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

Thank you Operator and good morning once again to everyone, and welcome to the December quarter earnings call. Please refer to our press release and December quarter earnings presentations, which can be found on amtd.com. Our Safe Harbor statement and reconciliation of certain non-GAAP financial measures to the most comparable GAAP financial measures are included in the slide presentation. As well, descriptions of risk factors are included in our most recent financial reports, Forms 10-Q and 10-K. As usual, this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without prior consent of TD Ameritrade. As is our usual custom, please limit your questions to two so that we can cover as many analysts as possible within the allotted time. With that, we have Fred Tomczyk, our CEO and Bill Gerber, our CFO here to review our December quarter results and major accomplishments. And with that, I’ll turn the call over to Fred.

Thank you Bill and good morning everyone, and welcome to our first quarter earnings call for fiscal 2014. We started fiscal 2014 with a strong first quarter, leveraging our continued strong organic growth as the retail investor re-engaged with the markets. With less uncertainty in Washington, an improving macroeconomic environment and the beginning of Fed tapering, retail investors are making their way back to the markets, leaving us with a lot to feel good about. Let’s take a look at the quarter’s key highlights on Slide 3. Our average client trades per day for the quarter were 414,000, an activity rate of 6.9%, the best quarter for trading in more than two years. Net new client assets were $14.5 billion, a 10% annualized growth rate. Client assets are closing in on a record $600 billion, ending the quarter up 24% over last year. We grew fee-based balances to a record $136 billion, up 31% year-over-year. Interest-sensitive assets remained at a record $97 billion despite clients cycling cash back into the markets. Net revenues came in at a record $752 million, an annualized run rate of $3 billion, up 16% over last year. This brings us to diluted earnings per share for the quarter of $0.35, up 30% over last year. That’s a strong start to fiscal 2014. Let’s now take a closer look at how each piece of that strategy fared, starting with asset gathering on Slide 4. This quarter was our second-best ever for asset gathering as we brought in $14.5 billion in net new client assets, a 10% annualized growth rate. As it has been for some time, we are seeing encouraging signs from both our retail and our institutional channels. On the retail side, our sales funnel, which covers our engagement with prospective clients through the account…

Thank you Fred and good morning everyone. We are off to a good start to our fiscal year with strong results this quarter driven by a combination of strong asset-based revenues and improved trading. Activity rates and DART numbers are at levels we’ve not seen in over two years. Organic growth continues to be a primary focus of ours. We once again delivered double-digit net new asset growth, and at $14.5 billion this was the second-best quarter in the company’s history. In all, this was a good quarter and we have a lot to be proud of. With that, let’s begin the financial overview on Slide 8. We’ll start with the December to December comparisons on the left side of the page. On Line 1, transaction-based revenue is up $71 million or 28%, driven by 80,000 more trades per day and two more trading days. The commission rate continued to remain strong at $12.56 driven by elevated derivatives trading and strong payment for order flow. Derivatives trades made up 41% of the total. Options were 34%, futures were 6%, and foreign exchange was 1%. On Line 2, asset-based revenue is up $30 million or 8% due to the growth in fee-based investment balances and continued growth in spread-based balances. As a result, revenue was up $101 million or 16% year-over-year to a record $752 million. On Line 5, operating expenses excluding advertising are up $25 million or 7%, primarily due to increased headcount, clearing expenses related to the increased trading volumes, and professional services as we continued to focus on value-added projects. On Line 6, advertising expenses are up $11 million primarily driven by an increase in digital media and new account promotions to take advantage of the momentum we are seeing with net new asset growth. We also began…

[Operator instructions] Our first question will come from Rich Repetto from Sandler O’Neill. Please go ahead.

Yes, good morning Fred, good morning Bill. I guess my question comes—you know, with all the client metrics that you feel are important improving, whether it’s DARTs, margin loan balance, net new assets, I guess the more difficult question, Fred, is the sustainability of the momentum that you’re seeing in retail client engagement. I’d just like to get your views as best you can – I know it’s difficult to predict – but what you see as the sustainability of these improved client engagement metrics.

Yes, that’s always difficult to call, Rich, and I don’t have a crystal ball here of what the future holds, and that’s really the relevant question. But I would say that I think that the economy seems to be in better shape than it’s been in quite a while. That doesn’t mean it’s a strong, healthy, booming economy. I think it’s just increased growth. I do think not having an event out of Washington has made a big difference in terms of people’s confidence, and there’s no question whether you’re listening to the banks or other players in the market or companies, I think you’re seeing some consumer spending come back. You’re also seeing businesses start to—business loans start to increase and increased interest in businesses investing. So all that in my mind bodes well to an improved environment. Having said that, I think we all know that these things are never straight lines all the way up, and we are following a year when the S&P 500 was up 30% year-over-year. So while we are generally bullish and optimistic here, I would not be surprised to see a correction. It wouldn’t take much to see a correction, but I think then we’ll continue on our path.

Understood, that’s helpful, Fred. My one follow-up would be on the float balances, Bill. It seems like float increased, and I’m just trying to, I guess, draw this a little bit more clearly. Even with the IDA up, that you still have the flexibility if rates were to go up higher later in the year, or even on the short end next year, that you’ll be able to still—you’ll still have that flexibility to leverage the longer term rates, given that the float is high, even though IDA—the spread went up quarter to quarter.

Well, that’s generally true. We follow pretty sophisticated asset liability management techniques, which TD has been a helpful partner with us, and when we look through everything and we would say our asset liability profile – and that includes fixed float but also includes duration and cash maturity schedules – all look to be right around where we would like them to be for the environment we see ourselves in. We do look at this as a marathon, not as a sprint, so I think the most important thing right now in this type of environment is to be patient and manage for the long term, and not extend would be our view at this point. Extend on a normal basis, but not stretch it for short-term earnings.

Got you. Congrats on a strong quarter, guys.

Thanks Rich.

Our next question is from Michael Carrier from Bank of America Merrill Lynch. Please go ahead.

Thanks guys. Maybe just a question – when you look at most of the metrics, like the net new assets margin, DARTs, everything is pretty favorable. We typically see the seasonal increase in advertising. The additional pick-up that you mentioned heading into this quarter, is it more of an offensive strategy, meaning the trends are very favorable that you think you can take some market share, or is it just kind of the one-off events like the Olympics, that it’s just kind of a little different this year?

It’s really a combination of both of those, Mike. You know, certainly the Olympics in and of themselves will add spend, and our experience last time we did the Olympics was that it was very strong for our brand, so that’s why we did it again. But right now as we said, the net new asset momentum, all the metrics that we cited, we think now is the time to tap the gas pedal a little harder on advertising, and this obviously is a very important time of the year for investors as well as this is a very big time of the year for people who are engaged, particularly in the Olympics but in the markets. So we think the combo of all those things is what makes us look to add to the monies that we’re going to spend this quarter.

Okay, thanks. And then just as a follow-up, I guess a question on net new assets but focused on the investment products. It looks like this quarter, and granted one quarter it’s tough to tell a trend, but it looks like the fee rate ticked up a bit. I think on the sensitivity that you usually—that you’ve put in the appendix, it looks like the amount ticked down a bit that you need in order to gain earnings. Just wanted to see, is there some product shift? I know, Fred, you mentioned more from an income, to an opportunistic strategy in terms of where money’s flowing, so does that help you? And then is there any shift in terms of the RIA growth in net new assets to retail that’s also driving that shift in terms of the investment products?

Well the first point, there’s no question that you will have higher management fees on, for example, an equity-type portfolio with the opportunistic portfolios are much more asset allocation and more balanced with an orientation towards equities in this type of environment, and you know, supplemental income will be a lower management fee. I’m not sure that impacted the numbers in the quarter that much. The sales trends do bode well from a fee rate. And to be quite honest, I think between retail and institutional, both have been strong. The mix on net new client assets remained about the same as it was last year – you know, roughly three-quarters institutional, a quarter retail, so it wasn’t a shift there. But you know, as your assets continue to grow, you can work at your 12V1s from the various providers, and we do that on a continual basis.

Okay, thanks guys.

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

Hey, good morning. Maybe just coming back to one of the expense comments you just made. Can you give us a little bit more detail about the projection over the next few quarters? It seems like this quarter surprised a lot of us in particular on the comm side, and I think you talked about the number of employees; but I think in the second quarter, you should get some of the—you’re beginning tax things too, so is it going to be another step up, and where else should we expect the trajectory towards the end of the year?

Well Alex, last quarter we talked about that we were going to be about $380 million. We came in at $382 million, and obviously there were—if you look, the clearing expenses were up, which was really due to volume. So we felt like we hit pretty close to exactly what we were trying to do. We did—over the past several quarters and continuing, we had—we converted a lot of professional services to permanent staff. We on-shored items that we used to offshore. We had more sales people, and we’re gearing up for tax season, so all those things were combined. We’re still looking at the same range in our outlook, so I wouldn’t see it really deviating very far off this 380 level for the next few quarters.

Okay, good. And then secondly, maybe just on capital return, obviously you just paid that special dividend a month ago, or announced it. Just thinking how we should be thinking about this more going forward. It seems like you call it a special dividend, and when you say special, it’s not really part of your return strategy per se, so just wondering if you’ve talked to the board about maybe instituting something that’s more recurring, given that you have so much free cash flow, because I think investors—you know, when you call it special, they don’t really give you credit. But I think if you do it a little bit different, I think you might get a little bit more credit for it if you actually make it part of your return strategy. So just wondering if your thinking is evolving a little bit or if you still have other things in mind when it comes to the free cash that’s generated.

Our view on return of capital hasn’t changed, and it has been—we regularly vet it with the board, but we continue to look at things and say we do think we’re in the seventh inning in a nine-inning baseball game in terms of acquisitions, so you do want to the ability to keep some firepower back in case you want it. Having said that, we don’t see anything on the horizon in the foreseeable future, quite clearly, so therefore when we end the year, we basically look at our balance sheet and our free cash flow, and we’ve always said between $500 million and $1 billion of excess liquid assets over management’s target. And if you look at the special, it tends to—to the extent we’re over that, we’ve paid it out. But we’ll consider all available uses, whether it’s investing in growth, making acquisitions, whether it’s buybacks, whether it’s recurring dividends, one-time dividends. I do think paying down debt, we’re right on where we want to be in terms of one times EBITDA, so we don’t see the need and we don’t have any desire to pay down our debt further. I think we consider that sort of our permanent capital structure. But we’ll continue to adapt and adjust based on market conditions, but our view is just do the right thing and if we have excess capital, we should be repatriating it to our shareholders in one way, shape or form.

All right, very good. Thanks.

Our next question is from Kenneth Hill of Barclays. Please go ahead.

Hey, good morning Fred and Bill. You saw some good activity trends clearly for the quarter. You saw some more improvement here in January. Given you guys have about 41% of DARTs coming from derivative trades, I was wondering what inning you guys think you’re in as far as customers using derivatives as part of their portfolio, and what kind of things you’re doing to kind of keep that as an increasing portion, whether it’s either education or on the technology side.

Yes, I think on the trading side we had very strong numbers, and very strong numbers in January. The derivatives question is going to be depends who you ask. If you ask Steve Quirk, who runs our trading business, our trading side, basically he would say derivatives are going to continue to grow. And as it allows people to trade in any type of market, they expire so they have a resiliency and annuity-type of revenue stream to them, much more so than cash equities; and once people start on them, they get used to them and they like them, whether it’s a primary strategy or a secondary part of their investing strategy. We’ve seen that – once people get used to them, they start to get more sophisticated and try more things. In terms of what we do, we continue to work at the education side, but I think we’re getting rewarded here for all the work we’ve done over the last three to five years on upgrading our platforms, consolidating our platforms, putting in new features, new functionalities, new websites, new trading tools, new information, new content. We continually work at that and you’re seeing that across the board. So I definitely think the investments we’ve continuously made over the last three to five years in the technology platforms has really, really worked well for us. I can’t say enough – to introduce a whole new client website, your main website, to 6 million account holders, that’s not easy. People don’t like change, but I have to say we’ve got a lot of good feedback. It allows people to get there one step at a time and it positions them very well for this type of environment.

Okay. I just wanted to follow up, then, on the breakaway broker trends. You mentioned they were still remaining pretty strong. Wondered if you’re seeing any change in kind of recent history there – is it more from independents still, or any kind of progress from the warehouses as of late?

I think it pretty much continues to be from the independents. Well, it’s both, but the part that is elevated from what we have seen three years ago is the independent channel.

Okay, thanks very much.

Our next question is from Steven Chubak of Nomura Securities. Please go ahead.

Hi, good morning. Clearly, you and your competitors benefit significantly from interest rate tailwinds, and when we go through the exercise of attempting to overlay the revenue and earnings upside, it suggests that pre-tax margins could exceed peak levels really not seen since 2005 – somewhere in the low to mid-50% range in what was clearly a favorable operating backdrop. I didn’t know if you could speak to some of the potential threats or headwinds to the pre-tax margin growth, assuming we get to that normalized earnings and interest rate environment, whether it be more aggressive marketing, higher payouts for RIAs, or simply maybe even the re-emergence of commission price wars.

Yeah. That’s hard to call, but I would say barring any unforeseen events, which has to be, I think, your base case, as interest rates rise and we continue to grow and manage all the various dimensions and metrics, they will expand and they will expand significantly. I think we look at it separately, whether if there’s investments in growth that make sense, our standalone base will make them but at a pace basis, but pre-tax margins should return to historic highs as interest rates increase. But you know, that will take time. It’s not going to happen in the short term – it takes a while. It’s hard for me—you know, whether we’re going to have another round of commission price wars, who knows? I would hope the industries all learned from the last one that basically it’s a zero sum game, and we are down now to five players in the industry and we should all just focus on competing in other dimensions, which will be much more marketing, incentive base, technology platforms, new investment products, whatever it may be. It’s a very competitive business, but to start on price any more, I think—you know, hopefully everybody recognizes it’s a zero sum game at this point of the industry maturation.

Thanks. That color was very helpful. And then just one more from me – I’m not sure if you mentioned this earlier, but clearly the margin balance growth in the quarter was quite robust. The growth in recent years has clearly lagged what has been very strong market appreciation. I didn’t know if you could speak to expectations for margin balance growth in light of what appears to be improving retail sentiment.

You know, margin balances typically and historically have followed buying power, which follows market, so it’s basically the market inside the margin accounts. I think the exception where it lagged a bit here is we did have one stock that got to be an awfully big percentage of our margin balances, and that stock – which was Apple, which was the most widely held stock – went from, I don’t know, over $700 down to under $500, and that definitely made a difference in margin balances, for TD Ameritrade anyway. So I think going forward here, it should be much more a function of buying power, which is a function of the market.

Okay. Do you think we saw maybe a little bit of a catch-up, at least this past quarter?

I wouldn’t call it a catch-up. I mean, the S&P 500 was up 30% last year. It was a strong year, so you would expect margin loans to rise.

Okay, fair enough. Thank you for taking my questions.

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

Morning guys. Just wanted to ask about investment product balances of about $30 billion on a year-over-year basis. Wonder if you could break down how much of the growth was market related and how much was driven through sales.

Yes, I think it was 130—

One-thirty, yes – 130.

--balances. I mean, I don’t have that split – I’m sorry, Chris, but I would say in a quarter, inside a quarter, it’s going to be more driven by the market than any other single thing.

Got it. And when we think about the outlook for this year, was it just kind of a normal market return embedded in the outlook?

Yes.

Yes.

Okay, good. Thanks a lot guys, that’s it.

Our next question is from Joel Jeffrey from KBW. Please go ahead.

Hey, good morning guys. Just a follow-up on the margin question. The rate keeps coming down a little bit, and I’m assuming that’s probably due to mix as more active traders are paying a slightly lower rate. With typical retail traders getting back into the market, do you expect this to rise, and if so, how soon might that happen?

Now that’s difficult to call. I think that you can take away from it there’s no question in the quarter we saw the biggest percentage growth in margin balances from the more active traders. They’ll typically have a more—a lower rate, so that really is what happened in the quarter. You would expect that as the average client gets back into the market, but again it all depends on the mix and how much of the increase is in a difference client group, and that’s hard to forecast.

Okay. And then just as a follow-up to one of the comments you made earlier, you talked a little bit about sort of the value in the additional ad spend around the Olympics. Can you give us any kind of metrics on kind of do you see the growth in new accounts, do you see it from existing accounts and doing more activity with the spend? How do you think about where the benefits are going to come from?

Well the first—we look at two things. We definitely look at new accounts and new assets and all that kind of stuff, but we also measure awareness and brand consideration kind of metrics. The one thing—you know, we’ve done a lot of things to try and get brand consideration because we have changed from being solely an active trader firm to an active trader and a long-term investor firm and an asset gatherer. The thing that we noticed when we did the Olympics, which we did the last time and it was the first time we’d ever done it, was that around that time, we got an increase in brand recognition and brand consideration that we hadn’t seen from anything else we’d done. So that was the driving reason, and it is the most watched event in the world so basically we would expect some uptick in new accounts. But I think it’s mainly—the thing that we saw the last time was mainly driven by brand recognition and brand consideration.

Great, thanks for taking my questions.

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

Thanks. Hey guys. So when we look at customer engagement, I know everybody has been talking about it already, and I know one month doesn’t make a trend; but in January, the rate looks to be over 7.5% - this is the activity rate I’m talking about. It’s interesting to me because your business is so much different now than it used to be. The advisor business is so much larger, so one would think that maybe the activity rate should be a little bit lower given advisors are so much bigger. So can you maybe speak to that dynamic a little bit? Is it maybe a false assumption to assume that maybe advisors aren’t as active as the retail segment, or is the retail segment just so much more robust maybe now than it was in, say, ’06?

You know, there’s no question the activity rate in the institutional channel is lower than the activity rate in the retail channel. Having said that, if you look year-over-year at increase in trades, both are up nicely year-over year, but actually the institutional channel trades per day are actually up higher—a higher percentage year-over-year than the retail side. About a year and a half, two years ago, we introduced StrategyDesk and thinkpipes to the RIA channel and that has done very well for us, and a segment of the advisors that work with us and have custody of their assets with us have embraced that, and that’s allowed us to move up into some bigger RIAs.

Okay, great. Completely unrelated question – the new stockholder agreement with TD Bank, obviously those guys extending, they’re clearly committed to the relationship. Were there any material amendments to the agreement, and if there were, could you maybe walk us through some of the highlights?

You know, I think for all intents and purposes and in all material respects, it’s all published so it’s publicly available. But having said that, there’s no significant changes from the old shareholders agreement to the new one from our perspective. One exception is that after January of 2016, which is the expiry date of the original stockholders agreement, the Ricketts parties lose their rights under the terms of the stockholders agreement but they retain their rights as significant shareholders, but they would lose, for example their board seat rights that they have and they would cease to be a—while it’s an amended stockholders agreement that the Ricketts are a party to, they will basically fall away after January of ’16 in terms of the stockholders agreement. But for all intents and purposes, the rest of it is pretty much the same.

Okay, excellent. Thanks.

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

Thanks. Hey everybody, good morning. Just a question on the dynamic of rising in derivative trades and mobile trades. I was hoping you guys could just talk through profitability of that business relative to your more kind of traditional business. Is it more profitable, less profitable? Did it cost you guys more to provide services to those type of investors, or it’s kind of similar to the rest of the business?

Well from a revenue perspective, an option trade is a richer commission per trade than an equity trade, number one. Number two is an option—somebody that’s a regular option trader, their trading patterns are much more resilient. They tend to be more active. They can trade in any type of market. Options expire, so it is definitely a more profitable part of the trading business. With respect to when you get to mobile, we have metrics that clearly demonstrate that people that use mobile trade more frequently than people that don’t, and when they adopt mobile they tend to trade more than they did before, so it definitely helps with trade lift. You know, whether you want to attribute the cost of keeping up with all the various mobile devices against that, to be quite honest, I think we don’t have a choice and nobody in this industry has a choice. It is a secular trend that’s going on. It’s quite noticeable – it’s been noticeable for a while. You can see it in the technology industry, so from our perspective you have no choice but to keep up with the trends in mobile devices as part of your business generally.

Got you. And then a separate question in the IDA, and I think somebody tried that already, but when you think about the spread right now, and I think you guys mentioned whether you look at the 5-to-2 or 7-to-2 on the (indiscernible) curve, it’s at the wider level it’s been in several years. Where do you need that to go to actually make a decision and start to extend duration a bit?

Well to try and reiterate what I said earlier is—you know, we follow pretty sophisticated asset liability management techniques, and whether that’s fixed-float mix or what we call extended duration or overall duration, we would say for the environment we see ourselves in, we are in a very good position. So we don’t see ourselves increasing duration a whole lot from here. That’s not to say it won’t go up or down on a tactical basis as net interest margins won’t move up or down inside a quarter a small amount, but we don’t see—you’ve got to keep in mind this is a marathon, not a sprint, and we’re very much—we would say we’re on the asset liability managed profile we think we should be.

Got you. Great, thanks guys.

Our next question is from Devin Ryan of JMP Securities. Please go ahead.

Hey, good morning. I have a question around client cash. Client cash to total assets, it’s still within the normal 15 to 20% range but it looks like it ticked down to the lowest level since the financial crisis, which I guess makes sense just as sentiment is improving here. But from a financial perspective, I’m assuming that whether this is a positive or negative really depends on where the money is flowing, so can you speak a little bit to how a changing mix impacts your yield on those assets, meaning would you rather that money stay in cash or were moved to other products.

You know, I think you have to look at this and say, just do the right thing for the client and let the client do what they think is right. So whether they take it out of cash or put it back in cash is really up to them. We really—there’s not something we’re recommending. It’s very much what either the RIA is recommending or the client is doing on their own, so you kind of go with the dynamic. You know, this has happened before and the fact that client cash—you know, you can look at the percentage of client assets. That will, inside a quarter or even a year, is going to depend more on what happens to the denominator than the numerator, and that’s really what you’re seeing as going to the bottom because the market is up so much. But you look at the balances – we’ve seen this before where typically we’ll trend up in, let’s call it the mid-teen range, based on the asset gathering, then it will slow down for a quarter or maybe even two quarters but then it comes back and starts to pick up again. The fact, I think, that during the quarter we had something like $12 billion of net buys by our clients moving into the market, and our client cash still was—still rose, we feel pretty good about that.

Right, and I appreciate that color. I guess what I’m trying to get to is for Ameritrade, is any shift in terms of maybe cash moving out of—or cash moving to other products, is that more profitable to the firm or is it more profitable to have a higher cash balance and that money stay in cash?

That’s going to depend on the interest rate environment and where they move. I understand the question – I’m not trying to evade it. It’s just we’re not going to take any action to encourage people to stay in cash or not stay in cash. I think people make their own decisions and it will be what it will be. From a purely economic perspective, client cash is very profitable, but if they’re moving it from cash into being very active traders, then you can make a lot of money doing that.

Right. I appreciate the color. Just with respect to the improving investor sentiment that we’ve been speaking about, clearly conceding your results and kind of the core business drivers, has there been anything that you would point to where you’d say, this is where we saw the meaningful change in activity, or has it just been more of a steady improvement in recent quarters? Just trying to put some more context around all the comments – I mean, margin balances are at a record, activity rate is quite high. You know, we’re coming off of a low base, but does it still feel like there’s quite a ways to go in terms of that momentum?

You know, I would say we saw this improving all through the last quarter. We saw a strong October, a strong November. We expected a pull-back in December and we didn’t get it, and even during the holiday weeks when you would normally expect trading to soften, it really didn’t soften. So I think that catch us a little bit by surprise, and then clearly as we started the year, I don’t think we would have predicted how strong trading has been so far in January, and it’s been pretty consistent. So I think January has consistently been very robust.

Okay, great. Thank you.

Our next question is from Bill Katz of Citi. Please go ahead.

Okay, thanks very much for taking my questions. First question – just coming back to margins overall for the company, if you look at the last couple quarters, it’s been relatively flattish despite what seems to be a nice improvement in the top line. So absent interest rate changes, what would be the key driver to incremental margin improvement for the franchise?

Trading.

Certainly trading will build, and as we look at—as I mentioned to an earlier question, we expect the expenses are going to stay relatively flat in this area for a while. We obviously always look for improvements in that, so—but exactly to your point, as you’re getting more asset growth, that’s going to help even if rates don’t move. Trading levels will increase margins – that’s true. The investment product fees, the things that we’re doing in that area, all these things are going to help. I mean, I don’t think there’s any magic bullet in here, but each one of those that we are trying to drive is important, as well as trying to make the efficiencies and the expense side to either reduce or redeploy the expenses into more client-facing salespeople and/or technologies that we think will drive further growth as well. So it is a combination of a lot of things. There’s not one or two I think that we should easily focus on.

Okay. And just as a follow-up, you mentioned you have healthy growth in sort of the FAs. Could you comment a little bit about the acquisition costs or any change in trends around pricing to bring in the FAs?

You mean the branch people or the—

No, no – breakaway brokers. What do you see in terms of acquisition costs to bring these brokers onto your platforms?

We haven’t seen any real shifts. It’s a competitive business but it continues to be very much a relationship business from our perspective.

Okay, thank you.

Our next question is from Chris Shutler from William Blair. Please go ahead.

Good morning. Just hoping that you could dive into some of the underlying trends that you’re seeing in terms of client asset allocation, so any differences you’re seeing in terms of behavior between RIAs and retail investors, and particularly just on the domestic equity side.

I would say on the retail side, we are primarily an equity and option house, and we’re very small fixed income book. But there’s no question you would see people pretty bullish on equities generally. It shows up in just about every metric. It shows up in Amerivest flows, and even in the mutual fund allocations. If you went to the RIA side, they have been fully invested all the way through. They’re very low—they’re sort of the lowest client cash—allocation to client cash that we’ve seen, and again they would be fairly bullish on equities.

And no huge shifts in terms of preference between domestic and international equities on the RIA side that you’ve seen?

I’m looking around the table here, because I haven’t seen anything noticeable.

Okay. And then a totally different topic. Just wanted to get your thoughts on payment of order flow. I know that some exchanges over the last year have been pretty vocal on their views related to that topic, and if there’s any risks or considerations you think that we should be thinking about going forward.

This is an area that seems—I don’t know what it is. Every few years, there is some noise around it. It’s something that’s gone on since I’ve been involved with the company and I think since Bill Gerber’s been involved in the company, which is longer than I. You know, if an exchange wants to change the metric on their exchange, that’s their choice. I think our interests are very much the general market structure, and we would say that the retail investor today is getting better execution at lower cost than at any time in history. So if we have a market structure thing we want to debate as an industry or with the SEC, let’s start with, okay, tell me what the issues are, because the retail investor is getting very good execution at low cost. Our interests are very much that it remains a competitive market, that there’s lots of venues. I think all of us have seen technology events, and we think it’s important that there’s multiple venues in the market for people like us to move our flow around to make sure that we get timely and good execution, and that’s first and foremost on our mind is good execution. But if an exchange wants to do something on their own, that’s clearly up to them. They’re a business just like we’re a business, and we will respond accordingly. But everything that I’ve seen is that the market structure generally is an area of interest but I’m not sure there’s universal agreement what problem we’re trying to solve.

Okay, great. Thanks a lot guys.

Our next question is from Mac Sykes of Gabelli. Please go ahead.

Good morning gentlemen and congratulations on the strong quarter. Quick question here – it seems like we’re in an accelerating age of security technology. I read this weekend that even your Bluetooth kitchen appliance can get spammed, so in light of Target’s breach and other events recently, do you think we are entering a phase where the user experience could be impacted by more stringent security requirements and the potential for more fraud, and is mobile—the way that’s set up, is that any different than typical online trading?

Yes, mobile is a little bit more tricky. You have to be more careful from an IT security perspective. I’m not sure we’re seeing a shift, per se. I think we’ve just seen a very big breach, and any time you have a breach of that size, it’s going to create a lot of headlines and awareness. But you can rest assured that we haven’t lost sight of it, even when it’s quiet. This is an area that you have to continuously invest. You have to have good people, and as we always say, you’ve got to have best-in-class preventative controls that you don’t have an infiltration or somebody get inside. Number two is you’ve got to have best-in-class detective controls so that if it happens, you have to assume that—you know, the first line of defense is preventative, your second line is detective, and that when you see it, when it gets in, you’ve got to be able to see it quick. I think one of the issues with the Target breach, at least based on what I’ve read in the papers, is they got in and it took a long time to detect it. That’s when it gets to be a big breach. Thirdly, you’ve got to have remediation controls, so if it happens and you detect it, you’ve got to be able to dismantle it and disarm it as quickly as you can. This is a never-ending battle. It’s a global problem and the only thing you can do is continue to invest and make sure that you’re at the front of the pack in terms of those three levels of controls.

Great, thank you.

Our next question is from Gaston Ceron of Morningstar Equity. Please go ahead.

Hi, good morning. I wanted to follow up a little bit on some of the mobile trends that you guys have been seeing. I think you said during your prepared remarks that—something to the effect that that kind of helped—the rising use of mobile kind of helped you kind of offset some of the traditional lull that you might have seen otherwise in December. I know it’s early days, maybe just hoping here, but just curious if you think that that kind of offsetting effect, that it could possibly extend to other seasonal lull periods, like the summer months for example or things like that, or if it’s just too early to say at this point.

You know, I think it could and I think it does. I think what you saw here was you went into the holiday season, people had mobile devices, and you had an active market, the market moving around and things like that. So I’m not sure it’s going to cause somebody to trade when they wouldn’t have otherwise, unless—but it allows them to go in and to monitor, and when they monitor, they will adjust based on what they see in the market. So you need the combination of the mobile device and some market movement during that time, and I think that’s what we saw over the holiday season.

Okay. And then lastly, you’ve talked a little bit about some of—we’ve talked a lot about the positive trends you’re seeing. Just curious – with the industry here in the U.S. kind of still evolving but somewhat mature at this point, what is your outlook for what I guess you would call sort of long-term organic account growth? I mean, I think in the last few quarters you’ve been growing at, what, 1% or so each quarter, right, so what would be kind of your long-term outlook?

I do think account growth is going to be a low single digit gain. Having said that, I think while we focus on account growth, we are more focused on the things that drive revenue these days; for example, we used to report new accounts. We don’t report new accounts anymore; we just don’t think it’s as meaningful a metric as it was early in the history of the industry, and today it’s much more about getting the right type of accounts, making sure they’re either active or they have better assets—or not better assets but bigger assets. So in our view, it’s as much if not more so about the quality of the account than just raw accounts.

Right, thank you very much.

And our next question is from Rob Rutschow of CLSA. Please go ahead.

Hey, good morning everybody. Most of my questions have been asked, but in terms of the client payables balances on your balance sheet, presumably that’s mostly derivatives. Is there any reason the cost on those liabilities would increase as rates go up?

Certainly we are in control of that, and so we have a lot of ability to move that around, but it’s something that will go up. I wouldn’t say it’s going to go up materially over any time in the near future. I just don’t see that moving very much in rate.

Okay, great. Appreciate it.

This concludes our question and answer session. I’d like to turn the conference back over to Mr. Tomczyk for any closing remarks.

Well thanks everyone. In closing the call, I would say that the economy, the markets and the retail investor engagement is much better than it’s been in the last four or five years. This improving environment has certainly helped us to get off to a strong start to fiscal 2014. We feel very good about how we’re positioned for this environment and the management team remains focused on executing our strategy and building out our long term earning power. We’ll see you next quarter. Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.