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Good day, everyone, and welcome to the TD Ameritrade Holding Corporation's June Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is President and Chief Executive Officer Tim Hockey; and Chief Financial Officer Steve Boyle.
At this time, I would like to turn to call over to Jeff Goeser, Managing Director of Investor Relations. Please go ahead, sir.
Hello. This is Jeff Goeser, Managing Director of Investor Relations for TD Ameritrade. Thank you for joining us on such short notice. I'm here with TD Ameritrade President and CEO Tim Hockey and CFO Steve Boyle to share with you some perspective on today's announcements. You can find everything related to those announcements on our corporate website, amtd.com, just click on Investor Relations.
A reminder that these documents include our safe harbor statement and the reconciliation of certain non-GAAP financial measures to our most comparable GAAP financial measures. Information about relevant risk factors can be found in our Forms 10-Q and 10-K, which are also available online. This call is intended for investors and analysts. Questions from reporters can be directed to our media relations team. Or you can follow our Twitter handle @TDAmeritradePR, which will be live tweeting today's call. We have 20 covering analysts and a lot to cover. [Operator Instructions].
And now I'd like to turn it over to Tim Hockey. Tim?
Great. Thanks, Jeff. Before we dive into the Q&A, I'd like to spend a few moments talking to you about the leadership change announcement that we released earlier today. After my quarterly meeting with our Board of Directors this past week, the culmination of discussions about the best path forward for the future was an important conclusion, that it's time to transition to a new CEO to guide the next phase of our growth. As you are all well aware, boards and management teams regularly discuss plans for the future. There are many factors that go into these discussions, and the decision was not taken lightly by the Board or myself.
Instead of providing you with the standard, vague explanation of you leaving to pursue other interests, in the interest of providing an extra level of clarity, I can tell you what am I leaving is not: I'm not leaving for another job or to spend more time with my family or because of my health or because I've done something contrary to our core values. My leaving is also not a reflection on the performance or health of TD Ameritrade. Those of you who have followed us for the last few years should understand this more than anyone. When I started in 2016, our non-GAAP EPS that fiscal year was $1.58. This year, consensus for fiscal 2019 is around $4. That's the best 3-year pure EPS performance improvement at this company going back more than 20 years.
In 2016, our return on equity was approximately 17%. Today, we're at more than 25%. Our funded accounts were 7 million in 2016. They're approximately 12 million today. Client assets were $774 billion. Now they're $1.3 trillion. 2016 DARTs was 463,000, and this year-to-date, we're averaging 871,000 trades per day. Total net new assets in 2016 were $60 billion, and this year, we believe we could exceed $90 billion. Along with hard work, strong organic growth and a great acquisition in that time period, we had some tailwinds in generating these results. All in all, I'm very proud of the team's performance these past 3 years.
You can see the underlying strength of our model in the numbers we released this quarter, like near-record client experience scores and a robust institutional sales pipeline. These are all indicative of the strong momentum we built. After that, all of the cultural change we've injected into the organization, with a refreshed purpose, strong associate engagement and a steady return for our technology innovation roots. These are all great accomplishments, and it was in discussing the best path forward for this company that the Board and I came to the decision that it's time for a new CEO to lead our next chapter.
Decisions like this don't come easily, but I and the Board remain committed to our strategy, and I'm 100% focused on the steps ahead of us. We are in the final weeks of fiscal 2020 planning, and that will continue. We have a lot to do to push our Board-approved strategy forward and a strong management bench committed to see it through. I've agreed to stay on until the end of February 2020 through our annual shareholders' meeting while the Board conducts a compressive search for my successor. They will engage an executive search firm to help, and they'll consider internal and external candidates.
The good thing about announcing this now is that it's like sending a gigantic help wanted ad to the world. They'll spread the net wide in search of the right CEO to take TD Ameritrade forward. And if they find that person before February, I will move into an advisory role to help with the transition. I've asked our management team to maintain an open dialogue with our associates and to keep efforts focused on what we need to do to deliver on our 2019 goals and start 2020 ready to do even more.
Until the day I officially leave this company, I am focused on one thing: driving our strategy forward. It's very important for me to leave with our momentum intact and to set up my successor, my management team and all 10,000 of our associates for long-term success. These last 3.5 years that I've been at TD Ameritrade have been one of the highlights of my career. I'm tremendously proud of what this team has done, and as I prepare to leave, I do so with a lot of optimism for the future.
And now, in the spirit of business as usual, I've said just about all I can say on those subjects. So Steve and I are happy to take your questions on the quarter.
[Operator Instructions]. Your first question is from Brennan Hawken with UBS.
Tim, I appreciate that -- your comments and the noted points about how there are certain things that this is not about, which is very, very helpful to clear the record. But the announcement's a bit surprising, and your tenure, while -- it seems like you're just sort of starting to hit your pace in the CEO role. And so it comes a little surprising. Was there a disagreement in between what -- where you wanted to go versus the Board? Did it have to do with a potential acquisition? Was there anything -- is there any additional information that you can give us to help us understand where this very important decision came down to and where the major friction points were?
Thanks, Brennan, for the question. Obviously, it's difficult to find the right balance between discretion and disclosure. But I can tell you that, as I said, there's no one thing. These were conversations that I held with our Board over a period of time. They were open and honest conversations about the way forward. And at this time, we just agreed that this is the right time for a transition and to be public about it and to -- that I will stick around until February 2020. It's not really that much more interesting than that, honestly.
Your next question is from Rich Repetto with Sandler O'Neill.
I guess my question since I only have one is that can you tell us how the strategy of Ameritrade might change going forward. How -- why is the strategy of the Board -- why does it require a leadership change, I guess?
Yes, thanks, Rich. So great question. And I should've been more clear in my last answer, and that is, the Board has approved our strategy, and in discussions with the management team, we are more than energized around delivery of that. So there has been no change in direction. And as we all know, the environment that's facing our entire industry has gotten a little more interesting. So if anything, just being even more expeditious about execution of a winning strategy. And as I said, from the quarterly results, the strategy so far is winning. We have the luxury right now of having reported last so we got to see our relative comparators, and we're feeling pretty good about the delivery of the strategy so far. And so the team and I are united to keep doing exactly that, and the Board is supportive.
Your next question is from Chris Harris with Wells Fargo.
So your BDA balances were down in the quarter, and it looks like they were down a bit more in the month of June. How are you guys feeling about the outlook for the growth in these balances?
Yes, so thanks, Chris. This is Steve. There's definitely some mixed indicators out there. But what we are seeing is, in June, the balances are actually up from May. And in July, they're up from June. And so we take that as a positive sign, and you're obviously going to continue to monitor this. But with rates potentially coming down in July, you would expect that some of the pressure that we felt over the last couple of quarters should continue to abate.
Your next question is from Devin Ryan with JMP Securities.
Thanks for the perspective. It's obviously not expected, but best wishes, Tim. My question is on just the retail net new asset growth. Obviously, trends there have been a little bit slower and a little bit slower than we've expected. Just love to go maybe a little bit deeper into what you're seeing there and whether -- is activity slowing on kind of the gross side coming in? Or if it's kind of maybe a higher gross clients moving out, just trying to think about kind of maybe on a gross flow basis if you can give us any perspective.
Sure. I'll take that one. So as everybody has seen, as an industry, the net new asset growth was down in both retail and institutional, and as I said, we've had the benefit of taking a look at what the numbers were for the competitors. Good news is we've gained -- we measure ourselves in terms of share of that growth in any given quarter and year-over-year. And we're up in share both in retail and in institutional and, obviously then combined, both linked quarter and year-over-year. And it's as we surmised, right, which is we are still continuing to, believe it or not, continue to put in place the changes that -- in our comp strategy, in our relationship model in the branches post the Scottrade acquisition. And so this takes a little bit of time to move forward.
I'd be remiss if I didn't announce or didn't talk a little bit about the announcement we've made about some branch closures today because that was a reflection of the number of branches that we had opened originally at the time of the merger. We thought, okay, this is a good opportunity to watch for a year or 2. And we made the decision that it was more effective to have a smaller number of higher-density branches, and these are more effective and productive. But I'm actually quite pleased in a slower economic environment and a slower M&A environment for the entire industry of our progress.
And I think you asked specifically about how -- this is our best third quarter for retention ever and on a year -- it's obviously been a slower year, but on a year-to-date basis, it's a record M&A number too for retail.
Your next question is from Michael Carrier with Bank of America Merrill Lynch.
Maybe just one on expenses, given the announcement that you guys made on the branch closures. And then some of the investments that you guys made in the past few years, whether it's been on the technology side, the automation, just wanted to get a little bit more perspective on how you guys are thinking about expenses over the next 1 to 2 years if we're in a tougher rate backdrop and maybe where you have some levers versus where you want to continue to invest.
So I'll start and then kick it over to Steve. Our philosophy that you've heard is to try and have positive operating leverage over a cycle. And so we have the benefit of some amazing growth, some amazing tailwinds. So as you know, we were investing more in the technology that has helped improve our client satisfaction scores. It's upped our innovation quotient, if you will, and started to deliver on the things that we think will help us continue, even on a tougher environment, some of that growth we've been talking about.
Having said that, we try not to in a tougher environment, just as we call it, peanut butter the expense cuts around the organization so that you're equally starving in a lower-rate revenue environment every business. We think everybody can do a little bit of belt tightening. But at the end of the day, it's about making the right choices that double down your investments on new growth opportunities and cutting back further on the opportunities that you think you might have. So we want to be very judicious and, call it, more like a scalpel as opposed to an ax in terms of the decisions we make around expenses. But having said that, we will certainly reflect the overall revenue environment. So Steve?
Yes. So I'd just add. We did mention on our last quarter's call that we would be bringing our rate of growth and expenses down to more of our historic 2% to 4% range and we're -- as Tim mentioned, we're in the process of our annual planning right now. And so if anything, I think you'll see that range a little bit lower, but we'll give you an update in October.
Your next question is from Dan Fannon with Jefferies.
Can you talk about the trend in commission rates that we're seeing this -- across the industry in terms of the decline? Obviously, there's a mix component, but just wondering about the promotions you guys are doing, if there's anything different that's driving this down. Or what would make that stabilize in this environment?
Sure. So this quarter, we saw a little bit slower decline in commission rate than we had seen but pretty close to the trend. I think a lot of the factors that we've been seeing are pretty consistent. So from a headline rate perspective, things are pretty stable. I'm sure all the revenue pressure on everyone is going to probably make that even more so. But there's still a fair amount of hand-to-hand combat out there, a lot of people targeting especially the best clients. We're making sure that we defend those clients. So I think you'll continue to see commission rates probably decline at a less of a slower pace in the future. And there wasn't anything too spectacular in mix this quarter. Mix hurt us just a little bit on balance, but it wasn't the biggest factor.
Your next question is from Bill Katz with Citigroup.
Sorry to go back to the CEO change. But -- and thank you for your perspective, Tim, and also best of luck. I guess from -- the question I have is, when you think about the sort of the disparate views by you and the Board, can you talk a little bit about whether you were seeking an independent path or one that will be more consolidation-oriented? And I know you can't speak for the Board, but what kind of profile do you think the Board might be looking for incrementally?
Yes. I mean, as I said, those types of conversations, especially those types of conversations, would be very confidential so I really can't comment on them, other than to say what we always have vis-Ă -vis M&A, which is I'm sure me, my successor and the Board will always take a look at something that makes strategic and financial sense.
Your next question is from Chris Shutler with William Blair.
Best of luck, Tim. Could you just -- so kind of a minor question, but could you give us a sense roughly how much of your retail M&A and your, I guess, your institutional M&A has been coming from new versus existing clients?
I don't think we disclose it, no. Yes, we don't. And even if I knew it, I couldn't tell you. But I don't actually know it off the top of my head. We don't disclose it.
It's all right.
Yes. Let's call it a mulligan. Why don't you ask another question because we couldn't answer it?
I'm good for now. All the other ones were about your decision, Tim. I think I'm good.
Good. Well, let's go to the next question then. Somebody else.
Your next question is from Kyle Voigt with KBW.
Just one on the BDA, the fixed float mix and the duration there. Just wondering if we start to see those balances begin to grow more meaningfully from here, should we expect that fixed float mix to change materially? And should we continue to expect the duration to remain relatively just on the shorter end of where we've been historically?
Yes, thanks, Kyle. I don't think you'll see the fixed float mix change dramatically over time. The fact that we have a pretty disciplined ALM strategy and have been able to deploy a lot of our balances in fixed investments I think will help us to the extent that we end up in a down rate cycle here. So that's been a positive for us. And I think we'll stick with that. We have been extending a little bit shorter because there's really been no slope between the 5- and the 7-year. We're starting to see that increase a little bit. And I think if we get some meaningful lift between the 5- and the 7-year product curve, you'll probably see us go a little bit longer, and you'll see the duration tick up a little bit.
Your next question is from Brian Bedell with Deutsche Bank.
I will want to come back to questions about you, Tim. Sorry to see you go. Best of luck. But maybe if you could share maybe your personal view of the industry that -- now that you've been in Ameritrade for quite some time. And even just putting aside Ameritrade and just thinking about the online brokerage industry in terms of what you see personally as sort of the next phase of development for the industry and whether you believe, given the potential regulatory environment and pressures in the industry, that consolidation does make a lot of sense. Or do you think companies should really go it alone?
Wow. So I wouldn't have thought that one on this call. That's probably on my next call or the one after that [indiscernible] I'm here for. So look, the reason why I came to this industry is because it's a spectacular industry. We actually did some fun math. So I'll see if I can get this right, so I'm going from memory.
So going back to 1997, and we said when we went public, we had 4,600 companies or something like that, I'll be slightly off, that were public at that time. And in the intervening years since then, if you scrub out the companies who have either gone delisted or have been consolidated, and then you say, who is at about $200 million market cap or above in 1997? And that's your list. So then you get down to about 650-or-something-like-that companies. And out of those 650 companies, TD Ameritrade, in terms of total shareholder return over those intervening years, is #11. And the company that is #1 was Apple. And so -- I mean what a fantastic industry over a large period of time. I mean market impact is up-and-down, but we have so many incredible secular long-term tailwinds at our back. There's no reason to believe that, that won't continue, whether it be the trends to RIAs for institutional business, whether it be the do-it-yourself trend, whether it be the wanting to be aware of how much you're paying for investments and, therefore, do it with a high-education delivery system like ours, where we -- I mean there's just so many things that are in our back. So I absolutely see this as a great industry to have been in, and I'm glad to have participated in it, and I will continue to for the next little while.
And it sounds like you don't think consolidation industry-wide is necessary, so to speak, because of the great fundamentals.
Well, there has been a significant amount of consolidation to date. The question is whether it will continue. I mean my predecessor used to like to talk about it in terms of baseball innings, and I have no idea what inning we're in, but we participated in one just a couple of years ago, and we're very happy with our scale, and we have been for quite some time.
Your next question is from Will Nance with Goldman Sachs.
Maybe I'll try one on the BDA portfolio. So I was wondering, you guys have mentioned that you think pricing on these is relatively inelastic and you see some room to kind of cut cost relatively quickly on the back of fed cuts. Could you just give us a sense of ballpark what the weighted average cost is in the BDA just so we have a sense for what your flexibility is as we contemplate a number of rate cuts over the next 12 months?
Yes. So our quiet period, you can kind of infer is around 25 basis points. And we've given a range of disclosures of what we think the -- a beta of 20 to a beta of 40 would look like if that were to take place.
Your next question is from Craig Siegenthaler with Crédit Suisse.
Tim, I heard the comment that the Board is looking at both internal and external candidates, but I'm just wondering, will the board also be evaluating candidates from TD Bank?
Well, I think if you look at internal and external, it's pretty much the entire universe. So I think, never wanted to preclude anything, but that will be up to the discretion and the choice of the Board to try to go after the best candidate.
Your next question is from Steven Chubak with Wolfe.
Just had a question on the reinvestment ladder. So based on the current forward curve, in the management remarks, you noted that over the next 12 months, the current reinvestment yield is tracking only slightly below the 123 basis points on maturing balances, and it sounds like there's no planned changes in terms of the duration profile and how that will be managed either. But as we look out to year 2, that reinvestment pressure is going to become much greater and gets a headwind of about 35 to 40 basis points. I don't know if you could provide some perspective on how you might alter the strategy around how you're managing the duration profile if the forward curve proves to be right and that reinvestment headwind starts to become much greater in the out-years.
Yes, so Steven, thanks for the question. We really don't want to get into speculating too much about the future. I don't think we've -- we're not ones to change dramatically from our ALM profile. We do make some modest changes, and we're certainly not ones to take a lot of undue risk. I think one of the things you'll see here as we go through this cycle is we have no risk to prepayments, no negative convexity on our balance sheet. And so my sense is that we'll likely to stay the course here.
Your next question comes from Michael Cyprys with Morgan Stanley.
Tim, I'm sorry to hear that you're moving on. I wish you all the best. Just a quick question here on synergies from Scottrade, just hoping to get a little bit of an update on the expense and revenue synergy side. I think last time, you said you were about 1/3 through the $300 million that you expected over 5 years. I was wondering where you think we are today. And on the expense synergy side, I think last time you said we were around maybe 68%, if I'm not mistaken. Just curious where we are today and where the branch closures would take you to.
So on the expense side, I'll start with the easy one, we were already through that easily. And these branch closures that we've just announced today are in addition to that. On the revenue side, the way we thought of it was the $300 million was sort of over the 5 years. And we're not quite through the end of the second year period yet, but we're already sort of somewhere tracking somewhere between 2- and 3-year-type results. So call it halfway through, even though we're less than 2 years into 5. So we're feeling very good that we absolutely achieved the expenses already, and any further synergies we get would be sort of second-order and we're over and above.
This concludes the Q&A period. I'll now turn it back over to Tim Hockey for any closing remarks.
Great. Thanks, everybody. I really appreciate everybody coming together. And I know we sort of ruined your evening, but we gave you an hour back tomorrow morning. So thanks again. Great quarter. We're thrilled with it, and we'll see you next quarter for earnings. Take care.
This concludes today's conference call. You may now disconnect.