AMTD IDEA Group
Q4 2011 Earnings Call Transcript

Published: 26 Oct 2011

[Operator:]

Good day everyone and welcome to the TD Ameritrade Holding Corporation’s 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 would like to turn the call over to Bill Murray, Managing Director of Investor Relations. Please go ahead sir.

[Bill Murray:]

Good morning everyone and welcome to the TD Ameritrade fiscal 2011 earnings call. As is our custom on the yearend call we will be covering the September quarter and fiscal 2011 results as well as our outlook for 2012. As a result, we will be allocating extra time to the call this morning. Hopefully you’ve seen our press release and if you’d like to follow along with the slide presentation it can be found on www.AMTD.com. Before we begin, I’d like to refer you to our Safe Harbor Statement which is on Slide Two of the presentation as we will be referring to forward-looking statements. We will also be discussing some non-GAAP financial measures such as EBITDA. Reconciliation of these financial measures to the most comparable GAAP financial measures are in the slide presentation. We would also like you to review our description of risk factors contained in our most recent financial reports forms 10Q and 10K. 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 so if you can keep your questions to two, we’d appreciate it and I’m sure we’ll get to all of your questions today in the allotted time. With that, we have Fred Tomczyk and Bill Gerber here to review the 2011 results and major accomplishments.

[Fredric J. Tomczyk:]

Good morning everyone and thanks for joining us today to discuss our September quarter and our fiscal yearend results. 2011 was a strong year in the face of a very difficult environment. For three years we’ve been talking about our game plan in that environment

[William J. Gerber:]

Well this certainly was not your typical quite September quarter. Market volatility was very high and that helped us in terms of trading levels. Additionally, we had a record new asset quarter of $12 billion which culminated a record year of $41 billion. However, not everything in the quarter was perfect. The yield curve has dropped further and we are now 15 to 50 basis points lower on the three to seven year swap curve than we were in the June quarter. Also, margin loans dropped by about $1 billion in the September quarter. However, despite all that, we had a strong quarter and a strong year which we are proud of. Let’s begin with the financial review on Slide 11. Since we have a lot to cover today, and you can read the specific line items, I’m just going to provide color on the major items of note circled on the page. We’ll start with the September quarter comparisons on the left side of the page. Transaction based revenues for the quarter seen on line one were up $65 million or 26% from last year’s results as trades per day were up 31%. Commission rates were $11.85 in the quarter versus $12.29 last year. The majority of the decline was due primarily to mix. On line two, asset based revenue, was up $41 million or 13%. We’ll discuss this more in a bit. On line five, operating expenses before advertising were $386 million. W We incurred approximately $15 million of unusual expense items in the quarter, primarily related to the thinkorswim conversion, higher sales incentive for record net new asset results, and bad debt associated with higher volatility in the quarter. This results in a run rate of approximately $370 million per quarter which is a reasonable run rate as we enter fiscal 2012. On line nine, operating margin was up 6% to 38% primarily due to strong overall revenue growth. Earnings per share was $0.29, up 45% year-over-year. And EBITDA was $312 million or 44% of revenues. The full year comparisons are on the right hand side of the page. Please note that there was one and a half more trading days in fiscal 2011. Both revenue and operating expenses grew 8% year-over-year, driving an increase in operating income of $83 million. The revenue increase on line four was primarily due to organic growth almost completely fueled by an increase in asset based revenues. The operating expense increase on line seven was primarily due to sales incentives for record results and technology related products including the thinkorswim conversion, the completion of our datacenter conversion, and the elimination of the development of a new back office system we described last quarter. Earnings per share on line 13 was up 11% due to the organic growth. Finally, on line 15, full year EBITDA exceeded $1.2 billion which puts us at a 1

[Operator:]

(Operator Instructions) Your first question comes from Richard Repetto – Sandler O’Neill & Partners.

[Richard Repetto:]

I guess the question Bill, on the IDA so you’re showing a 130 to 140 for next year sort of the modeling here threw off my modeling. But I guess the question what’s the yield of what’s rolling off, you tell whatever here, the next quarter, the next year, what’s the average yield if the average IDA is 145? Is it above 200 basis points rolling off or some parameter to give us an idea?

[William J. Gerber:]

The more important deal is what I think is the more important thing Rich, I think what is again statistically going to change more going forward is the reduction in float balances from over $6 billion back down to closer to $3 billion and the extension of the 40% of the institutional portfolio to the three to seven year part of the curve versus the one to two year part of the curve. So in our modeling those are the two things that tend to keep the rate between that 130 and 140.

[Fredric J. Tomczyk:]

Rich, I mean you’ve got to remember there’s two books there so there’s two things rolling off. You’ve got the institutional book which is much shorter and you’ve got the retail book which is much longer. So I mean, it’s easy to get confused if you don’t have the details down broken apart into how it’s managed.

[Richard Repetto:]

I hate to waste a question on this but I’ve got to, given the environment here where we’re at right now in regards to low yields, as you said Fred suppressed earnings, at 450 basis points would be double, how is the M&A landscape in the sector overall given – is there more increased activity or is this you think, a negative contributor to any discussions that could be going on?

[Fredric J. Tomczyk:]

First off Rich, I’m not going to comment on any particular company. We’ve always said we would do whatever makes strategic and financial sense for our firm, but it has to make both strategic and financial sense. I don’t think the interest rate pressures in the market create challenges for all online brokers and I think on top of that it impacts different companies differently because we’re in different positions in terms of our balance sheet and where we’re at. I don’t think it actually increases or decreases it, at least from our perspective. We’re very comfortable where we’re at. We’re very focused on our organic growth and we’re very well positioned to take advantage of opportunities as they present themselves.

[Operator:]

Your next question comes from Patrick O’Shaughnessy – Raymond James.

[Patrick O’Shaughnessy:]

I wanted to ask you about the new repurchase authorization, where would that put TD Bank’s ownership if you were to buy back all those – I guess you have 36.5 million shares outstanding on your authorization at this point. Where does that leave TD Bank’s ownership and what sort of arrangements might you have to come to, to make sure they don’t go to ownership cap?

[William J. Gerber:]

It would put them just below 48%. But similar to the last 30 million share authorization that we got, we agreed with TD that first of all they can’t vote anything over the 45%. They can only go over 45% because of the share buyback that we’re doing, so anything over 45% they can’t vote. They need to sell when our stock is over their carrying value and by any measure by January of 2014 they have to sell down to 45%. So it’s the same arrangement we had with the last quarter, but if we bought all 30 million they’d be just below the 48%.

[Patrick O’Shaughnessy:]

Then my follow up question, you guys had obviously really strong growth in your IDA balances this quarter, how much of that was kind of a flight to safety, customers moving to cash versus how much was just really strong net new inflows and that was what was driving the higher balances?

[Fredric J. Tomczyk:]

It was primarily due to the strong inflows and/or organic growth was the main thing that drove it. Having said that, which you may be surprised is that in our retail business really we did not see anything change, it was pretty much right on, our organic growth. The percentage that was in client assets, the percentage of assets rose a bit but it’s still inside the range that we’ve always been but that’s more because of the denominator as opposed to the numerator. Where we did see a little bit of pickup and one of the reasons we did not extend and kept more in float is that we did see a flight to cash probably $2 or $3 billion in the RIA book and that part will move back into the market at some point.

[Operator:]

Your next question comes from Daniel Harris – Goldman Sachs.

[Daniel Harris:]

I want to touch on the margin loans. Obviously this is actually a little sticker than we thought, down only north of 10% on the quarter which I guess surprised me a little bit. And I’m guessing that retail, despite what seemed like a risk stayed a little bit more engaged if we look just at the margin loans. So I was wondering if you could give us a sense of what you’re seeing from retail clients, whether it’s still just the active traders that are staying engaged or whether the typical retail traders actually blew some of the margin debt off.

[Fredric J. Tomczyk:]

I think it varied over the quarter from where it is today. In August we saw the retail client both the more active traders and the less active traders or the long term investors, both very engaged in the market in August. In fact, the active traders were very active and the long term investors definitely took advantage of the market to buy their favorite stocks and so we saw them go into that. We did see generally speaking people move out of equity mutual funds and into more conservative mutual funds whether they’re balanced funds or fixed income funds. Having said that, since then I think there’s definitely with the volatility in the market and today volatilities continue to be pretty high and the risk continues to be relatively high, the actively traders have remained very engaged but more the long term investors are waiting to see what’s going to happen here and are taking a wait and see approach. We did a recent survey and in that survey what’s at the top of people’s minds, our clients’ minds right now is Europe, and they want to see where that goes and how that gets resolved or not, before I think they come back into the market.

[Daniel Harris:]

Shifting to the commission rate per trade, obviously it sell here seems like the mix shifted a little bit more towards people that have lower deals with you guys, but you’re also talking about a higher level of derivative trades and that seems like that’s just been increasing and yet the average commission rate just continues to drop. So, what are we seeing here? How should we be thinking about this? Obviously, you give us a little bit of a range but more under the skin what are we seeing on that commission rate per trade?

[William J. Gerber:]

It’s mostly the increases from the futures and foreign exchange which are at a lower price point so on a percentage basis those have ticked up and that’s really the primary driver. And of course we call those derivatives and they’re part of that, so that’s really the key eliminate that’s driving it.

[Fredric J. Tomczyk:]

The only other comment Dan would be that the option trades, the commission per trade on option trades has come in for two reasons. Number one, is one we have plenty of options trades and they’re still higher than equity trades. They have come in from what they have been historically because we’re having fewer contracts per trades and the penny pilot expansion has definitely impacted order flow.

[Operator:]

Your next question comes from Matt Fischer – CLSA.

[Matt Fischer:]

Just to touch on organic growth, can you give us some color on the percent of retain versus institutional and maybe existing customers versus new customers in that $12 billion?

[William J. Gerber:]

We don’t disclose that historically, but I’ll give you some. We’ve always said historically that the institutional business grows at about two times the rate of retail, and when you work out that math on that that would say our mix of our net new assets is about 50/50. In the last two quarters we’ve definitely – both sides have continued to do well. Obviously, with the $12 billion it’s unusual to have a record quarter in the September quarter which we’re quite proud of and both retail and institutional did well. Our organization really did take advantage of the uncertainty in the market and we did pick up a fair bit of business in August and September. Having said that, I’d say on the last couple of quarters our mixed has moved to a little bit more than 50/50 slanted towards institutional in more of a 60% institutional 40% retail range.

[Matt Fischer:]

I guess maybe if you could give us an idea in terms of what initiatives and what’s really driving the organic growth and possibly who is it really coming from?

[Fredric J. Tomczyk:]

It is not one thing. I think it’s all the things we’ve done and whether it’s some of the marketing approaches we’ve done. I attribute a fair bit to the change in our sort of distribution model both in retail and institutional. The improvements in our customer service over the last three years has been phenomenal, our net promoter scores are at record levels, our customer service is at record levels. We continue to expand our products and will continue to do that. Right now we’re starting to roll out new client cash management services. So it’s not any one thing, I think it’s just continued momentum in the organization, continued focus, and a continued focus on delivering on things that we know clients are looking for from us that is driving it.

[Matt Fischer:]

Any updates on [FAs] and TD Bank branches would be appreciated as well.

[Fredric J. Tomczyk:]

That continues to go along, it continues to develop out but as I’ve said for quite a while, it will take a while to get that up to be a meaningful component of our number but we’re very happy with where it’s at. It’s right on about where we expected.

[Operator:]

Your next question comes from Michael Carrier – Deutsche Bank.

[Michael Carrier:]

First question, just two things on the outlook one is just on the IDA, the $6 billion I think you said on the institutional side in terms of extending the duration, I guess you mentioned like 40% of that bucket, why the 40%? Could it go higher if the duration in terms of the calculations you guys are looking at, if the assets, or the mix of institutional clients’ portfolio changes over time? And I guess just on the buyback side, we’re just trying to calculate it, it looks like you guys don’t have that in the numbers in 2012 but I just wanted to make sure we weren’t missing something.

[Fredric J. Tomczyk:]

Let me just talk about the institutional. Keep in mind that the IDA’s roughly now 70% retail and 30% institutional at the current moment. As we said, we did have it go up a bit as the RIA’s moved some of the money to the sidelines here in the current environment. First off, is we’ve always had the retail book on some version of a ladder that probably goes from over five, six, seven year period so it winds up with an average duration of roughly three at the high end. The institutional we had been keeping very short because you do have the RIAs between us and the client and the RIA’s making the decision in the best interest of their client so we’ve kept it much shorter, we had been on a two year ladder so you could have one year duration ignoring the float balances and we keep a fair chunk in float. I think as we’ve looked at it and watched it build and it’s stabilized, we’ve come to the conclusion to satisfy ourselves we could go a little bit longer. Why we picked 40%? It could be 40%, it could be 50%, it could be 30%, but that’s the number we picked. I think the main thing we’re trying to optimize here is keeping ourselves lots of flexibility that when rates do rise we can manage the net interest margins in a rational and orderly fashion. In the RIA space, you have to keep in mind there are substitute products that those people look to so we have to pay attention to the pricing we have on that cash management very carefully. I mean, it is a judgment call but it’s something we did after a lot of study.

[William J. Gerber:]

On the buyback Michael, what we’re looking at is I mean, there are some timing factors in there. We are looking at the 40% to 60% return to the shareholders of the net income, but you know I think maybe we do have some in there but I agree it’s not nearly as aggressive as we had over the last quarter.

[Michael Carrier:]

Then just a follow up, just on the sales side and the net new assets, the numbers continue to be impressive particularly just given the environment. You guys have worked on a lot of initiatives over the past 12 or 24 months. I think most recently was building out the sales force. I guess when you’re looking forward in terms of what you’re working on, you know it seems like it’s tough for it to get better than this but I guess from your perspective in terms of what you’re working on, maybe the sales force build out, some of the cash management opportunities, is there anything new that we should be looking to even to just maintain these levels? Obviously, it has been good net new asset growth.

[Fredric J. Tomczyk:]

We’ve been very happy with it, three years in a row double digit. In fact, what we’re particularly proud of is because we’ve always said 7% to 11%, people average at 9% and we did I think if I go back 10% two years ago, 11% a year ago and then 12% last year so it’s actually rising. I’m not convinced we can keep up that rising as a percentage. It’s hard, but I think we’re quite hopeful on the cash management stuff that we’re putting out into the market. We know we hear lots of [inaudible] that’s the number one point that our clients make to us. Sometimes you have to be a little bit lucky with what’s going on in the world with banks and pricing for debit cards. That also could turn out to be a little bit to our advantage as we roll that out. And, we continue to look for new sources of accounts and assets. The TD Bank initiative is one of those and I think we do have a few other things that we’re working on but it’s a little early for us to get into those. But, you could rest assured that I think we looked at the ins, we looked at the outs, we look at our retention and what we cross sell to our client base and I think that’s managed, and changed, and adjusted every quarter based on how we’re trending. But I think overtime to keep that up we have to continuously introduce some new products and services, cash management, the TD Bank initiative and other ways to gather more new accounts and assets. And we will look at our marketing approach. We’ve been on a similar marketing approach for quite a while here and we’ll start to look at various programs and see what’s working and what could work better.

[Operator:]

Your next question comes from Joel Jeffrey – Keefe, Bruyette & Woods.

[Joel Jeffrey:]

Maybe just to follow up a little bit on that question, I mean it seems like you guys have clearly been growing the IDA balance in a rather strong way and it seems like a lot of these clients are primarily relatively insensitive to the low yields. Is there anything you see that could cause them to change to become more interested in yield and do you guys have any products in place that could compensate for that?

[Fredric J. Tomczyk:]

The way it’s growing I think yes it moves up and down but it’s moving up and down a bit inside a range of 15% to 20%, client cash as a percent of client assets. And when it’s moving in that range, most of the variation is due to the denominator not the numerator. The numerator, if you look at it, has been consistently growing at a rate that is not far away from our organic growth rate. There are times when you have an anomaly like this quarter with the RIAs moving a little bit to the sidelines, but it’s been consistently growing with our organic growth. As you look forward, I mean I do think and generally speaking the retail keeps more in cash as a percentage of client assets than the institutional does. But, I’d say there’s always products and services that you can introduce. But, I think in general what’s going to change that mix a bit is the market, just because the denominator changes but also because of investor sentiment and if equity markets start to go and people get more bullish I think you’ll see a mix more into the equity side. When the yield curve starts to steepen you can see people start to move more into fixed income type products. We have a full slate of those types of products, we’re just not a product manufacturer like others are. But it’s easy, lots of people are trying to get – with our organic growth rates you can rest assured we have lots of people beating down our doors to give us products to help with our clients’ needs.

[Joel Jeffrey:]

Just lastly, on the IDA spread guidance you gave, is that institutional extension plan incorporated in both the high and low on the guidance?

[William J. Gerber:]

Yes, it is both.

[Operator:]

Your next question comes from Eric Bertrand – Barclays Capital.

[Eric Bertrand:]

On the outlook range for advertising 240 to 285 I can definitely appreciate why it’s wide because you just don’t know how the environment will unfold, but can you help us thinking about what would drive it towards the high end versus the low end? Would you use that as a lever to preserve current period earnings or is that a tool that you’ll swing around based on how receptive people are to your advertising methods?

[Fredric J. Tomczyk:]

I think it’s more the latter. We’re not going to move it up and down to protect a quarter for a penny or so. It’s really we talk about the timing and the spend quite regularly and so we do think we’re okay with that range and we’ll manage within it.

[Eric Bertrand:]

My follow up will be on the return of capital to shareholders, you’ve targeted that 40% to 60% range for a little while now but you’ve definitely outperformed that returning over 100% for seemingly a couple of years including your M&A. What would drive it down towards that 40% to 60%? Is it a change in your actual earnings power or do you just want to build up more cash?

[Fredric J. Tomczyk:]

We try to be patient here and I think this has worked well for us, and so you should expect us to continuously try to stay in that 40% to 60% range over a calendar year. There may be a quarter where we build cash for something, whether we want to repay debt, or for a variety of reasons. But I think you should expect us to stay in that 40% to 60%. Where we do see opportunity whether it be an acquisition or a weakness in the market where we think we have lots of earning power building and we continue to do well, then we’ll take advantage of that. But we try to manage it in a way that we stay in that 40% to 60% but then we’re very opportunistic in how we manage that and I think that’s different than the way a lot of organizations do. But when we look out how many we buyback we try to stay in a range and we’re just very focused on what will it look like three to five years from now. I don’t worry about next quarter, next 12 months, it’s just really very much focused on the long term.

[Eric Bertrand:]

Could you just let us know where the margin loans ended for the quarter?

[William J. Gerber:]

Margin loans ended the quarter at $8 billion.

[Operator:]

Your next question comes from Bill Katz – Citi.

[Bill Katz:]

Just trying to reconcile the very strong trading results for the quarter and your margin discussion at the low end you’ve allowed the range for this fiscal year. So your low range is 36% but I think you did 38% this particular quarter and you call that about two percentage points worth of noise in this particular quarter. So how much of the low end of the guidance might be a more conservative view versus some normalization in trading volumes and the impact on the margin?

[William J. Gerber:]

We look at the activity rate and we look at it over a period of history and say that we think 6.5% is conservative. We want to put a number out there that we think is going to be certainly aberrations can happen and things can go lower or higher. And so we put this range out and we do think the 6.5% activity rate for 2012 would be viewed as conservative.

[Bill Katz:]

Just a follow up, just coming back if you assume the midpoint point of the guidance would be the appropriate level, you’re looking at four more quarters of round numbers $0.28 to $0.30 of earnings power which certainly considering the rate backdrop I understand, but is there any building pressure to strategically think about options at this point in time given the perspective of low interest rates from the board’s level in terms of obviously, very strong asset gathering, very good repurchase, good positioning, but at the end of the day it’s not translating into earnings leverage and how patient is the board going to be?

[Fredric J. Tomczyk:]

Our board is very patient. We have a game plan which we’ve been executing and executing well. They understand we’ve focused on building our long term earning power and I think probably for all of us we’d like to say, “Geeze, we’ve done so many things that have done so well,” on all the key metrics that you can control but it’s not translating into earnings growth. But you have to put that into perspective on a relative basis and on a relative basis whether it’s our peers, or banks, or other broker dealers in the world, when we look at relative earnings performance the board is very comfortable with where we’re at.

[Operator:]

Your next question comes from Howard Chen – Credit Suisse.

[Howard Chen:]

You both spoke to a closer focus on investment spending and reallocating some resources in the next fiscal year. I was just hoping we could get some more details? Maybe to start how much has been investment spending over the last three years, what do you think it will be in the upcoming year, and where is that going versus the past?

[Fredric J. Tomczyk:]

I think the main message we’re trying to communicate is over the last three years we’ve really transitioned our whole business model and turned it on its head from an organization that was service only and focused on pre-tax margin and the trading business we’ve now become an asset gather. That requires quite a transition in terms of building out your sales forces, your distribution model, your marketing spend, and some of your technology and product platforms. So we’ve done a lot of that and all the things I think three years ago and even two years ago we would have said we wanted to do. We still see opportunities, we’re on no shortage of ideas so we need to continue to do that and build that out if we expect to have that kind of growth rate. It’s hard for me to sort of say, “Well if X is this and that.” But the areas we’re focused on, whether it’s marketing, technology, or our sales forces, you should assume roughly that we want to growth those areas, expense growth at two times the rate of the rest of the organization or more, is the way we look at it. The rest of the organization we want to keep our expenses fairly tight. As we’ve grown very fast I think we’ve added more people to keep up with that business than we would have expected just to keep up the services levels and to deal with the business, because we’ve grown quite rapidly. And I think where we’re turning our attention to now as you stand back and say, “Look at how we’ve grown through acquisition years ago to more organic growth more recently,” and we’ve been focused on infrastructure and the front end applications to help with the clients. It is now time, as with all growth organization to turn to all of your business processes and because of the way we’ve been built we think there’s lots of opportunities in there to improve efficiencies and improve the client experience. And we’re looking to that to help us keep that other expense growth down more as we go forward.

[Howard Chen:]

My follow up is kind of related, Fred you highlighted achieving a nice return off the continued strong new asset growth you’re all seeing, so I was hoping you could detail how you all look at that return because certainly we can see the investment spending, we can see the growth in the investment product fees, we can see the ROCA maybe falling a bit but what we’re unable to do is kind of tie all that together. So I was just hoping that maybe you could help do that.

[Fredric J. Tomczyk:]

I don’t think there’s any question, whether it’s us or anyone else in the industry, if you’re looking at the short term and you’re looking at revenue on assets, and take that metric as one of the things we clearly look at, it’s come down over the last three years and that’s primarily due to interest rates. You can’t go from – if you went back three or four years ago, we would have had roughly 55% of our revenues would have been asset base and probably 52% of that would have been interest sensitive if you include the money market funds. If you look at what’s happened to that, that’s been cut more than in half. That’s for anybody that is – I look at us as a financial model in the online brokerage space. The benefits of that is you’re very focused, the hard part is your revenue stream is not very diversified. The fact that we’re still at 50/50 and we bought thinkorswim and kept our trading growing, and we’re record trading levels, and our asset base versus our revenue base is still 50/50 is amazing and it’s all due to that growth. I think you have to – the way that I look at it though is to say interest rates aren’t going to stay where they are forever. Sooner or later, they will start to come back to more normal levels and so we continue to focus on building that for the long term. But there’s no question in the short term you can’t outrun the net interest margin compression in terms of revenue on assets.

[Operator:]

Your next question comes from Brian Bedell – ISI Group.

[Brian Bedell:]

A question for Fred on the online cash management program, can you detail a little bit more about the time line of the roll out and what products you’re particularly offering? I think you had mentioned previously you had the debit card, online bill pay, I don’t know if checks, if you’ll have the ability to get actual physical checks and other cash management options?

[Fredric J. Tomczyk:]

The initial phase will have bill pay, checks and debit cards, and access cards with ATM withdrawals for free and all that stuff. That will be the initial wave. The second wave, which will be later in the calendar year, will have a lot of the money movement, wires, transfers between account stuff that will come out. So there’s really two phases to this but the first phase is really much more about check writing, access cards, ATM withdrawals, all that kind of stuff.

[Brian Bedell:]

I guess in conjunction with the growth you could potentially get in IDA balances, maybe if you could share how the growth in potential IDA balances from this online banking strategy factors into your outlook for 2012 for those balances? And then also, just on the rate progression on the IDA throughout the year, maybe if Bill you could just comment on how you see that progressing in the two different scenarios sort of where you would see that IDA yield bottoming and the September ’12 quarter assuming you implement your duration extension strategy?

[Fredric J. Tomczyk:]

It’s hard to sort of craft out exactly how much asset gathering growth we’ll get from the cash management services. We do know it’s the number one client complaint to us so it’s been on our list for a good two years. We’re really thrilled to get it behind us. We do know there’s client demand for it, we do know there’s also people that would move to us for our type trading technologies if we had that fixed up. So we know that from our research. I think you should say that the high end of the range is it works really well and at the low end it doesn’t work as much as we had hoped. But it’s inside that range and I think you’ve just got to look at that in terms of the high end low end of the range.

[William J. Gerber:]

Then the September 2012, we would see the month of September both on the high end and the low end probably being five basis points below the high and the low.

[Operator:]

Your next question comes from Mac Sykes – Gabelli & Company.

[Mac Sykes:]

I think you’ve touched on this in two answers to Bill’s questions and Howard, but if we did get a new normal of the low interest rates, I’m just curious if you could see any changes that could occur? Whether the market could put back fee waivers to customers or there might be new product innovation in terms of the cash management side? If that might be possible in a new normal environment?

[Fredric J. Tomczyk:]

Anything is possible in the United States, there are a lot of creative people out there. Having said that, I think I want to be clear, for us the way we looked at it when we changed our cash strategy to move more to the IDA versus money market funds or free credits, it wasn’t just the interest rate environment and the fact that we could extend, it was more I did think we did take a view that when the reserve fund broke the dollar and all the stuff coming out with Dodd-Frank and systemic risk in the world, we did take a view that the money market fund industry had changed forever. And I think we’ve seen some of those actions where the industry itself has put in new restrictions to sort of more limit risk taking whether it be shorter durations, credit risk, or if your gross yield on your assets or your investments are above a certain range above the meeting of the industry, people want to look at it. You see Paul Volcker still saying this is an unsolved problem that you’ve got a product out there that is in many respects walks, and talks, and acts like a bank account but has no liquidity or capital buffers, that’s not right. And I think it is a systemic risk because if you ever have again with the reserve fund happening, all the overnight funding markets or most of the overnight funding markets of the world froze. And so I think he’s on to the right point from a systemic risk point of view. So we saw that as that’s changed for a long period of time and while it will get better than it is today no question when interest rates rise, and we do have to look at that as a substitute product, it’s not going to go back to the way it was four years ago in our view. Could somebody come up with some other creative solution? Possibly, but I do think that the regulators right now are much more focused on how short term funding markets work, how they’re regulated, and how you ensure liquidity. And a lot of the banking discussion around BASEL III and people talk about capital, I think the bigger and probably more sensitive topic, which is hard to discuss because it’s hard to explain to most people, is liquidity management.

[Mac Sykes:]

Just one quick follow up, if you could just quickly rank in terms of your retail customers how they’re thinking about the macro environment, what’s weighing on them the most is it our domestic economy, sort of the Euro zone crisis, the political outcome next year maybe? Just a quick sort of sensitivity on those factors would be great.

[Fredric J. Tomczyk:]

I don’t think it’s the political environment because I think they’ve just taken that as it is what it is. They don’t like it, obviously they’re not thrilled about it, and you can see politicians sort of the opinion polls would say they’re at an all time low viewing of government right now. Having said that, in our most recent surveys, clearly what’s at the top of the mind for people is Europe. And one of the reasons we paused on our extensions is because we got to a world where the S&P 500 dividend yield was higher than the 10 year Treasury yield. That’s highly unusual. Particularly, that happening in an environment where the credit rating was downgraded of the US, so that just shows you how much Europe has been overhanging on the markets because money just flowed into US Treasury. So I do think that is clearly on people’s minds because it has a big impact on everyone’s economy, the whole global economy. Second would be with the US situation. But top of mind right now is Europe and you can see that in the markets every day. A little rumor here a little rumor there, the markets move quite a bit.

[Operator:]

Your next question comes from Alex Kramm – UBS.

[Alex Kramm:]

Just moving away from the outlook for just one second here and going on over to the RIA side, can you just talk about the pipeline a little bit? Obviously, this was a very interesting and volatile quarter, did you see any changes in terms of people maybe that were ready to move saying, “Well, we need another three months or six months. I don’t know what’s going on here.” Or was it basically unchanged, or did it even accelerate some of the movement?

[Fredric J. Tomczyk:]

You’re talking about the breakaway brokers?

[Alex Kramm:]

Yes, exactly.

[Fredric J. Tomczyk:]

I don’t think we saw any change in the quarter in their attitude or appetite to move to the RIA model. The pipeline continues to be very full.

[Alex Kramm:]

Then just going back to the IDA for a second, maybe I could get some more detailed numbers from you guys. Can you maybe just give us the rate you put on new money during the quarter? Obviously, you weren’t as active with being a little bit more cautious given the volatility. And then what the rate is you expect to put on if rates stay exactly as they are today? And then lastly, looking at the ladder over the next couple of years how long it will take for stuff rolling off coming down to this level where we are putting on new stuff right now?

[William J. Gerber:]

I’ll talk to more about the ranges. Certainly we are investing, the retail may be a little further out than the three to seven year. We have not yet started the extension of the institutional into the three or seven year space, but during the quarter the institutional monies were put mostly into the one to two year part of the swap curve. So if you go back and look at the history of the swap curve that’s where we put the monies in.

[Operator:]

I’m showing no further questions at this time. I’d like to turn the conference back over to Mr. Fred Tomczyk for any closing remarks.

[Fredric J. Tomczyk:]

Thanks everyone for joining us today. We’re very happy with the quarter, we’re very happy with the year. Obviously the organic growth, particularly the asset gathering, the $12 billion in the quarter was a record for us in what is usually the slowest quarter of the year. We had a record, over $41 billion for the year. We feel very, very proud of that. It’s the third year in a row of double digit asset gathering. Trading was at record levels, we feel very good about that. Earnings per share was up 11% despite a difficult environment and when you stand back and look at how it’s been over the volatility in the market, we’ve returned 80% of what we’ve earned to our shareholders to their benefit for the future and we feel very good about where we’re at. Thank you for joining us and we’ll talk to you next quarter. Take care.

[Operator:]

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