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Edited Transcript of AMTD earnings conference call or presentation 22-Oct-19 12:30pm GMT

Q4 2019 TD Ameritrade Holding Corp Earnings Call

OMAHA Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of TD Ameritrade Holding Corp earnings conference call or presentation Tuesday, October 22, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stephen John Boyle

TD Ameritrade Holding Corporation - Executive VP & CFO

* Timothy D. Hockey

TD Ameritrade Holding Corporation - President, CEO & Director

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Conference Call Participants

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* Brennan Hawken

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials

* Brian Bertram Bedell

Deutsche Bank AG, Research Division - Director in Equity Research

* Chinedu Bolu

Autonomous Research LLP - Research Analyst

* Christopher Charles Shutler

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

* Christopher Meo Harris

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

* Devin Patrick Ryan

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Kyle Kenneth Voigt

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Macrae Sykes

G. Research, LLC - Research Analyst

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Richard Henry Repetto

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

* Steven Joseph Chubak

Wolfe Research, LLC - Director of Equity Research

* William Alfred Nance

Goldman Sachs Group Inc., Research Division - Research Analyst

* William R. Katz

Citigroup Inc, Research Division - MD

* Zachary Noah Feierstein

Morgan Stanley, Research Division - Research Associate

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Presentation

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Operator [1]

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Good day, everyone, and welcome to TD Ameritrade Holding's 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, Tim Hockey; and Chief Financial Officer, Steve Boyle.

A file containing Mr. Hockey's and Mr. Boyle's comments on the quarter can be found on the company's corporate website, amtd.com, under Investor Relations. This call is intended to address related questions from investors and analysts. Questions from reporters can be directed to the company's media relations team or you can follow their Twitter handle at @TDAmeritradePR, which will be live tweeting this morning's call.

Let me take a moment to compile the questions..

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Questions and Answers

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Operator [1]

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Your first question comes from the line of Rich Repetto.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [2]

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Thanks for all the information and the rundown of the business initiatives that you're focusing on. And I guess, my first question would be, you mentioned a lot of areas we expect -- that you're working on and investing on where you could see growth. Is there any way you could prioritize them in -- to receive in -- like which 1, 2 or 3 have the greatest possibility of impact in the top line and by how much and on what timetable?

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

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It's Tim. So let me take a first stab at that and let me actually talk a little bit more about the process because I think it's probably important. When the announcement came out and we made the decision to go to $0, the first thing we did was we got the team together, the senior executives team and took a look at our strategy and then at our priorities for 2020 and started to re-prioritize those in light of the new environment. And so many of these initiatives were underway, some of them were a little further out, simply because we thought they were not as important in the environment we used to be in. And so then we recalibrated those, much of which you see in Steve's list, in his commentary.

In terms of prioritization, again, it is relatively early days in terms of their absolute size. These would be relative guesses to what we think they would be projecting in the out-years. And we were frankly conservative in our expectations of revenue growth in the 2020 forecast. So we're not going to be able to disclose much more in terms of the absolutes, but just thought it was important to help you understand that these initial first couple of weeks stage how we went through and prioritized. And obviously, there'd be further fine-tuning as we learn more. But over to Steve for some more.

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [4]

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Yes. I'll just say, Rich, a couple of things. So we started our strategic resiliency project about a year ago, and we've been focused on putting in place customer profitability, aligning our cost to our -- with our strategic priorities. And I think the organization has a new, more fulsome view of where we're making our money and where we're expending our resources. And I think that's going to be a -- what's going to be a big area of focus anyway. And it's going to -- I think, it's taken on even more urgency with some of the changes that we have. Fully paved lending is one that's pretty exciting. You saw, in the quarter, how strong stock lending revenue was for us. That's something that we've talked about over the years and has never risen to the top of the list. And now we've some changes in personnel and the new environment, we're really excited about that. We haven't really thought about one month of that in the plan for next year. But that's a significant initiative for us. Asia has been a big initiative, and we see growing momentum in Asia. We're really excited about that. And, of course, institutional has always been a very strong growth business for us. But as we, again, segment out those customers and the RIAs, we see that those high net worth customers are particularly valuable to us. And we're going to have some new things introduced this year and some increased focus on that. So we think that's a great opportunity, too.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [5]

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Okay. And then my one follow-up would be, in the commentary of prepared remarks, you talk directly about and I think, "Sustainable competitive scale benefit." And specifically, you say, looking back, the Scottrade purchase was a prudent decision. So I guess, given that everything that's gone out with the $0 commission and looking for efficiencies, some say consolidation is a way to maximize efficiencies. But I'm just trying to get an update on how Ameritrade and the Board look at consolidation now that we're in a $0 commission environment going forward?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [6]

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So Rich, the team here was joking about after having a number of quarters where we didn't have an M&A question on the call, how many we would get in how many different ways there, Rich. And so that's one. And our standard answer on that is, we will take a look at anything that makes financial and strategic sense. But you're right, we did make the comment that the Scottrade deal was fortuitous timing. Scale is important. We have scale. We're very comfortable with our earnings power now, even in this new environment.

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Operator [7]

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Your next question comes from the line of Chris Shutler.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [8]

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Are you there, Chris?

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Operator [9]

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Your next question comes from the line of Rich Repetto.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [10]

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I already asked and answered.

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Operator [11]

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Chris Shutler, are you able to speak?

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [12]

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Can you hear me?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [13]

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Yes.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [14]

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Guys, sorry about that. It sounds like you're thinking about gearing your pricing, your solutions, your service level depending on how engaged clients are with TD Ameritrade. Could you maybe flesh out what you're thinking about a little bit more there?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [15]

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Yes. Chris, I'll take that. Some of the work that Steve had been alluding to is that we've done a lot of analysis in the last little while about where our costs are being driven and the segmentation and the type of our clients. And so we put segment leads in place. They are now working through the offering, the client experience for each of those different types of segments. And we really do understand the costs and the revenues associated. If we haven't had the commission impact a few weeks ago, then I could very well have imagined in the next, call it over the next year, we would've started to be much more targeted in the appropriate price or value for each of those clients as opposed to what I've always found interesting in this industry as sort of one price fits all with a high degree of emphasis on awareness of that particular price point.

In light of that, with that price going now down to $0, it doesn't preclude us from really understanding where there are opportunities to best charge for the value created. So I think that work will continue. I think the team is actually quite energized to not have that, sort of, sword of Damocles hanging over us, which is the price point. Yes, it was very painful and the revenue give up wasn't helpful at all. But it's actually a bit liberating in terms of really trying to understand where we can create value for clients and then potentially charge for it. So the good news is, we've got, I'd like to say, probably 18 months head start doing that work. And so that should just be accelerated now.

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [16]

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Yes. I think similarly too, Chris, on the expense side, there's a number of things that we give to everyone today that a number of our clients really don't utilize, but cost us money. So we think there's probably ways to value engineer that offering so that the clients still see a great offering and really don't know it's a change, but it's a lower cost to us going forward. So I think I see that as well.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [17]

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Okay. Great. And then as a follow-up, in the commentary, you mentioned that in the $0 commission environment you think that there could be some disruptions in the IBD and full-service broker industries. Maybe just elaborate on that comment, and how do you see that playing out over time?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [18]

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Well, first, as I would say, if you go back 45 years, this industry category, the online brokers, the "Discount brokers," was born out of price competition. At that time, the price was $75. So here we are now at $0. In the last 45 years, our category has been winning share from those others, the full-service categories, the wirehouses. And so now that, that number has gone all the way down to $0, I think that trend will accelerate. So that will be a category accelerant to all of us.

More recently, the impact, of course, has been that there have been new entrants at a $0 price point. That's largely been their differentiating characteristic, that has now been gone away. And I would say, more idiosyncratic to us, at TD Ameritrade, we have been holding our DART share at the largest in the industry and gaining M&A share in the last little while, even with the $2 price delta to our largest competitors. So that overhang, if you will, has gone away as well.

So now we're competing straight up in a $0 environment, and we think that all of the investments we've made in the client experiences is really going to start to pay off, because we've got the best experience, the best platforms, the best trading and education, the best network, and not just by our estimation, by a third party. So -- and we think in that environment, we will win.

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [19]

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And I think, Chris, on the institutional side, we think that the changes in the environment are going to drive more -- first, going to emphasize speed, that's going to create discussions with clients; friction, we think, there'll be more breakaway brokers potentially here in this environment and more people rethinking things tends to get them to think about the independent model, and we think that that's very good for our institutional business.

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Operator [20]

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Your next question comes from the line of Mike Carrier.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [21]

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You guys mentioned feeling confident in keeping expenses flat over the next few years, while maintaining healthy net new asset growth, I think, in the high single digits. So assuming there's some comp and other costs associated with the net new assets that come in the door. So maybe what are some of the offsets to keep the expense base flat over the next few years?

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [22]

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Sure. So as I mentioned, we've been sort of gearing up for this. I think that the biggest emphasis is that we're really focused on those places where we really think that we excel, where we can win and where we are trying to stop things. So we announced the branch closures last year. We've refined our branch network, it's still incredibly important but a little bit streamlined. We've shut down our trade architect, duplicate platforms. We've shuttered our Investools business. We closed our -- we sold off our Trust business in June.

So we're really focusing on what is our core competency, where can we grow, not trying to be all things to all people. And we've also been really enhancing our automation. So we're providing a much smoother digital experience for our clients. We're reducing client irritants. We're reducing their reasons to call us. We've got an AI tool that helps us understand why clients are calling, and we're addressing the things that drive the most call volume into our call centers. We are looking at the flow through our branches and make sure that we're really providing value-added activities to our customers and not just doing servicing, or if we're doing servicing, we're doing it with lower cost customer service reps as opposed to financial consultants. So a whole host of things that we think will be powerful in 2020 and beyond, as we go forward.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [23]

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And just a couple of other things on that. As we alluded to the strategic resiliency work what's really trying to bucket our costs against 3 categories of things: the first one and the most important is, those things that are really differentiators for us, our platforms, our educational offerings, things that make us stand out relative to the competition and our clients really value. Second category is the -- just keep the lights on what you need to do, I mean, your focus there, of course, is to make that more and more efficient and automation really helps there. And the third category are those things that aren't differentiators. They are things that you might have tried, that we're keeping on life support, but our clients are saying they don't really value. And that category used to be slimming down or getting out entirely. Steve gave you a few examples of decisions made already, and we have others in the offer that's -- that will all be driven by the data that our clients tell us they value or not. So we think there's good opportunities to make sure we continue to streamline our dollars into the things that differentiate us.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [24]

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Okay. That's helpful. And then just a quick follow-up on some of the new initiatives. One area your mentioned was building on a more compelling offering and solutions for (inaudible) investors and then for the higher net worth RIA clients. I guess just curious, when you think about what you offer today, what do you think is needed in order to be more successful there?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [25]

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So Tom's business, as we know, has been growing at huge rates, but there were some offerings in, sort of, the family office side that our clients with larger books that are interested in having donor-advised funds. This is something that we're working on and should have out relatively soon. Some of the higher-end services that our private -- charitable giving, trust accounting, cash management capabilities, all of those things that are helpful to higher net worth clients, and they've been asking for a while and those are important too.

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [26]

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Yes. And I guess, we've also been looking at what our engaged investors, what they see as advice or help from us and what they really value in that, and we think there's opportunities to provide extra services for people that'll be willing to pay for, and we're working on some of those offerings in the upcoming year.

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Operator [27]

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Your next question comes from the line of Chris Harris.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [28]

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With respect to the commission cuts, the decision happens really quickly and it is permanent, but, I know, you guys have been thinking about this, I'm sure, for quite some time. So can you walk us through your thought process on why it's $0 right away as opposed to maybe dropping it to a few dollars and seeing what happens from there?

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

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Yes. Thanks, Chris. The -- so as you imagine, this has been a bit of a slow moving train for literally decades, the discussion about what price point will be here, when. The set has gone from $75 down to now $0. What we've done over the last couple of years, especially in early 2017 when the last round of price cuts happened, was really understand customer price sensitivity curves. And so we've done a lot of analysis as to at what point our clients were going to be too sensitive and too sensitive as in we would have too high an attrition risk were we not to move. So at the same time we sort of started thinking about how do we get our strategic resiliency program ready and standing up, at the same time, we're getting prepared for what we thought would be perhaps an eventuality, although probably not as early as it actually happened, going to $0.

What the analysis told us is that about, call it, $2 or $3 price point, you can eke out an extra premium, if you will, for the value proposition that you provide. But below that price point, and especially at $0, there is -- when the major competition goes to $0 then it is pretty much game over from a -- from that particular price being commissions for trade. We don't necessarily believe that that's true for all prices through all services. It's different, obviously, sensitivities of clients for different offerings. But at that particular flashpoint of $0, we needed to match. And so that's why the decision was made on the day and we went a couple of days later.

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Christopher Meo Harris, Wells Fargo Securities, LLC, Research Division - Director and Senior Equity Research Analyst [30]

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Okay got it. And then with respect to some of your longer term planning, can you remind us when the agreement with TD Bank comes up for renegotiation? And could there be some potential release with that agreement given what's happened on the commission side of your business?

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

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Yes. The agreement, actually, we have to notify each other by July of 2021, whether we wish to renew it and extend it. And that would be effective 2023. So there's lots of time between now and then and then lots of time after. But yes, there's an opportunity to have discussions with TD to see what the appropriate prices for deposits are.

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Operator [32]

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Your next question comes from the line of Devin Ryan.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [33]

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So wanted to touch on the 49% increase in new accounts since they moved to $0. That really stood out to us and if we can maybe dig into that a little bit more. I'm curious if net new assets corresponded with the new account trend just over the kind of short period of time and where are those accounts coming from, if you can. Are they old active trader clients that are just moving over? And then any expectations looking forward just around what new account growth could look like, especially now that your prices have been removed as an impediment?

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

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Yes. So I'll take that. And so, first, Devin, I would say the data we have so far, a couple of weeks in, really is quite anecdotal. There's the initial euphoria of $0, our -- literally, our client advocacy scores go up literally daily. We track them daily. They go up 10 points in the last couple of weeks and which is great given that we've also had about a 10% point increase over the last year. So a pop on the steady increase is fantastic. Then we've got all of the activity of new clients being attractive because of the headlines and probably the new stories. And, as we alluded to, there's lots of great anecdotes of clients coming home that have said, hey, we loved your service. But, in fact, we thought that the price point was better elsewhere. So therefore, there is no differentiation point. And now we'll come back to everything that you have.

So unfortunately, all of this is relatively anecdotal. Some of the NNA data that we have, it takes time to build, especially in our institutional business. But we've seen some very encouraging signs, the ACATS, the account transfers, that we can track daily, that's coming in, are quite positive. And our sales teams themselves, they're actually using that as an opportunity to talk to our clients and to bring them back. So I'd say there's no anecdotal negatives that we're hearing other than perhaps, certainly, fun story, clients who are calling us saying, hey, we're worried that $0 that you can't afford to give me the service that you're willing -- that you've been giving me. So I'd be more than happy to pay the $6.95 price to get the service I've been having. And, of course, we've been happy to assure them that they will get the service that they are used to at a $0 price point. So we're thrilled about this and our teams. I can tell you our associates are incredibly thrilled to be -- to have the cloud of the price differential taken away and so we compete head up, because on that game we will win.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [35]

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Yes. You should take the commissions. Real quick follow-up just on the balance sheet. You bought some treasuries in the quarter. I'm just curious how you guys are thinking about using the balance sheet from here just in the overall asset liability management? And how much you could or would think about expanding that?

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [36]

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Yes. So I don't think we'll expand it too much. That was sort of an opportunistic thing that we were able do. I think you'll see most of the changes that we do going forward in the BDA balances. But what we did at the time, the summer, the treasury and the swap curve, sort of all askew and it was much more advantageous for us to put on duration on the treasury curve and most of it is in the holdco. And so we've got mark-to-market, but there's a couple of hundred million that's in the broker outside of said cash. And those treasuries have about a 10-year duration. So you do see some decent movement with rate changes.

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Operator [37]

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Your next question comes from the line of Brennan Hawken.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [38]

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And for those keeping the score at home, here is question number 2 on the M&A front. So we've got commissions now at $0, some would argue that, that previously was an impediment or a potential risk for a competitor response to any deal in motion. How do you think about that when you consider an industry where scale is now increasingly important? And also, maybe, Tim, can you add how this -- the fact that there's a leadership transition happening now, feeds into or may impact your decision to pursue any strategic alternatives?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [39]

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Well, on the M&A question, I think, asked and answered. But on the CEO transition, I think, that's important. So the process is under away. Certainly, the Board has convened a search committee, they've had the search firm, there are candidates being considered. I can tell you that the move to $0 has absolutely improved the opportunity to get a good quality CEO in here. I can tell you that when I was considering coming to TD Ameritrade a number of years ago, of course, the -- that sword of Damocles about when is price point going to $0 going to happen. Nobody wants it to happen on their watch. Well, it did on my watch. But I can tell you that, that's now gone away. So having a new CEO come in, I think, just made it easier to attract them.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [40]

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Okay. And then when we think about -- and Tim, this is nothing negative about you. You know how I've felt about your leadership. I said it during the last call, I'm just kind of confused about the announcement of the transition. So this is meant with all and clear due respect. Can you explain to us what the process is for review given the fact that there is a CEO transition in place? There are some really monumental changes happening to the industry? And while I have full faith and confidence in your judgment, you are not going to be there beyond February. And so, like, dealing with the repercussions of decisions having, like, continuity through this very, very difficult period, it's important. And one of the questions that we regularly debate with around -- with investors is, whether or not that factor is impacting Ameritrade? How involved is the Board in these dynamics, in these discussions, in these decisions? If you could just shed a little light on there? And sorry, it's a bit of an awkward question, I...

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [41]

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I appreciate the question. In fact, I think, it's a perfect question, because it is on everybody's mind and it shouldn't be the elephant in the room. Look, a couple of things happened after my announcement in July. First thing was to get together with the team, my leadership team first. And say, look, the phrase I use is me as we, there is no more CEO, there is now a senior leadership team that is going to take the organization forward. So I can tell you that after July, the discussions both with the Board and collectively came up with a very, very tight and cogent set of strategy and tactics that I could hand over to my successor in the middle of our fiscal 2020. And it's the tightest I've ever seen, frankly. And then, of course, the world changed in early October. In terms of the Board, I think, that's an incredibly important discussion. The Board -- we've probably had more conversations with the Board collectively since July to make sure that there is very tight alignment with the Senior Operating Committee around both the strategy and the day the announcement around the price competition came out, we convened the Board within, I think, 6 hours. And we had 100% -- their 100% support. We walked through the analysis, we walked through our research. We walked through what had happened in the industry. And there was 100% support for the team's collective decision on what to do moving forward. So it is a great question. I can tell you I will -- as I told the team, I will be here swinging with every breath I have until my last day. And I'm very confident, both the team and the Board, with the new CEO, we'll be able to compete even more strongly and powerfully in the new environment. But great question, I appreciate your comment.

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Operator [42]

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Your next question comes from the line of Bill Katz.

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William R. Katz, Citigroup Inc, Research Division - MD [43]

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Just sort of change tack a little bit. I was just wondering if you could go back to some of the fiscal '20 guidance assumptions. And I was just wondering if you could sort of maybe unpack on the revenue side a little bit. I guess what I'm struggling a little bit is just sort of the underlying number of rate cuts you're assuming versus what the forward curve might be anticipating. I think we peel back the 10 basis point decline in the net interest margin year-on-year just given a lot of moving parts and -- so how do you get to that dynamic just given what looks like BDA guidance where the yields are -- actually yields are for client balances, what have you?

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [44]

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Yes. So Bill, maybe, I'll start with the interest rate assumptions. So we wrapped up our plan a little bit earlier, as Tim mentioned, this year than usual and rates were sort of all over the place so we decided just to land on a scenario and stick with it. And so we do have in, sort of, a midpoint scenario, one rate cut in March. But we've given you all the changes that we would expect, what the impact of an additional rate cut would be and you can move that at different points in the year and whatnot. So that was why we tried to be as explicit in our footnotes as we were, Steve (sic) { Bill], and take that for what you wanted it.

On the net interest margin side, there is a lot of moving parts there. As you know, margin spreads are higher than BDA spreads. We've had a lot of movement in segregated cash. But generally, the decline is because rates are starting to come down here and that's going to be probably factored into next year as well.

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William R. Katz, Citigroup Inc, Research Division - MD [45]

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Okay. And just a follow-up. Just coming back to the net new asset outlook for you. You, like always, also suggested that it removes the impediment for growth, yet your organic growth rate has sort of stayed the same in terms of your assumption year-on-year if you look at fiscal '19 guide versus, I think, when you're initially guiding for this year. Is that just a point of conservatism? Is there anything that's different that sort of temper some of that view? And then as you think about that mix going forward, just what -- how does the yield on that incremental growth compared to legacy book of business?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [46]

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Yes. So on the actual growth rate, what we decided to do with our 7% to 10% range was to not adjust that as the result of the most recent change given when we were putting that in, it was really 2 weeks in. As we said earlier, the anecdotal trends that we're seeing are very strong. But we'll have to come out with subsequent quarterly revisions, obviously, with performance unless we've got a little bit more time under our belt.

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [47]

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I think that's right. We're at 7% last year. So we're at sort of the low end of the range. I think the fact that we're now in a $0 rate environment, and obviously that was not in last quarter at all, it happened October 1 is we think a positive factor going forward.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [48]

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I guess, the other point -- I am not sure, Bill, this was exactly the question, but we have heard from a number of folks, why do we think -- everyone is saying that $0 was going to help them, why do we particularly think that? And I think the fact that we were growing without $0, $0 was our -- price was our biggest client here since and, in fact, we are seeing reduced revenue by the most amount of money. And so, by definition, how our clients are going to be getting that much more value in the offering. I think those are all reasons why we are quite confident that this is going to be powerful for us.

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Operator [49]

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Your next question comes from the line of Michael Cyprys.

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Zachary Noah Feierstein, Morgan Stanley, Research Division - Research Associate [50]

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This is Feierstein, on for Mike. Just want to circle back to an earlier question. I guess, would a lack of a permanent CEO being named prevent the company from executing on M&A?

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

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That's number 3. And so the answer is the company, including the Board and the management team, where we all consider opportunities that make strategic and financial sense. It's more than just one person.

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Zachary Noah Feierstein, Morgan Stanley, Research Division - Research Associate [52]

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Okay. That's helpful. And then, at a higher level, you mentioned, kind of, a focus on growing in Asia in your prepared remarks. Is there any place else internationally in the next -- kind of in the near term that will make sense to expand into?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [53]

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We've actually done a scan globally a number of times, as we do our strategic work, and we've decided to focus on our Asian opportunity. That makes most sense. We think that's the biggest opportunity for us for the next little while. So no other considerations right now.

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Operator [54]

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Your next question comes from the line of Kyle Voigt.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [55]

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If you look at your 2 larger eBroker competitors, both of them generate significant revenues from offering proprietary products. So wondering if you can give us some updated thoughts on the pros and cons and having a proprietary product offering. And is that something you'd consider more seriously now in a $0-commission environment?

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

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Yes. We've looked at this a number of times over the years. The best time to, I think, build out a proprietary product offering was probably 25 years ago with a significant price point pressure, obviously, on active and passive. As you know, we've got a very open architecture model. Our wrap products and our advisory products are helpful for us. But there is -- we feel secular pressure on that particular category as well. And we also think that there is something that's helpful when we, in fact, have an open offering that isn't a branded, specifically, TD Ameritrade and makes all things available for our clients. But, as you know, you need absolutely massive scale for an offering in asset management these days, and so we don't think that, that makes sense for us.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [57]

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Okay. And my follow-up is, just with respect to one of the bullets in the prepared remarks, taking a hard look at your contracts to review the value attained. Can you just clarify was that more in reference to your expenses or your revenues or both? And which one you're referencing these contracts and the value attained? Would that include relationships with market makers and order routing revenues and you think there could be some incremental revenue opportunity there over time?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [58]

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The short answer is that any time -- delivering what we deliver is an ecosystem with lots of partners. And so they all have contracts and as a result, we're going to revamp all of them and prioritize them big to small. And so for example, about 50% of our costs are our third-party contracts. So those would be something on the expense side. But we look at things on the revenue side as well.

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Operator [59]

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Your next question comes from the line of Brian Bedell.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [60]

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Maybe just question number 4 on M&A and strategy together. But Tim, just obviously, as you sort of begin to exit over the next several months, just to get your view, given what we've -- what's happened now in the industry, do you think consolidation makes more sense -- in-market consolidation makes more sense? Or do you think the organic growth initiative that you've laid out, and thanks again for laying out all of these in the prepared remarks, actually makes more sense and that the independent firms can thrive better on their own with these initiatives?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [61]

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Yes. Well I'll probably be moved to give exactly the same answer all over again, but I should, asked in particular, we will continue to make sense of any offering that is sort of -- we look at anything that has financial and strategic sense. More generally, if you're asking in an industry that benefits from scale and an industry that has small players that have had their price differential, which was their main value proposition stripped out, there will probably be some consolidation. That makes sense in any industry.

But for us, in particular, we're very comfortable with our scale and our size and our Scottrade acquisition, obviously, helped us get there to be very competitive in a $0 environment. And so we're comfortable where we are.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [62]

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Okay. And then just on the revenue initiative, especially in the new environment. Maybe, Steve, if you could just talk about the -- that sort of ability to get to the $2 improvement per account, it -- was that just sort of a sampling or do you think that's readily achievable in the next 1 to 2 years? And is the stock lending sort of the easiest one to get to? And then maybe just to layer one more in on banking. Do you think there is potential to launch more cohesive banking strategy with TD Bank, like, more of an online transactional banking strategy that could also generate new client activity?

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [63]

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Yes. So let me start again there. I do think that there's lots of opportunities including additional banking products. And so clearly that'll be something that we'll continue to move forward on. What we did as we looked at our segmentation work was, it showed a light on the fact that we do have a number of customers who have relatively small revenue with us. And we think it -- there are a number of ways where we're providing value that people will be willing to pay for. And so the $2 a month per account was sort of a way to think about that. So I do think it's very achievable. It's not going to come all in one step, it's probably lots of smaller things. But absolutely, we'll do that. And I do think some of the other things, like, a fully paved lending, that's going to be last on those small clients and more on clients that have substantial positions with us. But an opportunity not only for us to make money, but for them to share in what we're making. So I think it helps our value proposition as well as our earnings.

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Operator [64]

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Your next question comes from the line of Will Nance.

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William Alfred Nance, Goldman Sachs Group Inc., Research Division - Research Analyst [65]

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Maybe just to put a fire point on I think Bill's question earlier. So the midpoint of the range assumes like a 1.76 Fed funds rate. I think the odds of an October rate cut are in the 90 percentage rate. And I think the forward curve is roughly 1.30 to 1.40 rate on average next year. So I guess that we do see something more like the forward curve in 2020. Do you guys still think you're in the revenue range and if we are more towards the lower end in that rate environment, do expenses kind of match that?

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [66]

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Yes. So our view would be that we've given you all the data and you can make the rate call. I think if you did see 2 or 3 rate cuts next year, you would be towards the lower end of the revenue range. And -- but we think it's -- the range is a good range and that the low end would be good result for us if that were the scenario.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [67]

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And what we try to do is to both be conservative on some of the inputs to the initiatives that Steve laid out and that might be a little bit of an offset as well.

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Operator [68]

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Your next question comes from the line of Steven Chubak.

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Steven Joseph Chubak, Wolfe Research, LLC - Director of Equity Research [69]

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Just wanted to ask a question on the relationship with TD. So we'll call this question 4.5 on the M&A topic. But TD had strong ambitions in U.S. wealth. And one of the perceived hurdles at least through a combination historically had been the uncertainty around pricing. So with commissions now at $0, growing convergence of U.S. wealth in digital, I'm just curious, do the pricing developments change the nature of the relationship with TD? And can you provide some insight on the narrative of potential combination.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [70]

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I think that qualifies as a full-blown number 5, not 4.5. But -- so first of all, the price point, I don't think, has any bearing whatsoever on the relationship with TD. You'd have to ask TD what their plans are further on down the road, but our relationship is strong and the price point doesn't have any impact on it whatsoever.

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Operator [71]

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Your next question comes from the line of Mac Sykes.

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Macrae Sykes, G. Research, LLC - Research Analyst [72]

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Two questions here. Do you expect any changes in the profitability of payment for order flow given the industry move to $0 commissions, both for you and perhaps other participants?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [73]

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No. We don't. And as you know, our focus is always on best execution for our clients.

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Macrae Sykes, G. Research, LLC - Research Analyst [74]

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Okay. And then, could you talk about the competitive threat from short-duration cash ETFs to your BDA business going forward?

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Stephen John Boyle, TD Ameritrade Holding Corporation - Executive VP & CFO [75]

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Yes. So we already have a number of financial fixed income alternative opportunities available to our clients. And to the extent that they have invest in cash, they utilize those. We have some CDs that are getting ready to mature here. We've seen some money move into some money market funds as the curves inverted here. And so I'm sure there'll be lots of new products coming up, but we don't really see that as a big threat to our cash balances. We think that our cash is principally transactional cash and clients are relatively rating sensitive on it and want it in immediately investable form so that they can make trades when they want to make trades. So not a big issue for us, we don't think.

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Operator [76]

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Your last question comes from the line of Christian Bolu.

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Chinedu Bolu, Autonomous Research LLP - Research Analyst [77]

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I guess number 6 on M&A. Maybe a different angle on that question. Can you talk about maybe the pros and cons of Ameritrade being absorbed by bigger rival? Is it even feasible given the TD equity stake? And would there be any sort of strategic benefits to be in part of a bigger, a larger group?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [78]

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So Christian, I am glad you asked the question and number 6. So the -- you phrased the question, can you talk about the merits and the answer is, no. I think it's been asked and answered, but there's lots of ways around that. But we will continue. The Board will continue to look at all combinations that make strategic and financial sense. I really can't give you any more color than that. It would be inappropriate...

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Chinedu Bolu, Autonomous Research LLP - Research Analyst [79]

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Just to be clear, I'm asking it in terms of someone taking you out, not you taking somebody else out.

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [80]

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I understand what you're asking.

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Chinedu Bolu, Autonomous Research LLP - Research Analyst [81]

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Okay. Got it. So we'll move on. I guess, maybe, organic growth, I guess, the retail business was soft again this quarter in terms of organic growth. I think you alluded to a pickup in flows post $0 commission. So maybe a couple of questions there. More color on where these flows are coming from? Is it from peers who already went to $0 or from other players? And any way to maybe quantify some of the uplift in activity you expect or you hope to get from $0 commissions? Maybe if you go back to the free trade offering you had in the late '90s. What was the differential in activity rates on the average featured accounts versus other accounts?

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [82]

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Christian, that one I'm really happy to answer. So all sorts of things. First of all, the ACATS in, which is really our best opportunity to see from individual players where we're getting the flows. It's from all over. You can imagine some of the $0 price players when their competitive plan gets torn out from underneath them, that would be one. But they're relatively small dollars anyway in terms of what has been over there. And all the ACATS are in and out. Our outflows are slowing and our inflows are increasing. But it is pretty widespread. You mentioned the free trade offering we had, literally 20 years ago. We actually went back and looked at some of the analysis of the trading intensity of those accounts. Ironically, it was -- well, we actually had to double check. It was over 20x the trade rates from clients, who are participating in the free trade. Now, we don't think that, that would be the case or we'd have to buy a whole bunch more data centers with going to $0. But there is absolutely, in a fact, that when you remove the friction from trading, it will get more activity. As you know, and we said many times, even in a world of $0 commissions, traders are by far still our most profitable customers. And we've been growing that segment at, in many cases, high single digits and low double digits over the last little while. So we're very excited about the inflow of new activity, and we think our offering will continue to win in this environment.

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Operator [83]

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

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Timothy D. Hockey, TD Ameritrade Holding Corporation - President, CEO & Director [84]

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Great. Well, thanks, everybody, for calling in. As we said, even though it was a great quarter and a great 2019, it was, sort of, overshadowed on October 1 by all of the news. But I think you've got a sense that the team is united in a series of very tight tactics to take advantage of this opportunity. And that frankly, after many, many years of having the discussion and having to answer of what will you do if commissions go to $0, I think that the day is now here. Clients are better off as a result of it, and we will continue to grow even faster in the years ahead. So we're quite excited, and thank you all for being part of the call.

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Operator [85]

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