brand-new Essential Portfolios among the top 3 robo-advisers.

We were also once again named best for novice investors and best for long-term investing in Barron's annual broker review.

Now each of these awards is a credit to our teams and the work they do to serve our clients, but they are not the endgame for us. Winning client loyalty, improving our share of wallet and building lasting relationships with clients is how we ultimately measure our success. But third-party recognition definitely suggests that we're on the right track.

This makes us even more optimistic and excited to share what we're building here at TD Ameritrade with the clients at Scottrade. Integration planning continues, and we look forward to receiving regulatory approval for a targeted September close.

Now with that, I'll pause and turn it over to Steve for the financial review.

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [4]

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Thank you, Tim, and good morning, everyone. As Tim mentioned, we did have a very eventful quarter, yet despite that, we continued to deliver strong core business results.

Let's begin with the year-over-year comparisons on Slide 12. Earnings per share was up 5% on revenue of $904 million. Transaction revenue increased $5 million or 1% due to 8,000 more trades per day, partially offset by a $0.35 decline in base commissioned rates, including a partial quarter impact of rate cuts.

Asset-based revenue was up $56 million or 12% due to high average balance growth of 16% as well as higher rates. Operating expense was up $43 million, including incremental spend related to technology and Scottrade-related expense. We had robust marketing spending consistent with last year.

Let's move to the next slide to review the linked-quarter comparisons. Strong revenue growth was offset principally by seasonal expense items, which we'll review in detail in a minute. Transaction revenue was up $10 million due to 30,000 more trades per day, reflecting seasonal increases in active markets, including the Snap IPO. Asset-based revenue was up $36 million on balance growth, duration extension and rates. Finally, we incurred a slightly higher tax rate.

Let's move to the next slide. IDA revenue was $269 million, up $34 million or 14% year-over-year due to balance and rate growth. Average balances were up $11 billion or 13% year-over-year. Net yields increased 10 basis points sequentially. Floating-rate balances benefited from the Fed moves while extensions were placed on the ladder at higher rates than balances rolling off the ladder.

In the quarter, we extended over $4 billion in balances at an average net rate of 166 basis points as compared to $2 billion in maturities at an average net rate of 147 basis points. Laddered maturities for the rest of this fiscal year averaged 141 basis points net of management fees and FDIC insurance.

Let's move on to slide 15. Net interest revenue for the quarter was $154 million, up $7 million or 5% from last year due primarily to segregated and corporate cash balances and rates. Margin revenue was down slightly year-over-year, as repricing from the rate increases was offset by negotiations and balances skewing towards higher-balance tiers. Also, there was one less interest day in the quarter. Stock lending remained relatively stable. We don't expect a significant lift from the Snap IPO due to its liquidity.

Sequentially, segregated cash revenue increased $3 million and margin revenue increased $1 million. Margin rates were up 11 basis points following the December Fed move, offset by 2 less interest days.

After the March 17 Fed move, we increased margin pricing by 25 basis points on borrowers with negotiated pricing but left all other margin pricing intact. We would expect to see that change reflected in the financials beginning with next quarter.

Fee-based revenue was $103 million for the quarter, up $15 million year-over-year. Advised balances or the combination of Essential Portfolios, Selective Portfolios and AdvisorDirect were up 20% year-over-year.

As Tim mentioned, each of these offerings complement each other, reinforcing the need for a continuum of solutions as we work to grow our share of wallet. Early results from the Essential Portfolios launch are positive, as we were approaching nearly $0.5 billion in assets just a few months into the full launch.

Let's move to the next slide. Interest rate-sensitive asset balances were $124 billion at period end, up $12 billion or 11% from last year, generating substantial earnings power. Cash as a percentage of total client assets ended the period at just under 14%, down from last quarter as clients were significant net buyers in the quarter.

Although the yield curve flattened in the quarter, it is still above the high end of our original guidance range. Additionally, the benefits of the rate -- these rate increases continue to exceed our expectations as pay rates to date have been lower than anticipated.

We have updated our rate sensitivity to account for balance growth, management fee increases in the IDA and the potential for further pricing competition. Our new range for the next 25 basis point parallel shift in rates is $0.06 to $0.10 earnings per share. Long-term deposit betas will depend on competitive dynamics but will likely trend higher over time.

Let's move to the next slide for a deeper dive on expenses. We are rolling forward operating expenses between periods, beginning with the year-over-year comparisons. In addition to normal compensation increases, expenses are up $43 million, largely due to technology investments, Scottrade-related items and higher incentives related to record net new assets.

We incurred $8 million of Scottrade-related expenses in the quarter as integration teams made significant progress in their planning efforts and certain deal costs were recognized earlier than expected.

Sequentially, we had normal seasonal increases in advertising and compensation as well as higher incentives in addition to the Scottrade-related and technology growth. With investors so engaged and the potential for more money in motion, we can -- we believe continued investments, particularly in technology and advertising, are warranted. As a result, we have increased our annual advertising budget by about $10 million to approximately $250 million. We're going to fish while the fish are biting.

And we successfully ramped technology capability faster than we expected, resulting in increased throughput. We expect to continue to ramp technology spend by a few million per quarter as long as we can continue to realize significant customer experience and efficiency benefits.

Let's move to the next slide to discuss guidance. Now let's clarify guidance in light of these changes. We are reaffirming our existing EPS guidance range of $1.50 to $1.80. A few of the individual metrics that contribute to EPS need to be adjusted, but the full year EPS range is still appropriate due to offsetting items.

Since there are so many moving parts, we are providing some information that should help you level-set your models for the rest of the year. Going down the page. On commissions, we expect revenue to decrease by $80 million to $90 million for the year. This equates to approximately $1.10 to $1.30 per trade. We would expect our base commission rate to be slightly below $8 per trade for the rest of the year.

Total commission revenue is trending to $300 million to $320 million in quarterly revenue. Asset-based revenue, on the other hand, will be significantly higher than the original guidance due to balance growth, timing of extensions and favorable interest rates. Total asset-based revenue is trending to $560 million to $580 million per quarter.

Operating expenses are increasing with investments, higher activity levels and Scottrade-related costs. With increased revenue year-to-date, we are taking the opportunity to increase investments per growth. Also, Scottrade-related expenses will be closer to $30 million for the year. As a result, operating expenses are trending to $530 million to $540 million per quarter. With all that said, the net impact of all these items on our planned fiscal '17 earnings is expected to be neutral to positive. Our original EPS guidance range is still appropriate.

And now I'll turn the call back over to Tim.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [5]

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Thanks, Steve. Well, we've reached the midway point in the year, and it's been quite a year so far. Strong investor engagement has created a robust environment of money in motion. Clients are revisiting their portfolios aligning positions with their vision of the future and competition across the industry has never been more intense.

And we've been engaged every step of the way, whether it's increasing our marketing spend to drive incremental organic growth or fast-tracking technology projects to bring greater efficiencies and automation to the client experience.

Growth has been strong and our fundamentals are good. Record new business trends are fueling strong organic growth, and we can see much more potential ahead. So we will continue to strike while the iron is hot and invest in our future.

We want to deliver the best investing and trading experience the industry has to offer. That means a lot more work in cleaning up dissatisfy-ers, becoming faster and more nimble and continually evolving how we get things done. We have a large integration on the horizon that depends upon it.

And with the pricing interest rates providing some needed tailwinds, we have the flexibility we desire to keep our focus on the necessary, investing opportunity and explore the things we haven't even considered yet.

And now we'll open up the call for Q&A. Operator, over to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Chris Harris from Wells Fargo.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [2]

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Just wanted to ask a question about the impact on commissions from the cuts we saw in the industry. The impact on your rack rate was 30%. You guys talked about that. But the guidance is implying around 13% revenue dilution, which is a much smaller impact than the rack rate cut. Just wondering if you could walk us through the moving parts related to that.

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [3]

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Yes, sure Chris. So this is Steve. The biggest item I think is really how the various negotiated rate schedules that we have interact with the rack rates. And so what we're finding is that it's really principally on the equity trades that we're seeing the biggest impact, and that's not as big a part of our business. And so as you work through the math, the overall impact isn't that significant since you're going through those sorts of layers of negotiation.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [4]

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Got you. Okay. And then just a clarifying question on the expenses. The quarterly trend you lay out here, is that the level you expect to be incurred in the second half of the year as well?

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [5]

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That's for the second half of the year, correct. That's each quarter, second half of the year, yes.

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Operator [6]

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Your next question comes from the line of Chris Shutler from William Blair.

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Christopher Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [7]

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My first one is just on the rate sensitivity, the $0.06 to $0.10 for the next rate hike. Just maybe dive into that a little bit more. What's embedded and why the change versus the $0.08 to $0.10 previously?

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [8]

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Sure. So I think as a general rule, we should expect that, as we get further into the rate increase cycle, we'll see more and more client sharing. To date, the amount of sharing that's been done has been less than we would have anticipated. So there may be a little bit of catch-up going forward. And so we're seeing that we're sort of getting closer in our guidance towards our terminal betas.

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Christopher Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [9]

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Okay. And then, I guess, separately...

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [10]

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And just to clarify, Chris, so that would be on future moves. So we've done better. We've done towards the high end of our previous range on the moves to-date, which would include the March move that you'll see for the rest of the year.

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Christopher Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [11]

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Yes, got you. Tim, I think you mentioned the DFA deal. Can you give us a little more detail there? And how much lower your pricing is versus maybe other -- versus your competitors? And I guess I'm just curious how you benefit. Is it just attracting more advisers to your platform? Or is there some kind of revenue-share component? Any detail would be great.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [12]

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Yes. It's a great opportunity and a great partnership for us. They're a wonderful firm. We can't really share the details on the pricing, but I can tell you that, yes, it will be quite an attractor for our shared RIA clients to put their assets on our portfolio -- on our platform, rather.

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Operator [13]

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Your next question comes from the line of Steven Chubak from Nomura Instinet.

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Sharon Leung, [14]

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This is actually Sharon Leung filling in for Steven. The first question is on the IDA balances. It's now churning above the high end of your guidance range. Can you give us an update on the trajectory here? And also, a sense as to the amount that's expected to run off over the next, say, 12 months?

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [15]

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Yes. So we've seen, as you say, exceptional growth in the IDA balances. And I'd say that there's a couple of components to that. So one is just we've seen strong client growth, strong client engagement. The other is that sort of as we went through the last quarter, we saw that some of our net buying activity was not as strong as it's been historically. We saw a little bit of a buildup there. So we do think that there's the opportunity for the balances to decline a bit from here, but we think that we'll sustain most of the growth that we've seen so far. And we'll be above the level of growth that we had in our original guidance.

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Sharon Leung, [16]

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Okay, great. And then just on the sec lending balances. This continue to tick down now for a while. Can you give us a sense as to what's driving that? And particularly in a quarter where we had a relatively strong IPO calendar?

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [17]

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Yes, so when we talk about securities lending, we really need to think about 2 things. One, lending, how much are we using for our operational needs? And then, what really drives the revenue, which is the securities that we can receive high rates on, the hard-to-borrow type securities. What we're seeing is that we haven't had a lot of operational needs. And so those balances tend to go down. We try to focus on the revenue for securities lending as opposed to the level of balances. When we talk about why the revenue has been fairly modest. What we've seen is that even though we're starting to see a little bit of a pickup in IPOs, and particularly the Snap IPO, sort of a mega IPO. But some of these really large ones that come out are above the sweet spot for our securities lending. So it came out and sort of instantly had a lot of market liquidity. And so there wasn't a lot of scarcity out there to drive rates up. So Snap was good for us in a lot of ways. We saw strong trading, we saw a lot of clients that opened new accounts, that Snap was their first trade. But we didn't see much selective securities lending around.

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Operator [18]

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Your next question comes from the line of Conor Fitzgerald from Goldman Sachs.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [19]

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Tim, just one for you on kind of the asset flows. I think you mentioned retail outflows were higher in the quarter, although kind of well within historic ranges. Just wondering if there were any pickup in outflows post the pricing changes announced by a competitor in February. Or whether that was more uniform throughout the quarter.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [20]

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Yes. There's certainly a lot more activity after the pricing change. And as we said, it definitely ticked up. A number of activities ticked up as the result of not just the change itself, but also obviously, the media attention of the various different price changes across the industry. So there was an uptick and there was also an uptick in things like negotiated pricing, as you can imagine, but that has now moderated down. It was actually pretty spectacular. One of the ways we measure NNA growth is obviously what we called the [ net ACATS in ], which is a way of examining the transfers in and out across the industry. And it was -- for the firm, it was a record net in for the quarter. And it was a huge uptick year-over-year. So part of that is just the elevated level of awareness, given the pricing competitiveness in the industry.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [21]

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Got it. That's helpful. And Steve, just on the quarterly expense run rate. I think you called out $30 million of Scottrade expenses for the year. I think you've already incurred $11 million. So it sounds like there's kind of $20 million to come in the back half of the year. Wanted -- just wanted to just kind of sanity-check that math. And then any color on kind of what the professional expenses are? Just trying to get a sense if those are more one timers related to the deal, or if we should kind of consider them a permanent part of the run rate.

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [22]

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Yes. So they're really primarily deal-related costs. We don't include any cost that are going to continue on for the organization. Even our internal integration teams aren't included in that number. And the real difference is that we had estimated some of these costs would happen at deal close. And instead, we're recognizing them over the period between now and deal close. And so it's really just an acceleration of some of the deal cost that we had anticipated.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [23]

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And just -- sorry, just the $8 million of kind of deal costs that you had this quarter, do you view those as kind of a permanent part of your expense run rate? Or is that just temporarily elevated?

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [24]

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Those are onetime costs. Yes.

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Conor Burke Fitzgerald, Goldman Sachs Group Inc., Research Division - VP [25]

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And the $20 million coming in the back half of the year?

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [26]

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Same thing.

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Operator [27]

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Your next question comes from the line of Mike Carrier from Bank of America Merrill Lynch.

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Unidentified Analyst, [28]

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This is actually [ Sean Colman ] on for Mike. We just wanted to follow up on the net new asset conversation. When we look at the pricing move by peers and the competitive dynamics in the industry, it's impressive to see record net new asset growth in the quarter. Can you just give us a little more detail on the type of assets that came in and what you're hearing from clients in terms of value proposition that they're looking for?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [29]

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Yes. In terms of the assets in or not, I can't give you a lot more detail. That's sort of the macro number. But I can say I probably wouldn't have expected the level of activity up overall. I think it's a combination of a number of things. As we said, the number of clients, for example, trading this quarter was up 10% year-over-year, and yet volatility was down pretty dramatically. So we ended up still having an increase in the record DART number for the quarter. But the asset flows themselves, whether it be net new accounts being opened up literally in the 30% levels, I'm quite -- it actually gives me quite a bit of reassurance about our value proposition. I mean, as we said, we had a $2 premium under the old pricing model. We have a $2 premium, too, with the major competitors in the new pricing model. And as we've said, it's all about making sure we have the best client experience in the industry. We got a lot of work to do, I think. And it's a constant journey. But it was quite reassuring that at these price points, the level of attraction for brand new clients and new assets on the platform is still very, very high.

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Unidentified Analyst, [30]

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Okay, great. Separately, how has your view on M&A changed since the announcement of the commission cuts, if at all? And then are there any particular areas that look more or less interesting now?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [31]

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No real change in view. We're fully occupied with our Scottrade integration planning, and that's going to be a big task for us for the next little while.

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Operator [32]

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Your next question comes from the line of Richard Repetto from Sandler O'Neill.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal, Equity Research [33]

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I guess the first question is on the expenses. I guess this is more for Steve. But if you take the midpoint of the quarterly range you give -- that you gave for the next 2 quarters, you add that what you -- with the first half, and you're above the top end of your guidance. And I guess, the question is with Scottrade -- even with Scottrade, we get you above that. But was Scottrade accounted for in the initial guidance? And then does this go against those -- sort of the strategy of using efficiencies to fund investments?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [34]

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Rich, let me take that one. The -- first of all, Scottrade was not, obviously, in our original guidance. And the way I think about our expenses currently is when the pricing action happened in the industry, there was a lot of questions about, "Okay, are you be slashing your expenses?" But obviously, one of the reasons why the commission pricing changed was, in fact, there was an increase in other revenues which obviously more than offset it for industry players, and ourselves included. So that, coupled with our Scottrade deal, and the fact that we've got delayed closing between October announcement last year and almost a full year before closing is we sort of took this opportunity to say, "All right, can we move forward some of the advancements in investments? Whether it be getting ready for the Scottrade integration or the technology investments in both our client experience or operational savings?" As I said, I'm -- call it, 2 quarters ago, I talked about increasing our throughput as being a really important driver for us. And I'm thrilled, frankly. Being up about 1/3 or so in our technology project spend and yet literally doubling our throughput is -- it means to me that there's sort of been a step function increase in productivity in something that we really care about. Those investments directly help our operational efficiency moving forward and our client experience. They're almost always virtuous on both fronts. So I sort of see this as a good expense to spend now, given that we can cover it inside our sort of original EPS range. And they're investments that are paying off.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal, Equity Research [35]

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Okay, I don't fully understand what you define as throughput, but I don't want to use up 1 of my 2 questions on that. I guess...

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [36]

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Well, let me take it, Rich. And so throughput, I think it's important because we use that term a lot. Throughput to me is, for every dollar of spend on a technology project, how much are we getting done of the long list of enhancements, productivity gains that we have? There's always this constant list of projects that we're looking to get done. And when I got here, it felt to me like there was a pent-up demand for, notably, technology spend to make those enhancements. So that's why we announced, call it, a 25%, 30% improvement in the spend rate. But at the same time, we wanted to make sure we were investing in getting more efficient for every dollar. So we upped our technology spend, as I said, by about 1/3. And yet, we've seen as we measure output, if you will, per dollar, doubling. So it's a great combination, I think, of -- and we're seeing it in terms of deliverables that we're putting into market now, both for clients as well as our associates. So throughput is an important theme around here, and I won't count it against you on our second question.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal, Equity Research [37]

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Okay. Well, the second question is more long term. And I'm trying to understand, do you feel the necessity to moderate, or have a long-term strategy, if to combat, if there were further price compression? And you acknowledged that there could be with the lower sensitivity to interest rates that you somehow -- that's accounting for the further price competition. So I guess the question is the long-term strategy that TD Ameritrade has. Do you either diversify -- I know you talked about product distribution in Dimensional Funds, but more detail on that.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [38]

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Yes. That is a few things. First of all, the good news is that even if commission rates went to 0 tomorrow, we'd still be profitable. And that's before our integration with Scottrade and the scale enhancements that we get as a result of that. So we've reached that critical mass size where we're fully able to work with the competition in terms of the price structure that seems to make sense. Having said that, we're quite comfortable that the pricing that we have in the marketplace -- because you remember, there are $0 players in the marketplace now and have been for quite some time. It's been tried for many, many times over the years. So there are different revenue models that play in the industry, and we happen to have a simple price, all-in for the best platform on The Street. So in terms of the additional strategies to make sure that -- should that day happen, yes. That's why my predecessor before me and the team continues to build out other asset-based monetization strategies to offset that day. But I think the most recent activity would say we've had a flurry of activity, as we've intended to every 5, 6, 7 years, something like that. And it seems to have abated a little bit for now. And we're quite comfortable about our strategic position.

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [39]

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Yes. I think, too, Rich, in terms of the expense growth, what we're seeing is except for the incremental Scottrade-related expenses, which are really just a pull-forward of the one times, what we're spending money on, we think, is either going to improve our efficiency over the long term, it's automation items; or we think it's going to accelerate our growth, either through better client experience, new product offerings, or in the case of increasing our advertising and our investor services spend, increase the sales in net new assets. We're also seeing higher incentives during the quarter related to the higher volumes that we've seen.

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Operator [40]

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Your next question comes from the line of Brian Bedell from Deutsche Bank.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [41]

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Just on the -- back to the pricing competition dynamic. Do you have a sense of -- obviously, your organic growth held up very well, considering everything? Give a sense of how it impacted Scottrade. I would think that the target of a lot of the pricing competition with Scottrade customers. And then, maybe also on how you think about the price cuts from an industry perspective. Did it attract more flows to the entire online broker industry?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [42]

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So, it's Tim, Brian. On the Scottrade question, we're a bit of a delicate period. As you can imagine, we're still 2 separate competing companies, so we can talk about how any factors impacted them. Of course, our teams are working on integration planning, but we try and stay away from that. And it certainly wouldn't be my place to comment until the deal was closed. On the industry flows, it's tough to ascertain in fact, but if you go back to my original point earlier, it sure feels like just a heightened level of -- well, let me answer a different way. If you'd asked me before the round of competitive pricing changes, whether those changes would attract additional assets into self-directing because the cost of the trade was lower, I would have said, "Well, that's pricing theory." But because of the rate is a lot lower than economic -- than it has been in the past, I wouldn't have expected it to have much of an impact. And yet the activity seems to show 2 things happened. There might have been new assets being attracted to the industry overall, so the plate of pie might have got larger; or it might have just gotten more money in movement as a result, as I said, of the sheer level of media attention. It's tough to ascertain at this point.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [43]

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Right, right. Okay -- no, that's good color. And then maybe just maybe back to the deposit beta question. The -- obviously, the experience so far has been better. Maybe just to clarify, Steve. The asset-based guidance of $560 million to $580 million, that's only on the March hike, not future hikes. Is that correct?

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [44]

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It does include a hike later in the year, so effective -- I think a July hike effective in August.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [45]

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Got it. And then just on the deposit beta, you mentioned so far, good experience there. You would expect that to move up significantly in the next hike? And then what would you view as your sort of terminal -- you mentioned a terminal deposit beta.

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [46]

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Yes. We've talked about historically like a 40% beta. We think it's going to be a long time before we get there, and as I said, our experience to date has been quite positive. And it would seem like the industry, with some of the pricing changes, is going to probably not. But we may see modest betas in the near term here. So we'll continue to evaluate it with each move.

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Operator [47]

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Your next question comes from the line of Dan Fannon from Jefferies.

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Gerald Edward O'Hara, Jefferies LLC, Research Division - Equity Analyst [48]

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It's actually Gerry O'Hara sitting in for Dan today. Just a quick question. With respect to the rebate programs that you kind of discussed in the past, I think with respect to the Amerivest plan, could you maybe just give us a sense -- I think they were being phased out, but where that kind of stands now. I know there was some discussion around kind of some, I guess, increased reserves around rising interest rates. But if you could give us -- maybe a little color there, that would be helpful.

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [49]

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Sure. So we are reaching the end of that program. I think there's only 2 quarters left. We had a very strong quarter this quarter. And so essentially, all the portfolios -- or all the material portfolios were up. And so that meant that over the last 2 quarters, there was no need for any rebates. So we had a very modest reserve that we put up last quarter, and we reversed it this quarter. But it's really de minimis.

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Gerald Edward O'Hara, Jefferies LLC, Research Division - Equity Analyst [50]

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Okay, helpful. And I guess just a quick follow-up. Any other initiatives out there that are sort of just being introduced or being put in play just to attract flows? Or to -- with respect to the new robo plans or other portfolios?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [51]

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Well, nothing really that, other than I think I went into quite a bit of detail about the things that both have been launched, as well as some examples of what we've been working on. But I'd say generally I'm quite pleased, as I said in my answer to Rich, the -- at just the level of engagement around new enhancements. I'm obviously not going to preannounce them here, but talk about them in the future. But I've been quite struck since getting here, that with, again, a relatively modest increase in technology spend, we're really piling through the backlog, if you will, of ideas and investments for both experience change and improvement for our clients as well as for associates. And as I said, and I think Steve made the point, most of these investments generate 2 big benefits: Usually an operational improvement and efficiency gain, as well as a client experience enhancement. And new technologies are coming along all the time that are -- enable us to do that even faster. So good, hope to be able to tell you more about these enhances in quarters to come.

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Operator [52]

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The next question comes from the line of Doug Mewhirter from SunTrust.

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Douglas Robert Mewhirter, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [53]

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I just had 2 questions, One on the IDA yield and one on Scottrade. First, on the IDA yield, it may be an obvious question that I'm missing. So your original guidance range had between 100 basis points and 95 basis points of yield. And obviously, we're -- you're fairly well above that. And I assume that with the revised guidance range, you're assuming that you're going to be -- you're going to stay above that 95 to 100 basis point range because it sounds like was rolling on is being reinvested at what's rolling off. I just want to clarify that because I know it's invested across the curve and it can bounce around quite a bit. And also if you kind of have a new range in mind, that would be helpful.

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [54]

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Yes. So we're not going to go through specific ranges on the call. But I think if you think about it this way and you say the increases that you've seen in the IDA are largely due to the December rate increase as well as extensions at much higher rates than we had originally anticipated. If you look in the appendix, the long end of the curve is above the high end of our guidance range. In addition to that, you really haven't seen the impact of the March 25 basis point increase. And as we said, that increase is going to be a little bit better than we had originally expected. I think we had gave $0.08 to $0.10, and we're a little bit at the higher -- above the high end of that range due to lower betas on that move. And so that should give a boost to the IDA in the second half of the year over and above the 1.13% rate that you're seeing. And that's what driving a large part of the higher guidance range you're seeing.

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Douglas Robert Mewhirter, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [55]

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Great, that's helpful. And Tim, I know it's hard to talk about specifically Scottrade, but maybe in terms of what the future construction of the 2 companies would look like together. With the increased pricing competition, I know that sort of puts pressure on the business model a little bit, although you are making up on the asset side. Has that sort of changed the way that you view the combined organization in terms of for maybe how many branches you would keep open? Have you -- does that raise the bar on what individual branch profitability will look like? Or even some of the other initiatives that, that would look like in a merged Ameritrade-Scottrade organization?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [56]

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Great, thanks for the question. So question is back in October when we announced this deal, would we have done anything different or announced any different sort of range of branches, et cetera, relative to where we are now in pricing? Well first, remember that Scottrade was already at that price point that we're currently at. So from a client point of view, that sort of removes a potential [ dissatisfy-er ] depending on what we would have done with our price ranges. That's the first thing. In terms of the branches, what we said then, and I think it's still very true, is that to deliver the best client experience, what we're looking for is the best combination of high tech and high touch. And the fact that our range originally announced was 400 to 450 branches, we're still somewhere in that particular number. And of course, the planning goes on a market-by-market basis now with our Scottrade partners to try and figure out exactly which locations and when and why. So we're getting more educated on that as opposed to just the sort of high-level view that you do during due diligence. Obviously, scale matters even more, and we like the fact that both Scottrade and ourselves has continued to do well in this environment leading up to the close. So I'd say no, it doesn't change our view in any way, given the current activity. And we're looking forward to a close later on this year.

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Operator [57]

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Your next question comes from the line of Chris Allen from Buckingham Research.

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Christopher John Allen, The Buckingham Research Group Incorporated - Analyst [58]

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Just wanted to ask, on the margin lending changes, the pricing impact on negotiated rates, which I believe were roughly over 50% of the book. Any color in terms of what that's expected to do the yield moving forward in terms of the next quarter?

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [59]

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Yes. So we should see a less air from the negotiated pricing. I think you're right, that it's around 50% of the book. We have seen -- while we've seen better deposit betas than we had expected. We have seen a higher level of negotiation in the margin book. So a little of that may be dissipated over time, but you should see a bump starting next quarter.

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Christopher John Allen, The Buckingham Research Group Incorporated - Analyst [60]

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And that would be a full 25 basis point bump? Or some...

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Stephen J. Boyle, TD Ameritrade Holding Corporation - CFO and EVP [61]

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It will be like you said, you have to take the pro rata of how much is negotiated, which is a little bit over 50%.

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Christopher John Allen, The Buckingham Research Group Incorporated - Analyst [62]

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Okay, got it. And then I just saw a recent news article just on transfer fees -- I mean, sorry, transfer fees for RIAs in terms of referral fees. It sounds like you guys went to a basis point referral fee, where it had been percentage of revenues prior. This puts you more aligned with Fidelity and Schwab. Just wondering if you could give us any color there, expected revenue impact there.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [63]

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Yes. So we made that change and announced it a little -- a few weeks ago. Essentially, we took a look at our AdvisorDirect program and our -- the revenues. We tried to normalize from what was an inconsistent -- consistent basis point, but inconsistent depending on the fee scheme of the original RIA client that was getting the referral to basically a flat rate across all of our RIA partners. So as a result, it was more in keeping, frankly, with some of the tenets that DOL rule and their best interest was. And essentially, it's no real financial impact on either way. It's just a -- it's a cleaner model, removes any potential doubt of any conflict of interest on that point.

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Operator [64]

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There are no further questions at this time. I'll turn the call back over to management.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - CEO, President and Director [65]

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Great. Thanks, everybody, for taking the call. A wonderful quarter from our point of view, and we'll talk to you in a few months.

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Operator [66]

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