AMTD IDEA Group (AMTD) Q4 2012 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the TD Ameritrade Holding Corporation September Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is President and Chief Executive Officer, Fred Tomczyk; and Chief Financial Officer, Bill Gerber. At this time, I'd like to turn the call over to Jeff Goeser, Director of Finance and Investor Relations.

Good morning, everyone, and welcome to the TD Ameritrade September Quarter and Fiscal 2012 Year-End Earnings Call. In a minute, we'll be hearing from Fred and Bill, but first, I'd like to refer you to our press release, slide presentation and fiscal 2013 outlook statement published last Monday. They can be found on amtd.com. I'd also like to refer you to our Safe Harbor statement, which is on Slide 2 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 you to review our description of risk factors contained in our most recent financial reports, Form 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. [Operator Instructions] With that, we have Fred Tomczyk, CEO; and Bill Gerber, CFO, here to review our results and major accomplishments. Fred?

Thanks, Jeff, and good morning, everyone, and welcome to our fourth quarter earnings call. We're getting together a little later this quarter as a result of Hurricane Sandy. And I know that many of you are in the affected areas and we want you to know that our thoughts and well wishes are with you and your families. The unprecedented flooding, power outages and damage have left many of our associates, clients, families and their neighbors in need of ongoing assistance. So I'm pleased to report that we will donate $250,000 to the American Red Cross, and expand our annual match program to raise up to an additional $250,000 to help with relief efforts. We also closed 2 corporate offices and 30 branches heading into the storm, putting the health and safety of our associates first. We have redundancies throughout the country, and we were able to transition responsibilities as needed. We are designed to maintain seamless operational capabilities even if we completely lose one of our servers or operation centers on short notice. So it was business as usual for us, although, most products were not available for trading while the markets were closed. Call volumes were light as the storm hit parts of the country that typically generate 1/4 to 1/3 of our trading volume. We made the decision to release our official numbers at the normal time, then postpone this call to give you time to tend to what's most important. As a result, we don't plan to spend too much time today in the numbers themselves, instead, we'll focus more on strategy and where we're going in 2013. You can see the fourth quarter highlights on Slide 3, where we delivered $0.26 per share in earnings, which we feel good about in light of the ongoing challenges in the market during the quarter. On Slide 4, you can see the financial highlights of our fiscal year, which include $1.06 in earnings per share. In summary, we continue to deliver on our strategy, our financial position remains strong, organic growth continues unabated, and we continue to make strategic investments to strengthen our company and our competitive position. In each of the last 4 years, we've gathered assets at double-digit rates. No one else in the industry has done that. In 2008, we had $270 billion in client assets, and today, we're closing in on $500 billion. Derivatives have grown from approximately 10% of our trading volume in 2009, to close to 40% today. Our performance in asset gathering and trading position us well to fight through this challenging environment, and for when the environment improves. We have substantial long-term earning power. Our strategy has worked well and we believe it will continue to work well and you should expect the same from us in 2013. Now let's take a closer look on how we delivered on our growth strategy with a look at asset gathering results and expectations on Slide #5. In our fourth year of double-digit growth, we gathered, on average, $160 million in client assets each business day. We again had strong client service scores in both retail and institutional channels and as a result, client retention remains high. The $41 billion we gathered in 2012 is a credit to our teams working together to generate leads and deepen relationships with both new and existing clients. Within retail, call center referrals to our sales organization continue to drive strong growth. In 2012, referral conversions were up 19% from the previous year despite lower overall investor engagement. Our referral relationship with TD Bank continues to improve with leads sent to our investment consultants up 29% from 2011. Total assets from TD Bank-originated accounts contributed to nearly $1 billion in inflows, the first time we hit that mark in a single year. We are encouraged by these results, and both organizations continue to work on driving even greater volumes. On the institutional side, our sales pipeline remains as robust as ever. In 2012, we captured a record 441 breakaway brokers, a 27% increase over 2011. Veo open access is now working with more than 90% of the technology vendors used by our advisors, and our practice management teams created more than 2,200 new action plans to help advisors run more efficient and growing practices in 2012. When we look at asset gathering in 2013, our focus will again be on maintaining our momentum. The retail organization will focus on continuing improvements to sales, service and our product offerings. We'll also continue to invest in our sales and service channels to continue driving our asset gathering strategy going forward. And we will look to develop new sources of new accounts and assets as part of our next phase of growth. For institutional, the focus is on our offering, continuing to enhance our technology, our suite of products and the support services that help RAAs drive strong growth within their practices. Our breakaway broker pipeline remains full, and we continue to focus on this as a source of new RAAs for the TD Ameritrade platform. Now let's turn to the trading side of our business on Slide 6. We ended the year with an average 360,000 trades per day, an activity rate of 6.3%, almost 1% below our average activity rate over the previous 3 years. If our activity rate was at the average of the last 3 years, our trades per day would have been 45,000 trades per day higher, which would have added $0.15 to our earnings per share. But while investor -- retail investor engagement has slowed, and equity exchange volumes are historically low, we remain an industry leader and continue to gain market share. There are a number of positive trends worth noting. For example, with the adoption of derivatives across our client base, options now represent 31% of trading volume in the fourth quarter. And combined with futures and foreign exchange, total derivative trading volume represented 40% of trading volume. Mobile continues to grow, averaging nearly 8% of our trades per day in the fourth quarter. In fiscal 2012, we averaged 1,800 new users every day, up 32% from 2011. We know that investors who use mobile platforms are more engaged in the markets, and we tend to see increased trading activity from them over time. When we look to 2013, we will continue to focus on innovation, and we will also focus on the next phase of growth, which we'll see coming primarily from 2 places: first is futures. The natural progression for traders is from equities to options, and then from options to futures. We're seeing an increase in the number of clients seeking approval to trade this product, which tells us investor interest is growing. And second is derivatives for advisors. This year, we launched our Options Market Center for RAAs. More than half of advisors with more than $100 million in total firm assets now use options. And since the launch of the Options Market Center last fall, option trades per day among RAAs have grown by 36%. Turning to Slide 7. As we continue to grow client assets, we have also focused on growing a third revenue stream. This revenue stream, which we are highlighting for the first time, includes fees generated primarily from 3 sources: Amerivest, Advisor Direct and mutual fund trailers. We now have a strong product offering in place, and in fiscal 2012, we earned nearly $200 million in market fee-based revenue, a compound annual growth rate of 36% from $76 million in 2009. We have broadened our Amerivest family of packaged products to meet 4 different investment objectives and turned it into a sold product versus a bought product. With these strategies in place early in 2012, year-end balances were up 50% over the end of fiscal 2011. And as the need for guidance and ongoing portfolio management and advice continues, Advisor Direct has had a strong year as well, with converted assets up 41% over fiscal 2011. Our near-term goal for 2013 and beyond is to increase our market fee-based revenue by 15% to 25% per annum. Our revised offering allows us to stay true to our open architecture philosophy, while capturing most of the spread between retail and institutional money management. We feel that our Amerivest and Advisor Direct offerings are now designed properly, and aimed at the right target markets. So we feel good about our ability to now drive this revenue stream even harder. Let's move on to Slide 8. As we start 2013, we continue to benefit from the strong organic growth momentum that we built up over the last 4 years. While the challenge of the global economic uncertainty is following us into the new year, we are cautiously optimistic on the U.S. economy. We're hopeful that after the election, our leaders in Washington will work together to better solve our economic and fiscal challenges, and bring more certainty to retail investors. In our mind, the U.S. is in a better position than other countries to deal with its fiscal challenges. If we can better align monetary and fiscal policy, we will remove much of the uncertainty hanging over the economy and then, we believe, business owners and retail re-investors -- investors will reengage. The more momentum we have going into that environment and the stronger our competitive and financial positions, the better position we are to continue growing and ultimately realizing our substantial long-term earning power. In 2013, we will focus on maintaining our momentum in asset gathering with continued improvements and investments in our sales and service models and processes. On the trading side, if you want to maintain leadership, you must continue to improve, to innovate and seek new opportunities for growth. Derivatives will remain our focus, with increased attention on futures as the next phase of growth for retail traders. The work we've done improving sales processes and expanding and enhancing the marketing of our fee-based offerings has set the foundation for continued growth over the coming years. Now each of our growth initiatives for 2013 require investments. We will continue to invest in our business, self-funding that growth by identifying efficiencies and eliminating waste throughout the organization utilizing our Lean initiative. We will remain diligent on keeping overall expenses in check, and our plan is to have the same level of operating expenses in 2013, while driving industry-leading organic growth. Now when we look at capital deployment, our strategy has not changed. We continue to consider 5 options for returning or deploying capital to the benefit of our shareholders. In order of priority, those options are: one, investing in growth, either through organic means or through acquisition, provided those investments make strategic and financial sense; two, share repurchases; three, a recurring dividend; four, is debt repayment; and five, is a onetime or annual variable dividend. On top of that is how we consider which of these makes the most sense. Whatever we choose to do has to make the right strategic and financial sense for this company and our stakeholders, given the situation we find ourselves in at that point in time, and we strive very hard to preserve all of our strategic options. So for now, we believe that the best strategic and financial use of our capital in 2013 is to increase our dividend by 50% or $0.03 to $0.09 per share per quarter. Until 2010, we didn't have a dividend. Last year, we increased it by 20%, and now we're increasing it by a further 50%. We will also use $250 million to pay down a tranche of our debt in December. It's an odd lot, so we will repay it upon maturity. When you combine the dividend increase with the debt paydown, we will have returned 65% to 80% of our annual forecasted net income. Now the open question is what about further share repurchases? If we were to purchase many more shares, our largest shareholder, TD, and a key strategic partner for us, would have on ownership position above the limit stated in the stockholders agreement, which they would have to rectify by January of 2014. Selling down at current prices would cause them to recognize an accounting loss, even though they got in that position through no action of their own. Leveraging our partnership with TD helps us drive our business model in a way that enables our strong free cash flow, which benefits all of our shareholders. Given this situation, along with a number of other good options we have to return or deploy capital, we have decided that we will do limited further share repurchases. We believe this is the right decision for our company and all of our shareholders at this point in time. That brings us to our earnings per share range for 2013. We expect to earn between $1 and $1.20 per share. Bill will talk more about that in a few moments. Now in closing, when it comes to the macroeconomic environment, I don't have a crystal ball to predict what will happen 30 days from now, tomorrow, or even 3 years from now. Having said that, I do consider myself cautiously optimistic on the U.S. economy and the retail trading environment for 2013. I'm optimistic that once we get through tomorrow's election and get that behind us, our leaders in Washington will begin to work across the aisle to take our fiscal challenges on and provide clarity and thereby removing some of the uncertainty that has caused business leaders and investors to stay largely on the sidelines. So when retail sentiment improves, and it will, activity rates will normalize rapidly. A more positive outlook by business people and investors will turn investor sentiment faster than many people believe, particularly, given the amount of cash sitting on the sidelines or invested in risk-free assets right now. Over the last 4 years, we have improved our business model. We've strengthened our offerings for traders, investors and independent registered investment advisors. We've gained market share in trading, and we've gathered more than $140 billion in net new client assets. We've maintained a clean balance sheet and a strong financial position, and we believe that we have a differentiated business model that drives strong free cash flow and will deliver substantial earnings power in a more normalized market and interest rate environment. We've built a strong competitive position and we'll use that position to drive the next phase of our growth. Being the better investment firm for today's investor means never resting, being proud of your accomplishments, but never satisfied. It is a journey that never ends. In 2013, our goal is to do the same thing all over, but do it better. And with that, I'll turn the call over to Bill.

Thanks, Fred, and good morning, everyone. As it's been a week since we published our results, I'm sure you've had a chance to fully review everything. So as such, I'm going to keep my prepared remarks somewhat short as I walk through each of the slides. So let's begin with the financial review on Slide 10. We'll start with the September to September comparisons on the left side of the page. Commission rates and expense discipline offset relatively low trading, resulting in $0.26 earnings per share. Commission rates were up $0.62 from the last September quarter, as options increased from 26% to 31% of DARTs, and our payment for order flow increased due to higher option rates per contract and higher equity shares per trade. Moving to the full year comparisons on the right side of the page. Asset-based revenues and expense discipline offset lower trading, resulting in $1.06 earnings per share. Asset-based revenue increased $53 million as balanced growth drove $169 million increase in revenue, offset by lower rates driving about $120 million less revenue. Of note, market fee-based revenue drove $35 million of this $53 million increase in asset-based revenue. Expenses were basically flat with last year, a trend we plan to continue into next year. Now let's turn to spread-based revenue on Slide 11. On a year-over-year basis, this quarter we finished at $323 million in revenue, flat from last year. Balances averaged $76 billion in the quarter, up $9 billion or 13% from last year. This growth was offset by 21 basis points of rate compression. Now let's look at the next slide. Since 2009, we have grown revenue 40% as average balances have grown $41 billion or 124%, offset by 103 basis point drop or 38% decline in rates. Put another way, since 2009, balanced growth has contributed about $1.1 billion in increased revenue offset by $760 million less revenue due to rate declines. This rate compression represents an $0.85 per share decrease to earnings this year alone. With this $0.85 of lost earnings, along with the $0.15 cents of lost earnings due to low trading that Fred noted earlier, we would have almost doubled our earnings per share this year. Given the yield curve, it shouldn't come as a surprise to anyone that we see more rate compression. As we look to 2013, if we look at the midpoint of the range, further rate declines could negatively impact revenue by approximately $200 million, offset by balanced growth positively impacting revenue by about $150 million. Let's look at the IDA on the next slide. On a year-over-year basis, average balances are up $7 billion or 13%, and revenue is up $7 million or 4% as balanced growth contributed $27 million of higher revenue, offset by lower rates driving $20 million less revenue. Our average duration of the portfolio is currently at 3 years, at the top end of our 2 to 3-year target range. Let's now turn to Slide 14. For the year, our IDA net yield was 1.37% versus 1.55% last year, and was at the higher end of our original guidance range of 1.30% to 1.40% for the year. Since 2009, IDA revenue has grown $260 million or a 46% increase. This represents a 13% compounded annual growth rate. Average balances have grown $37 billion or 168%, which represents a 39% compounded annual growth rate. Organic growth, as well as our cash management strategy, drove this strong increase. Since 2009, though, rates have fallen 118 basis points or a 46% decline. So while balances drove $950 million of revenue increases, rate compression lowered revenue by about $700 million. In 2013, we see a continuing trend. At the midpoint of our outlook, balanced growth will contribute $130 million more revenue, offset by rate compression lowering revenue by about $175 million. The net yield range implies a midpoint of 1.12% for the year. Our extension strategy is unchanged as we will continue to maintain duration in the targeted 2 to 3 year range. We will continue to monitor the yield curve before making extension decisions. As we've discussed, mix, balanced growth and the yield curve all factor into the ultimate net yield we achieve, but the goal is always income. Let's now look at rate-sensitive assets on the next slide. Balances are up $6 billion or 8% from last year due to organic growth. We ended the quarter with approximately $63 billion in IDA balances, and our client cash as a percentage of client assets was approximately 17%. This percentage has been remarkably stable over our history, and marks the 13th consecutive quarter we've been in the 15% to 20% range. Please see Slide 21 in the appendix for a reference. As you can see, the last time we exceeded that 15% to 20% range was a few quarters immediately following the market crash in the fall of '08. This was due to the market decline in that time or the denominator, as cash amounts or the numerator were still very stable. We remain very well positioned for rising rates. Our rate sensitivity is unchanged as increasing benefit from higher rates will be recognized in outer years due to our laddering strategy. Now let's take a look at some key information on our guidance on Slide 16. Here's a summary of some of the key information in the outlook statement. Obviously, please refer to the detailed outlook statement available at amtd.com. Much of this is similar to what we have shown in the past, and has already been addressed this morning. We are narrowing our range a bit this year to $1 to $1.20 and an operating range of 36% to 38%, still industry-leading. Expense discipline will remain a key driver of maintaining these strong operating margins. We are guiding you to a midpoint of $1.45 billion. We are targeting the midpoint or lower to achieve a third straight year of approximately the same expense levels. The variability of our results is, once again, going to be primarily a function of trading levels. Our guidance assumes a 6% to 7% activity rate versus the 6.3% achieved this year, and the 7.1% pro forma activity rate over the last 4 years. We expect to see continued rate compression as our NIM and IDA ranges are 1.40% to 1.50% and 1.07% to 1.17%, respectively. Let's now move to the last slide. We ended the year with seasonally low trading levels, which have continued into the month of October. We are optimistic that activity rates will start to increase with normal seasonality, especially with the election season coming to an end. Regardless of the environment, though, we remain focused on retaining our #1 position in both trading and asset gathering. Our net new asset growth rate range is once again 7% to 11%. However, we hope to achieve a fifth consecutive year of double-digit asset growth, which would be an amazing accomplishment considering where we started a few years ago. We are emphasizing market fee-based products as a strategic priority as it provides us with a third revenue stream and increases our asset-based revenue. Its growth potential is outstanding and provides a more natural growth trajectory since it is market-driven. Expense discipline and process improvement will remain an area of focus as we continue to see the benefits of Lean. We will keep a clean and stable balance sheet which, coupled with our strong cash flow, provides us tremendous financial flexibility. We will deploy 65% to 80% of earnings in fiscal '13 through the debt -- payment and dividends. We have increased our dividend by 50% to $0.09 per quarter. The resulting dividend yield of 2.3% to 2.4% is now above the average of the S&P 500 and the S&P Financials. We're expecting $1 to $1.20 earnings per share for fiscal '13, but that variability will primarily be a function of trades per day. In closing, we are proud of our accomplishments in 2012. We executed on our strategy, maintained our industry-leading net new asset growth rate, continued to invest in growth initiatives and increased the dividend, all while holding expenses flat. This is a significant achievement in any environment. We remain optimistic for the long term given our business model, our dedicated associates and our momentum in asset gathering and trading. And with that, I'll turn the call over to the operator for Q&A.

[Operator Instructions] Our first question in our queue comes from Rich Repetto with Sandler O'Neill.

I guess, the question -- the first question is on the guidance, and I guess, you spent a fair amount of time talking about your optimism on trading and hopefully, we don't see what we had in the recent past. But I guess, at the midpoint of guidance, the DARTs are up about 6.25%. And I guess, is this just a reflection of actually put into the guidance of the optimism? Anything else that we can rely on to tell us that's a reasonable forecast? The activity rate, well I think, was below 6% in the last quarter. So just how you got there, that midpoint of the DART guidance, because that drives, I think, the biggest change in the year-over-year guidance.

If you look at the average activity rate over the last 3 years, it's about 7.2%, 7.3%, in that range. And if you went back to guidance a year ago, we would have been at 6.5% to 7.5%, and that -- that we consider it more normal. And we've always said, if it's inside the range of 6.5% to 7.5%, that's pretty much a normal activity rate. When you get below 6.5%, it's unusual. When you get above 7.5% it's also highly unusual, and rarely consistent. And I would look to the September quarter, which is historically the slowest trading quarter of the fiscal year, as being indicative of how you should look at activity rates. We think the activity rate we have in there, I think, at the midpoint is 6.5%. Now that's -- if we went back, I mean, we would say that's at the low end of the range that we would consider normal. But you also got to remember, we've just got to get this election behind us. I'd also remind people that the last time we had the fiscal cliff debate or I'm sorry the debt ceiling debate was a year ago in August, and in that month, we had 4 of the top trading days of our history and a record quarter at 484,000 trades per day in the month of August alone. So there is some, call it, some of it is just getting back to what we would consider a normal trading range and 6.5% would be at the low end. But on top of that, we do think, after we get the election behind us and some of the uncertainty gets cleared that things should get better. It just -- it may not happen until the second quarter however, I'd say, Rich.

Got it. And I'm all for normal, too. The next -- the follow -- my one follow-up question would be, you outlined, as far as the capital strategy, the 5 -- I guess, different options open to you. And you sort of ruled out, I believe, the share repurchase. You already upped the recurring dividend; I guess you could again. But I guess, the question would be, could you talk about the other 3, a little bit more color as far as where the investment in growth and I don't know whether there's any more potential debt paydowns, because then you're right to the onetime dividend, I guess. So just sort of addressing those 3 that haven't been ruled out, I guess, yet?

Well, I mean in terms of investments in organic growth, we have made those. We're going to continue to make those. What we're telling you is that we're going to self-fund those because we're having good success with our Lean initiative. We also launched the sourcing initiative and we're just keeping expenses very tight in light of the environment. And that has given us room to make those investments without increasing expenses. And I would say, all successful organic growth companies are able to continue to invest in the next wave of growth and in the future but keep their expenses in check. I'm not sure you can do flat forever, but if you can keep up to inflation or to your organic growth rate, you're doing pretty well. And so we think we can beat that this year, given -- with all the progress we've made on Lean, number one. Number two, the recurring dividend obviously, I think, when we looked at that, we have confidence that we can sustain that, and we also have confidence that we can increase that over time. There's no question that in the market right now there's an appetite for yield, and so getting our dividend yield up over the average of the S&P 500 and the S&P 500 Financials we thought was the right strategic move. Debt paydown, I don't think you should read that we will do further re-paydowns of debt. We've always said we wanted to maintain a balance sheet that had 1x EBITDA in terms of debt to EBITDA. After the $250 million, we are right in that range. So we feel good about that. And after the $250 million is repaid, as I said, it's an odd lot, you're basically right at $750 million in liquid assets, which is right in the target range of $500 million to $1 billion. So when you put that all together, we feel very good about where we're at. Do we have flexibility to increase the recurring dividend or do special dividends? Yes, we do. But I think, what we've done right now is where we came out as the right thing to do, given the situation we see right now.

Our next question comes from Roger Freeman with Barclays.

Just I guess, Bill, on the IDA rollovers, you said you're basically 3-year blended ratio now. Do you plan to stay at the upper end of that range? And -- or as you kind of roll forward over the next year, what is the duration of swaps that'll be rolling off look like? And are those, then going into 7 years or so to kind of balance that out?

Yes, so the -- let me answer your, I guess, the first question first about the IDA rollover. Yes, we're probably going to -- no, we're going to stay in the 2 to 3 year range. Naturally, of course, if you're starting the year at 3, it's going to -- if you change, then you think it's going to drift a little bit down, but as I would expect, we're going to stay in the upper end of that 2 to 3 year range, probably even, I'd say even 2 6, 2 7-plus. We are still investing the monies the same way that we have before primarily, in the 4 to 7 year range of the curve on the retail. And the institutional monies, the 60% that we identified that is institutional-like versus the 40% we talked about last couple of quarters which we said is more retail -- so that 40% institutional will also be invested in 4 to 7, but the 60% that we see as being shorter will stay in the 1 to 2. So that's -- I hope that helps you.

It does, Bill. I guess my second question will be just on Knight, 2 things: is there -- did that increase in payment for order flow -- is that driven in part or mostly by Knight; and also, considering how those [ph] investment was being held, but was there any gain from that running through the P&L?

No. On the second part, no, there's no gain from that going through the P&L. And we have had, and continue to have, order flow agreements with Knight, but I would say there is nothing unusual at all in there relative to Knight.

Our next question comes from Howard Chen with Credit Suisse.

Bill, on the continued asset gathering initiatives, as you continue to put up this impressive 7% to 11%, plus growth, I imagine that, just by definition, becomes harder as every year goes by. So can you just give us a sense of how the incremental profitability and return of $1 of net new assets is progressing for you all as you get better at this?

Yes. That's a number that's highly contingent on the interest rate environment. So it's one of those things that, at the margin today -- because you're really making -- your cash management profits are just not what they used to be, so while it helps, it basically -- it will really go when the interest rate environment starts to change. But having said that, Howard, I think what we've tried to demonstrate today as -- we continue to gather assets, just not trading business, we've also gathered a substantial sort of more -- what you would call more asset gathering mix, which is, as a percentage of -- revenue divided by total assets, would be lower than the trading side. The trading side, because trading clients basically trade frequently, which drives commission revenue. Also if you use margin loans and keep a fair bit in cash, you tend to make a lot of money as a percentage of revenue on trading clients. So we continue to grow trading clients as you've seen. We continue to gain market share, but as the RAA business grows at a faster rate and your long-term investor grows at a faster rate, you are going to have lower absolute -- lower revenue divided by assets than you otherwise would. Having said all that, we focused on the market's fee-based revenue. And we like the returns we're getting on that, and that has a good growth trajectory in front of us. I hope that helps you, Howard.

That helps a lot, Fred. And then, just touching on one specific thing you mentioned. Over the past few quarters, margin loans seem to be bucking the trend. This quarter they seemed to trend lower where actually, prices are going up and then the opposite happened last quarter. Maybe, Bill, is there any color on what drove that, and what are you assuming for margin balances going forward in the NIM and the overall guidance for fiscal '13?

Usually, what we have found is that margin balances have about a one month lag to where the equity markets are going. So if you see an increase in the equity markets now, a month from now we'd start seeing more margin lending. And the same happens on the way down. So we put that into the kind of the rule of thumb that seems to work for us. And we are seeing, actually, it's pretty stable, too, on margin loans for 2013 as well. So we're not expecting any form of big uptick relative to margin lending in '13.

Okay. Just to clarify one thing you said, though, Bill. So if equity market was up substantially, in late August and September, a month into your new quarter, have you seen that rebound in margin balances again?

Yes.

Traders tend to be contrarian, Howard, so they tend to sell into strength and buy into weakness.

Our next question comes from Brian Bedell with ISI Group.

A question for you to turn up, Bill. On the IDA yield assumptions of the 1.07% and 1.17%, what are your yield curve assumptions, as, from the curve that you invest in, on the swap curve in those 2 scenarios, and where do you see the exit rate, I guess, the fourth quarter of 2013 IDA yields exiting in those 2 scenarios, the 1.07% and the 1.17%?

The second half of your question, I'm not going to talk about, but the Global Insights that we use has a -- and go ahead and look at it online, by the way, if you to want to -- but it's got a very slight increase in the second half of the year. So we're seeing no increase, no real change in the curve anytime in the next 6 months, and a very slight one in the second half of the year, not material at all, it's really not going to move the needle very much.

But the low-end is flat, and the high-end is, the Global Insight's forecast...

The 1.07% would be flat curve throughout the entire year.

And we don't give quarterly guidance on the IDA, NIM. Just...

Right. Okay. Maybe we can make our own assumptions about how we trend down into that, I suppose. And then, just flipping over to the new revenue streams, do you see any material change in the realization rate as you change that mix? And maybe, Fred, if you could talk a little bit about the mix of products: Amerivest, the Advisor Direct and the traditional mutual fund trailer, the component of that? Maybe you can talk a little bit about the sales effort this year, what's changed in that effort to grow this -- the asset-based and revenue stream, and also, whether you expect your overall realization rate to increase over the next couple of years?

Well, a couple of comments, I mean, the last 3 years, we've worked hard to, sort of, overhaul the whole program around Amerivest, Advisor Direct and our mutual fund marketplace. The marketplace was designed to start emphasizing no transaction fee funds versus transaction fee funds, which we used to -- which -- so we really wanted the trailer revenue on a more constant revenue stream. And we've been doing that and that includes things -- the way we lay out our website and those types of things. Number two is on Advisor Direct, it's been very successful for us. But we have been taking -- referring over to advisors, which refers to an RAA, and we charge them a fee, I think, it's 25 basis points on the assets that they bring in from that referral. That one, we've been going down to 250,000. A year ago we moved that up to 350,000 and this year we moved it up to 500,000. And that really was because we had to take time to develop Amerivest the way we wanted to develop it and also, but to get the advisors in the right market. And most advisors, really, are after $1 million-clients in the Advisor Direct program, and they will take accounts down to 500,000. We found they were basically, doing the -- under the $250,000 to $300,000 client purely to accommodate us, as opposed to what they really wanted. And so we saw this as a win-win. And in Amerivest, we now have 4 flavors. We've turned it -- it used to be a product that you had to buy yourself, and you had to auto rebalance yourself, it's now a package that basically we can recommend to you. It's also a package we automatically rebalance for you and have regular ongoing conversations. And we basically turned the sales force that they can actually make that recommendation. We gather the KYC information and put in place the supervision routines and everything. So we've done a lot of work to do that, and that's been in place the last 12 months. And we introduced a new version of Amerivest just recently. So we feel pretty good about where we're at and every time we've broadened out the product and changed to the sold, and get them in the right target markets, it's worked well for us.

And if we see an improvement in the mix of Amerivest within the fee-based balances that would directionally improve the realization rate?

Yes. Amerivest has been, of all those areas, I would say, Amerivest is probably the fastest-growing.

Our next question comes from Chris Harris with Wells Fargo Securities.

Guys, so real quick. I want to come back to the question on margin borrowing. If you guys are assuming, kind of, flattish for your guidance for next year, but client assets are going to go up $40 billion or so on the net new asset side, I guess that implies that margin borrowing as a percent of customer asset is actually going down. And so I was just wondering, is that -- is there anything going on there, specifically, or is that -- you guys are just trying to be conservative with the guidance? It would seem to me that, if you're getting pretty healthy net new asset growth the market kind of normalizes, you're assuming DARTs go up then presumably, folks would be borrowing a little bit more on margins. So maybe if you could hash that out a little bit more, would be helpful.

I am all in favor of that, Chris. Anyway, I think, we're looking at it. We're trying to be a little conservative in there, but I wouldn't dispute your point. But time will tell, of course, but certainly, one of the upsides would be a healthier economy and more margin borrowing, I completely agree.

Okay. Then, a follow-up here on the expenses, the expense guidance. Again, just wondering here, if you're budgeting for kind of advertising be down, say, 5% or so, yet again, still very, very strong growth in assets, just wondering how we should really think about these 2 elements? And what gives you guys kind of the confidence to continue to have very, very strong asset gathering, yet you're spending a little bit less here on the expense side on the advertising?

Well, if you think about it, one of the -- let's talk about 2012 real quick. We spent $10 million on the Olympics, which is not going to occur again. So if you took that out directly, you're seeing that again, you're going to be pretty close to flat year-over-year in terms ad spend. But we do expect, we think we are getting better at this. We're -- our team in advertising is continuing to do a good job. So we are optimistic that we think we'll be able to yield a little bit higher, on relatively flat spending.

Yes. And we do have a couple of initiatives that are now in place that we have been working on, which we haven't talked about much but we now have a new online account opening process, which should help with pull-through rates and funding rates and things like that. And so we now manage it all as part of a funnel, with -- managing each step of the way, number one. Number two, we now have a new marketing website, which is the website we direct people to when we do our marketing. And it's laid out much better, it's much more dynamic, and it's much more scientific, and we believe that will help. And then lastly, we will, sometime before the end of the calendar year, put in a new secure website where our existing clients go that will allow us to start more, sort of, marketing against clients and presenting different offers in ways that we think makes sense. So it's really those things combined with some other stuff that we'll start to embark on now that give us some confidence that we'll get much better at pulling things through, through funding rates and cross-selling to our existing customers through our web channels, which basically, they are the ones we most frequently interact with our clients with.

Our next question comes from Joel Jeffrey with KBW.

I apologize I got on the call a little late, and if you touched on this, I'm sorry for asking again. But in terms of the debt repayment, I know you guys have some hedges against that, but what's the current savings you get on the interest on an annual basis?

For that, it's probably at 2%, maybe, 2% on $250 million, so $5 million.

Okay. And then, again, I apologize if I missed this one. You may have answered this on one of your earlier questions, but you've mentioned that your Amerivest and Advisor Direct products are now sort of better aligned for your target markets. Why were they sort of misaligned prior to the realignment, I guess?

Well, before we started on our asset gathering journey, Amerivest was really designed as a self-directed-only product. And so it was just a -- it was an ETF asset allocation package that, if the sales person brought it up to you, they couldn't recommend it, and you had to go and buy it yourself. You also had to rebalance it yourself. So it wasn't ideal in terms of a sales product. And we also noticed that basically, it had a fair bit of attrition out the back door. So you can -- I won't go into why it wasn't right, but we've had this strategy for at least 3 or 4 years, if not 5 years to change this, but we had to get all the compliance systems in place, we had to get new product systems in place, and we had to train our front-line people to sell it and recommend it. And so there was just a lot of work that had to be done, and then when you're moving the advisers up from 250,000 to 500,000 we wanted to do that in a few steps because there was some nervousness on how that might be taken, but it's actually turned out to be a win-win. But we've now got it where we want it, but it's been something that we've been migrating to for a good 3 or 4 years.

Our next question comes from Alex Blostein with Goldman Sachs.

I was wondering if you could just, kind of, break down some of the dynamics on the IDA, heading into next year? And what I'm trying do, I guess, is take a look at the compression you guys are assuming, that is coming from I guess, new assets coming in and what are your assumptions for the yield on those assets on an add basis versus kind of what's rolling off in repricing?

I mean, you can calculate and you can make your own projections on what you think the rate for the reinvestments will be. Where I'd look is at the LIBOR, the swap curve, and take off roughly 40 basis points. That's our net yield. After you do the 25, the FDIC and what you pay the client, I mean, you're roughly in the 40 basis points. So take that and -- 40 basis points, that's the reinvestment rate. What the ladder is rolling off at, we actually don't disclose. So I'm not going to help you there. But you should -- no question, it's lower -- the reinvestment rate today is lower than what they're rolling off at and that's the reason we're having the compression.

Right. And then, I guess, the IDA balance growth dynamics. So if I look at, I guess, the low-end of the range, it still implies I guess about 10% growth from the last -- from your September quarter. The balances have been a little bit more flattish, feels like recently. So maybe you can give us a little more color on I guess, what you think will drive this growth and if there's any sort of bulk transfers you could do to help that?

We don't see any bulk transfers coming through to -- in our projections. So there's none of that. We are seeing, in that new asset growth, you will get a share of that that's obviously going to be cash-based and is going to go into the IDA. So it's really more looking at, historically, what we've seen relative to growth in cash. And then, you try to take out the anomalies of certain times where you've had, like we talked about earlier this year, where the RAAs moved a lot of money in, in the March quarter and then in the June quarter, the retail moved a lot of money in and we could actually see those flows going into the market. So I guess, there's a little bit of -- you have to trust me in our judgment here that, looking at what we see, that's where we see the flows going through to next year.

Alex, if you look at Slide 21, you'll see that the December quarter of '11, we got up to close to 19% of client assets. We've always said -- 15% to 20% is the normal range. When you get up close to that 20% as we did in December of 2011, you can -- barring any bulk transfers, that number is going to come down, and your growth will slow over the next 12 months. When you get down to the 16.8%, you're at -- I think you're back to a more normalized rate, that average of between 15% and 20% would be 17.5%, but really, over time, normalizes and grows with the base of our asset gathering rate. Although retail will keep more cash as a percentage of client assets than the institutional side, though.

Got it. Thanks that's helpful and then I guess my last question. I guess broadly, when you look at the environment and, I guess, we're all hoping that activity rates will start picking up, but let's say if they don't and if the competition from everybody in the space for net new accounts is probably getting more intense to kind of mitigate the low interest-rate environment and low trading environment, how do you guys think about the M&A opportunity, I guess, in this scenario kind of fast forwarding 1 year or 2 from now?

Well, we're always looking at opportunities as long as it makes strategic and financial sense. You should rest assured we're always on the look, but we just haven't found any opportunity that is available that makes strategic and financial sense at this point. But we do have a business development department that monitors this and is talking to bankers all the time. But it has to make the right strategic and financial sense. And I think some things that people may not recognize in today's environment that, on any purchase transaction, if you're buying anything with assets, you're -- basically, the interest rate mark is going to be significant and it doesn't-- you wind up, normally, you wouldn't have revenue synergies from moving to the banking strategy but unfortunately, in this market, you have a revenue dis-synergy.

Our next question comes from Bill Katz with Citigroup.

You addressed this partially in some of your other commentary. But I'm just a little curious, when you step back and look at the competition for breakaway brokers, that does seem to be picking up a little bit. A couple of your peers have mentioned that, and one of them actually had to reduce their guidance as a result of that. So I'm just curious, as you think about the pressure on the ability to grow assets versus the margin, how should we be thinking about those dynamics?

Well, we haven't -- we have been very careful to make sure that when we acquire new breakaway brokers, that we have a discipline on the pricing. In fact, there is a metric, there is a measurement system and if the advisor's above a certain size, it winds up going in through the risk and finance departments to make sure that we're comfortable with the risk in the client and the RAA, and we're also comfortable with the economics of the pricing. So it's dynamic, it's not static, I mean, I would agree to that. And increasingly, we've seen some providers look to soft dollar things or actually, we've even seen one competitor start to do the refundable loans in certain situations, which we refuse to do.

Okay. And the second question is just on ETFs, you seem to continue to grow. Just curious, as you think about the engagement rate, so that 6% -- 6% to 7% range, what's the long-term outlook for the business if you guys continue to grow as a share of active mutual funds on the DART activity?

The free ETFs that we've had, the percentage of our trading volume has been pretty stable. And we're seeing a lot more, the ETFs are -- you will see it in advice-based solutions as opposed to somebody actively trading. If you're a real trader, you're going to wind up moving to derivatives versus options -- or ETFs, in our experience.

And with that, that does conclude our time for questions. I'd like to turn the program back over to Fred Tomczyk for any additional or closing remarks.

Well, thank you, everyone, this morning and hopefully, New York gets back to normal here shortly. Having said all that, I do think getting the election behind us and getting the retail investor back, re-engage the market, we think will be a positive for the industry. And we're looking forward to taking on the market and continuing to gather assets at double-digit rates and grow our market share in the trading side. We feel pretty good about where we're at, and we'll talk to you in January. Thank you very much.

Thank you, presenters. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.