Earnings Labs

AMTD IDEA Group (AMTD)

Q1 2007 Earnings Call· Tue, Jan 16, 2007

$1.03

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Transcript

Operator

Operator

Good day and welcome everyone to the TD AMERITRADE first quarter fiscal 2007 earnings results conference call. This call is being recorded. At this time, I would like to turn the call over to the Managing Director of Investor Relations, Mr. Bill Murray. Please go ahead, sir.

Bill Murray

Management

Good morning, everyone and welcome once again to the TD AMERITRADE December earnings call. By now you have probably seen our press release that was made public this morning. You can also view a copy of the release, as well as submit any questions to us via our corporate website at AMTD.com. We will be discussing a number of financial metrics on this call, so in order to more easily follow along with us, we strongly encourage you to download and print the presentation now from our home page at AMTD.com. Also, if you want to contact us directly after the conference call, please call investor relations at 800-237-8692. Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the federal securities laws. These statements involve risks, uncertainties and assumptions that may cause actual results to differ materially from those anticipated. Listeners are advised to review the risk factors contained in our most recent annual report on Form 10-K and quarterly report on 10-Q for descriptions of risks, uncertainties and assumptions related to the forward-looking statements. On this call, TD AMERITRADE management will discuss some non-GAAP financial measures such as operating margins, EBITDA, non-GAAP EPS and liquid assets. Listeners to the call can find a reconciliation of these financial measures to the most comparable GAAP financial measures and other required disclosures in the slide presentation, again on the website at AMTD.com. Please note this call is intended for investors and analysts and may not be reproduced in the media, in whole or in part, without prior consent of TD AMERITRADE. The call will cover the December quarter '06 earnings results for TD AMERITRADE Holding Company. At this time I would like to turn the call over to TD AMERITRADE CEO Joe Moglia, who will be followed by our CFO, Bill Gerber.

Joe Moglia

CEO

Thanks very much, Bill. Good morning, everybody and Happy New Year as well to everybody. For us in our history as a firm we've had about 125 or so quarters. This one is the best in our history. We are certainly proud of that. We had record earnings EPS, record non-GAAP EPS. A reminder of that, that non-GAAP EPS does not count the amortization of the intangible or the interest on our borrowing. The reason why we provide that is to emphasize the potential of the earnings that our cash can generate. Net income also came in at a record. We used about 90% of that to buy back our stock. Net revenues, $535 million. Of the net revenues, 61% of those were derived from our assets. Remember, over time our objective is to move toward being more of an asset gatherer. We think over time that will certainly help our multiple. Pre-tax income is also at a record, it's 45%. Now if you recall, the September quarter had us at 41%. We still have a few months to go with regard to our integration and at the end of the integration, as we have told you, we anticipate our pre-tax margins moving back above 50%, where they were prior to the close of the deal. EBITDA is also a record. If you annualize the debt to EBITDA ratio it is about 1.47. Our ROE came in at 34%; and finally, before I look at specific individual metrics, if you take a look at our pre-tax margin and our ROE, that puts us around the 90th percentile of the S&P 500. Now if you go to slide 4 and take a look at our operating metrics specifically for the quarter, our average trades per day were 238,000. That's up about…

Bill Gerber

CFO

Thanks, Joe. As Joe said, December was a record quarter for the company, coming in at $0.24. Let’s go now to slide 7 and I'll take you through the quarter and through the outlook. The EPS at $0.24 came in at the upper end of the range of the outlook statement and represents a 14% increase over the September 2006 quarter. This was primarily driven by a 10% increase in revenues, or $46 million, which was offset by a $7 million increase in expenses. On the revenue side, the increase consisted of three things: As a side note, before we leave the revenue changes, if you look at our income statement on the press release you will see a shift in the mix of our asset-based revenues between the December and the September 2006 quarters. This mix change is primarily between the line items ‘net interest revenue’ and ‘money market deposit account fees’. As we discussed during the last call, legacy Ameritrade clients moved $6 billion of cash off of our balance sheet and into the MMDA product late in the September quarter. The change on the press release between net interest and MMDA fees is primarily due to this $6 billion client cash movement. On the expense side, the primary driver of the $7 million increase was $5 million more advertising spend, as we seasonally increase our spend for the December quarter. Additionally, we had 7 million fewer average shares outstanding in December, primarily as a result of our share repurchase program. On slide 8, you can graphically see how our revenue mix between transaction-based and asset-based revenues has changed from fiscal 2005 to fiscal 2007. The primary driver here is the TD acquisition, which brought with it significantly higher asset-based revenues. The important point to note is that…

Operator

Operator

Thank you. (Operator Instructions) Your first question comes from Mike Vinciquerra - Raymond James.

Mike Vinciquerra

Analyst

Thank you, good morning. Joe, can you give us a little more detail? When you talk about the clearing side and the push back – forgetting the cost synergies, we know they are going to come here in the next several months – does it hurt you at all in terms of new product rollouts, any of your marketing plans? Are any of those delayed such that the revenue side might be hurt a little bit, at least in the near term?

Joe Moglia

CEO

No, Mike, I don’t think so. The bottom line is our functionality with regard to the product set will be all set and ready to go by around the middle of March. We will begin testing, certainly, well prior to that. Remember, if there is any reason at all to delay it, even a week or two, we get into the middle of tax season and that is going to put undue stress on our call center reps and it is going to back up our queues, and therefore have a bad client experience. We have said all along that realistically, for us to be effective with regard to the long-term investor we need to get the clearing conversion done so we can roll out the entire product suite to both the TD Waterhouse and the AMERITRADE clients. Today, we are rolling out most of that to the legacy AMERITRADE clients; the TD Waterhouse clients have not quite seen that yet. Now, I think it is fair to say though if we got that done in March we would begin that process a little bit earlier. I agree with that. But other than that, it has no change whatsoever in terms of any of our product rollout, our launches, our plans, our advertising, et cetera except instead of doing it at the end of March, we're going to be doing it sometime in May. If you call that part a delay with regard to potential incremental revenues, that'd be a fair comment, but I'm not worrying about that having any significant impact, as I said earlier, with regard to what we're trying to do, what we're trying to achieve.

Mike Vinciquerra

Analyst

Thanks, that's exactly what I was looking for. Secondly, the Suze Orman deal, just curious; without getting into too many specifics obviously, can you tell us how the deal is structured in terms of how she's compensated? Is it just going to roll through marketing expenditures where every referral that comes from one of her sources, there will be a fee paid for that? How does that work?

Joe Moglia

CEO

What happens is, Suze is basically asking all of her readers that if you haven’t seriously begun saving for your future/investing for your future, you really need to do that. She's encouraging them to do that specifically with us. What happens is, her readers would expect to open up an account with us, there'll be a special code in effect to that, and they've got to deposit at least $50 a month – certainly we would hope that would be more – but at least $50 a month for a period of 12 months. At the end of the 12 months, if the reader -- now our client -- has in effect done that, we would deposit $100 to that particular account. Suze gets nothing for this. We think we extend our brand, I think we get a lot of PR and a lot of advertising, and I think we're going to have a chance, hopefully, to open up many, many, many, many new accounts. Some of those accounts, we believe, will be great long-term accounts for us. All of that remains to be seen, but that's basically how it works. Every account that gets opened, if they fund that account monthly, if they put money into that account on a monthly basis over the span of 12 months, we'll contribute $100 to it at the end. There's no financial agreement between Suze and TD AMERITRADE.

Mike Vinciquerra

Analyst

Great. Thanks very much.

Operator

Operator

Your next question comes from Rich Repetto - Sandler O'Neill.

Rich Repetto

Analyst

Hi, Joe. First question, as you exit the fourth quarter if you just rough cut it numbers, it looks like a 58%, 59% margin. Two things: as you push back the conversion, is there still the same confidence level that you get to that 59% margin? Second, when do we get to track the revenue side in regard to net new assets and how you're doing as you transition the model to more asset-driven revenues?

Joe Moglia

CEO

First, when you talk about the fourth quarter, I assume you're talking about the September quarter for '07 right, Rich?

Rich Repetto

Analyst

Exactly.

Joe Moglia

CEO

As you anticipate or as you run your model and you come up with significantly north of a 50% pre-tax margin, whatever those numbers are, those numbers are not going to change. We're committed to 50% plus pre-tax margins and hopefully they'll be significantly higher than that. I don't disagree with your 58% number as you run the model. So there will be no change as far as that goes and we're still confident we'll be able to hit that. Secondly, with regards to what extent we are going to track net new assets for everybody, we have not made that decision, even though it comes up every quarter for the last year-and-a-half or so. We have not made decisions, we're not going to seriously think about it until after the conversion and the integration wind up getting done. We do believe we provide a tremendous amount of information, we do believe we provide a lot of transparency and we'll make that decision in terms of how much more we're going to give later on. But we're not going to do that now. I don't blame you for asking though, Rich.

Rich Repetto

Analyst

I've asked the last four quarters, so we've got to keep on asking. I just want to ask the CFO, what is the reorganization fee in the other revenue line?

Bill Gerber

CFO

A reorganization fee is when Lucent or JDSU or somebody like that does a reverse stock split or a regular stock split, that's a reorganization. So when that happens, there's a fee that involves a lot of work and there's a fee that goes to the clients who have that stock that we then ultimately reorganize.

Rich Repetto

Analyst

Another follow-up to Bill is, you can clearly see the Suite moving into the MMDA. Could you just review -- I know you've gone over this before -- but now that you've got $6 billion incrementally more in MMDA, how does that position you for both a change in interest rates and a change in the yield curve?

Bill Gerber

CFO

Most of that money is invested at about a little over two years, two-and-a-half year average duration. A movement in the interest rate market right now would have virtually zero impact on our yield there. So of course, over the period of two-and-a-half years, the reinvestment would go in at probably a lower rate. But right now, we're seeing virtually zero impact from a 25% increase or decrease in the rate environment.

Rich Repetto

Analyst

It seems like slide 14, that's probably the most accurate forecast, I would imagine. I was just trying to see, was there and dissention, any pushback from the team on that one?

Joe Moglia

CEO

Slide 14, the Super Bowl prediction?

Rich Repetto

Analyst

Exactly.

Joe Moglia

CEO

In all honesty to the group, for those of you who don't see this, we have a little bit of a tradition trying to call the Super Bowl here. So in the AFC, we expect the Patriots to beat the Colts; in the NFC we expect the Bears to beat the Saints, and then the Patriots will beat the Bears for the Super Bowl Championship. Now, there were a lot of versions of this slide, in fairness, as far as the team goes, and not everybody agreed with this. So at the end of the day, this was my call. I'm sure if it's accurate, everybody will forget that they were thinking about somebody else and everybody will say that this was their call. If it's wrong, they will say they were thinking about something else. But this is my call represented by some of the members of the team here, not all.

Rich Repetto

Analyst

It's good to be the king.

Bill Gerber

CFO

Very safe call, I believe.

Rich Repetto

Analyst

Thank you.

Joe Moglia

CEO

Thanks, Rich.

Operator

Operator

Your next question comes from Prashant Bhatia – Citigroup.

Prashant Bhatia

Analyst

Just real quick on the MMDA, I think you earned about 3.6% this past quarter and it looks like based on your guidance, you're going to grow the amount that's extended out by $1 billion next quarter?

Bill Gerber

CFO

Right.

Prashant Bhatia

Analyst

So I would have thought that the yield would grow somewhat higher, but you've got it going lower over the next few quarters. I am just trying to reconcile that.

Bill Gerber

CFO

We think that it is a little bit conservative. We are leaving room for tiering of clients in different payment tiers within the Suite program. So you're right, we certainly hope that it's going to be higher than that, but we wanted to put out what we think could happen. I don't think it's worst case, but we do believe the number could be a little bit conservative.

Prashant Bhatia

Analyst

That’s great. Second, in terms of CapEx, I think your budget is around $40 million now. That's two to three times higher than what you thought it was last quarter. What's the driver there?

Bill Gerber

CFO

The biggest driver is the branch renovations that are going to go on to accelerate all of the branches so that they have the same look and feel throughout the country.

Prashant Bhatia

Analyst

Finally in terms of the repurchases, the 20 million shares you have left, is it safe to assume that you'll use almost all of the net income that you generate to just continue repurchasing?

Bill Gerber

CFO

We are going to use a substantial portion of our net income to continue to repurchase, yes. It is a balance between paying down the debt and buying back the stock. Yes, we fully expect to act on the 20 million share authorization that the board gave to us.

Prashant Bhatia

Analyst

One last one. Joe, you had mentioned a new solutions team. I didn't exactly get that. Is that a new group that you're starting up? How many people, and what's the role there?

Joe Moglia

CEO

The objective of that group, Prashant, is to replace the Wealth Investment centers that we had. We had about 100 people in Orlando, Beverly Hills, and New York that dominantly were commissioned salespeople and the vast majority of the business that they did was fixed income. We think we can be far more effective with around the same amount of people in our call centers focused on the specific needs of our long-term investors being able to provide a better portfolio allocation services like Amerivest, fixed income will be part of that, et cetera. So it will be a bonus-based sales and service group that we think will be a little bit more focused across the needs of the clients and across what we're trying to do with TD AMERITRADE and ultimately have greater scale. Bottom line is, we think we'll provide a comparable -- if not a better -- experience to our clients at a better value. That turns out to be better for both clients and shareholders.

Prashant Bhatia

Analyst

That sounds great, thank you.

Operator

Operator

Your next question comes from Patrick Pinschmidt - Merrill Lynch.

Patrick Pinschmidt

Analyst

Good morning, guys. Joe, as you mentioned, your CPA acquisition cost came in at $360 in the December quarter. You noted that was at the high end and you didn't really see it ticking down. Is it fair to say then that the range for your projected advertising spend will probably come in at the low end of that range, to average out the higher cost per account acquisition?

Joe Moglia

CEO

Patrick, I wouldn't assume that. I think right now you ought to assume that we're going to come in at the midpoint or thereabouts, of our range that we've given you as far as the year goes. We'll give you greater clarity on that every quarter. But I would not make that assumption.

Patrick Pinschmidt

Analyst

A quick question on Amerivest. I read somewhere -- I can't remember where -- I think last weekend in Dow Jones they were talking about a potential JV that you guys were exploring with [XShares] to launch your own family of ETFs. Is there anything you can say on that, or would you like to say anything on that?

Joe Moglia

CEO

The bottom line is as we get more involved with the long-term investor segment, we've got to be able to provide better overall products and services to be able to provide them with the wherewithal to achieve their financial goals. That ETF is meant to be a life cycle concept. We can't talk too much about it now, but you should assume that we'll be doing more and more things along that line to take care of the long-term investor as we go down the road.

Patrick Pinschmidt

Analyst

Okay. So stay tuned. Great. Thank you, guys.

Operator

Operator

Your next question comes from Richard Herr – KBW.

Richard Herr

Analyst

Hi, good morning. The first question, and I was surprised it hasn’t come up yet, Joe, the new account growth is really strong. I was curious, what are you seeing there? We've had a few months now with the Bank of America offer, despite them giving away trades it looks like it hasn’t dented your account growth. Maybe you could talk a little bit about what you're seeing competitively?

Joe Moglia

CEO

Rich, frankly we have not seen much at all with regard to the Bank of America. Now remember, we spent a little time talking about this in the past. One, it has been done before, so there's some historical precedence here where there hasn't been a major impact. Secondly, I think you've got to look at what's going on specifically with regard to the client. The individual trader does very much care about excellent execution, he cares about risk managing tools. I think we and The Street in general provide them with that. For example, six out of ten of every one of the trades that we do at TD AMERITRADE get price improvement. That’s better than twice the national average. If you're a long-term investor, I think you think in terms of portfolio allocation services and I think most of the times you think in terms of broker dealer as opposed to a bank. So far to date, the impact to us has been negligible, if even that. That is probably true around the entire Street as well.

Richard Herr

Analyst

Thanks. That's helpful. Any progress, any updates you can give us on what you're seeing in terms of growth in the RIA business?

Joe Moglia

CEO

The RIA business continues to grow very nicely. We have said that one of the reasons why we're in that business is because within financial services we think it's a fast-growing sector. More and more the typical financial consultant that works for a full commission firm recognizes that he or she does not use anywhere near the full plethora of products and services that particular institution provides them, so why not do this on our own and really do a great job of focusing specifically on what their particular client wants? So the RIA market in general continues to grow and we're getting more than our fair share of that. Now we don't disclose specificity with regards to those numbers. We give you an update on that once a year or so, Rich, but we're pleased with what we see there.

Richard Herr

Analyst

Thanks, that is helpful. Just one last question and this is for Bill. First of all, I heard you had a birthday recently -- if you want to disclose what your age was -- happy birthday. Secondly, the reorg fees, just so we are clear, that is not recurring, right?

Bill Gerber

CFO

I'll do them in reverse order. The reorg fees, certainly any time there is a reorg -- it is a common occurrence -- we probably have one a quarter. But at any rate, they were a little bit higher this quarter. I would agree that this quarter was a little bit higher, stronger than normal, but they do occur. I want to say I forget your second question, but actually I should tell everybody I'm really 49, I just turned 49 yesterday, everyone's probably going to say that's a bunch of garbage, you are really 50 saying you are 49, but honest engine, I am 49 years old as of yesterday. Thank you for the birthday wishes.

Richard Herr

Analyst

Happy Birthday, Bill. Thanks a lot.

Joe Moglia

CEO

By the way, Bill is 50.

Operator

Operator

Your next question comes from William Tanona - Goldman Sachs.

William Tanona

Analyst

Good morning. I'm looking at the expenses, we obviously saw an uptick in terms of the full-year guidance for all of your non-comp expenses; the new low end of the range is higher than the old high end of the range. Part of that you obviously say is because of the delay in conversion. I can understand that. But then I look at certain quarters and I see that the expenses in the next two quarters are actually higher as well. Why, if it's just the delay of the conversion, wouldn't you see those expenses pop out to June and why are you seeing the overall non-comp expenses increase here in these next two quarters?

Bill Gerber

CFO

I'm going to have think about that one a little bit, Bill, but it is mostly related to the delay in the clearing conversion. We are looking at the run rate in our December quarter and then looking at what we think is going to happen in the following couple of quarters. It was just re-looking at all of the numbers and setting the new baseline.

Unidentified Corporate Participant

Analyst

The other thing I think we have is the ADP fee is extended. That would be non-comp.

Bill Gerber

CFO

That's a non-comp, that's correct.

William Tanona

Analyst

Okay. But it seemed pretty uniform across all of the non-comp line items, whether it was clearing, whether it was communications, going across the board they all seemed to be higher. I was just wondering if there was something else going on other than just the delay in the timing of the conversion.

Bill Gerber

CFO

No, it was really just truing up each quarter going forward based upon the best information we had.

William Tanona

Analyst

Thanks.

Operator

Operator

Your next question comes from Howard Chen - Credit Suisse.

Howard Chen

Analyst

Good morning, Joe, good morning, Bill. Joe, following on a question before, you've been somewhat hard on yourself in the past with regard to the current state of account growth of the company and the potential to accelerate that when you have these two great product sets in place. Given you're now doing the conversion in May but the systems go into place a few months before that, does this change your thinking at all on the ability to accelerate that account growth or wallet share at some point?

Joe Moglia

CEO

No, I'm not sure if this is different than what Mike Vinciquerra asked at the very, very beginning of the Q&A period. So we're clear, taking the clearing conversion and pushing it out a couple of months clearly provides a couple of months potential revenue opportunity costs. If we were going out with our full product suite to all of our clients and all prospects at the end of March let's say, as opposed to April, that would be a revenue opportunity, in effect, forgone. Having said that though, there is no change at all in terms of what we're trying to do; there is no change at all in terms of the product rollout; there is no change at all with regards to moving to a marketing and a sales organization or service and sales organization, or our overall advertising. So there are no changes in terms of what we're trying to do. The only reason why we're pushing back the clearing conversion is because we did not want to risk too much stress on our call center, possibly during the busiest time of our year and that would create a negative client experience. So foregoing a little bit of revenue opportunity for two months, I think is a small, small, small price to pay for a successful overall integration for the entire deal, the fourth quarter run rate and what we want to look like going into 2008.

Howard Chen

Analyst

Makes sense. Thanks. You purchased a good amount of stock during the December quarter and highlighted that in the release. We know TD is at or very near its ownership cap. If you want to continue to buy in the market, does TD necessarily need to sell?

Joe Moglia

CEO

There may be a possibility where we will continue to buy, and if indeed that violates where TD is, then TD would have to sell to in effect bring their position back in line. But they are certainly aware of that.

Howard Chen

Analyst

Right. Could you refresh us on exactly where their ownership is right now?

Joe Moglia

CEO

For two more years they have the right to be at 39.9% with regard to full voting rights, et cetera. Today though, because of the derivative that they entered into, they have around 45% ownership from an economic perspective, but not from a voting perspective. Now, remember, at the end of three years from the time of the close of the deal, they have the right to get to 45%; they just wanted to get 45% sooner, but they don't have 45% with regard to voting rights.

Howard Chen

Analyst

Great. A final one, Joe. Any updated high level thoughts on industry consolidation? I know you and the management team are maniacally focused on finishing this clearing conversion. Any thoughts here? Any updates?

Joe Moglia

CEO

Yes. Howard, when I got to Ameritrade, there were about 200 firms that had online presences in the United States. There were around 16 firms that everybody knew, today that number is around 60 and five. I still think that there is some excess capacity in the industry and I think that there is still probably some more consolidation to go. Because so much has already taken place, I think what remains to take place probably trades a little bit more thoughtfully, perhaps at a premium. As far as TD AMERITRADE goes, as we have always said, we will always be looking at things and if we think they are in the best long-term interest of our shareholders and the best long-term interest of our clients, we will seriously try to see what we can do there; but we are not going to do anything because (a) somebody else is doing it; (b) because it's in the paper; (c) because it seems to be a popular thing or a hot thing to do. We are only going to do what we think ultimately winds up making sense for us.

Howard Chen

Analyst

Great. Following up on that, I remember from the Analyst Day you hosted last year, Asif spoke to one side, the company's opportunities to move away from the scale-driven deals and more towards more interesting JVs, white label opportunities, et cetera. Anything in particular this quarter or recently you think fits within that category? I'm just trying to get a sense of what's in that very broad bucket that Asif spoke to.

Joe Moglia

CEO

I think there certainly can be bigger opportunities than what we're talking about now, but keep in mind some of the smaller acquisitions that were done as far as this last quarter goes, the [Krone] the Quote Tracker, the ITTC, would all be part of that. We would also look at something strategically that could be a JV that could be far bigger and more significant than that, if indeed we thought that made sense as well. So you should assume, Howard, that we are looking at all of those different opportunities -- small are large, tactical or strategic, scalable or not -- that we think ultimately makes sense. Bottom line is if we think it's smart for us and it helps us accomplish what we're trying to do, we'll try to figure out a way to do it.

Howard Chen

Analyst

Thanks, Joe.

Joe Moglia

CEO

Thanks, Howard.

Operator

Operator

Your next question comes from Roger Freeman – Lehman Brothers.

Roger Freeman

Analyst

Good morning. Could you follow-up a bit on the revenue opportunity associated with the clearing delay? Can you clarify what the impact is in terms of product that you can't roll out until that's done?

Joe Moglia

CEO

First of all, welcome aboard in terms of covering us. In terms of what's going on specifically, a big part of the next level of our development as we become an asset gatherer is to be effective for the long-term investor in the United States. We want to be the provider of choice for the affluent family in this country as far as their long-term investment needs go, period. Now, up until the last several months or so, we really didn't have a competitive long-term investor offering. With the acquisition of TD Waterhouse, we got a base to be able to build on that, but we're trying to significantly improve that. So as we combine that with our Amerivest service, our portfolio allocation service, we think we're going to have a pretty significant and very competitive offering in general for our long-term investor. Now, while we do the vast majority of all of our clients' trades, we have less than 20% of their assets. This gives us an opportunity not only to bring in new prospects and clients, but to grow the share of clients we have. We can offer that today, just recently, for the legacy Ameritrade clients. Until we get the clearing conversion done, we can't really do that for the Waterhouse clients. In effect, if we got the clearing conversion done tomorrow, we could be more aggressive about offering a long-term investor solution to all of the long-term investors out there. Since we're not going to get that done for a couple of months, it will take a little longer for us to offer that. So that's what I meant by a postponement or a potential revenue opportunity. It doesn't impact our numbers, not going to impact our numbers long-term, but if we rolled out the clearing conversion tomorrow I would like to think we would be more aggressive with the long-term investor segment in the marketplace sooner, that's all.

Roger Freeman

Analyst

Got it. That's helpful. In terms of the Amerivest product, the new and improved version you were rolling out last fall to your legacy AMERITRADE customer base, how's the response to that been? Any metrics you can provide there?

Joe Moglia

CEO

We're not going to provide specific metrics on that. We're pleased with the progress that we're seeing and it's starting to take reasonable traction.

Roger Freeman

Analyst

On another topic, with respect to pricing, there have been some new offerings in the market, trades as low as $2.50; specifically, options trading at a flat rate. Obviously there's been ongoing competitiveness in pricing, but are you seeing in acceleration in new offerings trying to go after the active trader and really pushing pricing down further?

Joe Moglia

CEO

I don't think we've seen anything different than what already exists. In the online brokerage industry, competitive pricing is part of our mantra. We understand that exists. I think pricing in our industry, while aggressive, is rational and a lot of the stuff that you're seeing now, frankly, you would have seen a year ago or two years ago or three years ago. So there really is no change as far as that goes. I think the key for us is to be effective rolling out the client segmentation strategy and becoming more and more of an asset gatherer which is our goal, our objective and our plan.

Roger Freeman

Analyst

Do you think there's any risk around options pricing going to a flat pricing instead of a per contract structure?

Joe Moglia

CEO

I don't see that at all near term, Roger. I mean, we're very pleased with what we're seeing with regard to our options business. We think we're very fairly priced. Again, it’s not only a matter of price, it’s a matter of the overall value proposition, products and services in effect that you provide the client and the relationship you have with the client. So it's all of those things.

Roger Freeman

Analyst

Lastly, have there been any changes in the rates that you're paying on cash balances in the past quarter? I think last quarter you said you were considering whether you needed to increase that to be more competitive.

Joe Moglia

CEO

We are offering CDs now that are competitive relative to what's going on in the marketplace, to try to track more long-term investor money. There have been a couple of minor changes with regard to actually what we pay as far as cash balances go. For the most part, as we move the money into the MMDA product what the clients get there is better than what they were getting with regard to their cash balances. So we feel reasonably good with where we are today as far as where we stand competitively in the marketplace and what that looks like. If you have a more specific question you may want to call us and we can go over our tiering.

Roger Freeman

Analyst

Thank you very much.

Operator

Operator

Your next question comes from Michael Hecht - Banc of America.

Michael Hecht

Analyst · America

Good morning, guys. Thanks for taking my question.

Joe Moglia

CEO

Michael, why wouldn't we take the Banc of America guy's call?

Michael Hecht

Analyst · America

No comment. A quick question on the average rates you guys paid to clients on MMDA balances. If you can review for me the value proposition the clients hear, as you moved over $6 billion of balances in the quarter. Any pushback you saw from clients in any cases? Are you moving funds from money market mutual funds into the MMDAs?

Joe Moglia

CEO

No, we really haven’t seen any pushback at all. It’s been a relatively easy process for the most part. Some of the questions that we had gotten from clients that actually called the call center were all very, very simple and positive for the most part. So it's almost – I mean, I am not going to go as far as saying it was a non-event, but it was pretty much a non-event.

Michael Hecht

Analyst · America

Anything on the average rate you pay on those balances to the clients?

Bill Gerber

CFO

I think it's about 50 basis points higher than what we pay. So 150-ish.

Michael Hecht

Analyst · America

150 basis points?

Bill Gerber

CFO

Right.

Michael Hecht

Analyst · America

So that's about the same as what they get on the free credit side?

Bill Gerber

CFO

Well, no -- I'm missing one. It's 50 basis points higher than what we pay.

Michael Hecht

Analyst · America

Higher than the free credit rate?

Bill Gerber

CFO

Correct.

Michael Hecht

Analyst · America

So closer to -- it was 157 or something like that. From the revenue synergy or pure economic perspective, clearly it seems the TD Waterhouse deal has exceeded expectations. Any color on the level of account attrition you are seeing on the TD Waterhouse side?

Joe Moglia

CEO

Yes our retention frankly, from the beginning of the announcement or from the time we closed the deal has exceeded our expectations and continues to do so. I'm very pleased with that. If there's going to be any issue whatsoever, that type of issue would normally take place when the clearing conversion takes place. That's why we want to be so diligent with regard to what we're doing as far as that goes. But we are very, very pleased with what we are seeing with regard to the retention.

Michael Hecht

Analyst · America

Just a quick housekeeping question. Any update on assets in the RIA business at the end of the quarter, and how that compared to last quarter?

Joe Moglia

CEO

We don’t break out the RIA assets quarter to quarter, but the RIA business continues to grow very nicely for us and we are pleased with the growth. As I was saying earlier, I think the RIA business is a growing market segment. There are really only three players in that segment, we are one of those and we are growing share.

Michael Hecht

Analyst · America

Thanks.

Operator

Operator

Your next question comes from Scott Appleby - Deutsche Bank.

Scott Appleby

Analyst

Thanks the taking the call. Bill, a long overdue congratulations.

Bill Gerber

CFO

Thank you very much.

Scott Appleby

Analyst

One of the things I just wanted to touch on was back to the consolidation picture and more high level. It seems as if you and others of the more established, older online brokers are moving up the channel. Does it make you more attractive to the larger firm, say a firm that you came from, Joe?

Joe Moglia

CEO

I think we're more attractive. I think we have been more attractive for a while. I think the TD Waterhouse acquisition just makes us that much more attractive. I think we're incredibly proud of what we've accomplished. I think we still have a significant challenge in front of us, but we are confident we're going to be able to achieve that. Frankly, if I am any one of those other firms and I look at my overall portfolio business, whether I'm an international entity with a U.S. footprint or whether I'm really a U.S. headquartered entity with a global footprint, there is no way any of those firms can come near going after the mass affluent nearly as well as what we can. So I would think we would be an attractive candidate to pretty much anybody that's interested in going after the mass affluent in the United States. To a great extent, isn't that Toronto Dominion’s strategy as well, with both banking and brokerage with regard to the United States. I think that they've seen that opportunity and certainly want to be part of that. So does that answer your question, Scott?

Scott Appleby

Analyst

Perfect. Perfect. Just a follow-up question for Bill. As you know, the options world is going to be quoting in pennies soon. What percentage of your commission revenue is payment for order flow through options? Second, where do you think that goes?

Joe Moglia

CEO

Okay. I've got that, Scott. One, we don't disclose payment for order flow and we specifically don't disclose payment for order flow as far as options go. You should assume all of that payment for order flow in general is certainly well under 10% of the overall revenues based on transactions. The option payment for order flow would certainly be a part of that. Now where does it go? I think one of my first earnings call when we were still AMERITRADE, I was told probably for four or five or six quarters in a row, payment for order flow was going to go to zero. My response to that: we are always going to have pristine enough flow that it's going to be in significant demand and sought after by the rest of Wall Street, whether that's our option flow or whether that’s our equity flow. Having said that, payment for order, that flow will be worth something whether it comes in specific dollars that are paid to you in quotes payment for order flow, or whether it's handled some other way ultimately remains to be seen. But I think there'll always be a value to our flow. Near term, I don't expect too much to happen with regard to payments for order flow and options. We’ll keep an eye on that.

Scott Appleby

Analyst

Great.

Operator

Operator

Your next question comes from Michael Goldberg – Desjardins Securities.

Michael Goldberg

Analyst

Good morning. I just wanted to clarify one point. You moved $6 billion of client balances to MMDA and my understanding is that of the legacy Waterhouse client balances, these were already in MMDA. Is that correct?

Bill Gerber

CFO

That's correct.

Michael Goldberg

Analyst

How much were those legacy Waterhouse balances that were in MMDA? How much in total is there of your combined client balances that are in MMDA?

Bill Gerber

CFO

About $14 billion.

Michael Goldberg

Analyst

Thank a lot.

Operator

Operator

Your next question comes from Rich Repetto - Sandler O'Neill.

Rich Repetto

Analyst

One last quick follow-up on the consolidation question. Do you feel your strategy as well as others movement towards asset accumulation quickly, do you think you're really at scale even after your complete the conversion in regard to asset accumulation? Even if you contrast yourselves to the Fidelity and Schwabs because it looks like there's other models out there that are complementary and way more compatible than they were a year or two years ago, to potentially merge with.

Joe Moglia

CEO

First of all, remember when it comes to the trading marketplace, that has been our focus for a long time. We are 25% of that market. While it has always been part of our long-term strategy to get involved with the RIA space and the long-term investor space, we're realistically only able to go after that aggressively as both the sales and marketing organization now. That really takes place post conversion. When you look at the long-term assets that are out there or the assets in effect that are out there, we're only 3% of that. So with regard to being able to get to scale, remember we're going after specifically mass affluent, there are only three segments we're going after. We wouldn't be going after those if we didn't think we had competitive advantages. So in effect, that's going to be our absolute prime focus. We think that we can do that, the mass affluent. We think we can do that as well as full commission firms and we think we can do that, frankly, as well as anybody else with our ability to scale and our overall operating leverage that I think are competitive advantages. Having said that, we are nowhere near scale yet and I think that we've got tremendous upside as far as that goes. So when you look at consolidation opportunities it's pretty clear as to what we're doing and where we're headed. As I've said before, our shareholders and our clients just care about us trying to do the right thing for them and that's what our focus is going to be. So down the road, if something makes sense for all of our shareholders, if something makes sense for our clients, we will look hard at being able to do that. But we're not going to get emotional on it, we're not going to do something because somebody else is doing it or because it seems to be cool at that particular point in time. So there are other firms clearly that have been focused on the high net worth business in the United States or the long-term investor business in the United States. When I say we're going to be focused, we are really truly going to be focused on that.

Rich Repetto

Analyst

Okay. Thank you very much, Joe.

Operator

Operator

There are no further questions. At this time, I would like to turn the call over to Mr. Moglia for any additional or closing remarks.

Joe Moglia

CEO

Again, Happy Birthday to Bill. Happy New Year to all of you. Thanks for being with us on our record quarter. If nobody had asked about the Super Bowl predictions, I would have gone over them now anyway. Thanks very much for joining us and have a great rest of the week.

Operator

Operator

This does conclude today's conference.