TD Ameritrade Q2 Earnings Conference Call: Full Transcript

Operator:

Good day everyone and welcome to the TD Ameritrade Holding Corporation's March Quarter Earnings Results Conference Call. This call is being recorded. If you require Operator assistance please press star then zero. With us today from the Company is Chief Executive Officer, Fred Tomczyk, and Chief Financial Officer, Steve Boyle.

At this time I'd like to turn the call over to Bill Murray, Managing Director of Investor Relations. Please go ahead, sir.

Bill Murray: Investor Relations:

Thank you, Andrew. Good morning everyone and welcome to our March quarter earnings call. Hopefully we have had a chance to review our press release in this morning's earnings presentation which can be found on amtd.com.
The earnings presentation includes our Safe Harbor statement and reconciliation of certain non-GAAP financial measures to the most comparable GAAP financial measures. Descriptions of risk factors are included in our most recent financial reports, Forms 10-Q and 10-K. As usual, this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without prior consent of TD Ameritrade. Please limit your questions to two, so that we can cover as many of your questions as possible.

With that, let me turn the call over to Fred.

Fred Tomczyk: Chief Executive Officer:

Thank you, Bill, and good morning everyone and welcome. Well it was a volatile start to the calendar year and as a result strong quarter for trading which was at record levels. We are also able to realize the benefit of the first 25 basis points set increase. Strong trading plus platforms increased combined with strong organic growth drove a record overall revenue for the quarter and with good expense discipline, we were further able to drive about 15% increase in pretax income year-over-year.

We will start with the review of our second quarter highlights on Slide 3. Average client trades per day were a record 5,900 in the March quarter, an activity rate of 7.6%. Net new client assets were $14.1 billion, an 8% annualize growth rate. Client assets ended the quarter at a record $711 billion, up 2% from last year.

Free-based investment balances ended the quarter on a record $161 billion, up 3% year-over-year. We've grown interest-sensitive assets to a record $112 billion, up 11% from last year and we earned record net revenues of $846 million, up 5% year-over-year. This resulted in our delivering $0.38 in diluted earnings per share for the quarter which is up 9% year-over-year.

Now, let's look at how we executed in each area of our growth strategy starting with asset gathering on Slide 4. Over the March quarter, we gathered $14 billion in net new client assets an 8% annualized growth rate. Fiscal year-to-date we've gathered $31.6 billion, a 10% growth rate with two quarter yet to go. Our retail channel had an exceptionally strong quarter in fact a record quarter for net new client assets.

Our mixed investor engagement our teams maximized opportunities before them, that in new record in-flows which when combined with low attrition to grow the strong asset gathering results in retail. We were pleased to have been named by -- as the best premises and the best for long-term investors in the publications annual broker review for each of the last four years.

The institutional channel delivered solid results this quarter, but saw a slower growth from existing RIAs as a result of the market conditions during the quarter. That said our new RIA sales pipeline is quite strong and coming out of our national LINC conference in February we won more opportunities than we ever have before. We do not see the trend towards the RIA models slowing down and advisers remain optimistic about their outlook for the future as well.

Now let's move on to trading on Slide 5, our second quarter was a record for trading with an average 590,000 trades per day, a 7.6% activity rate. The calendar year started with the heavy increase and volatility. During the quarter we saw 42 days two-thirds of our trading days with enter day volatility of 1% or more, and 16 days with 2% or more. As we said before, this is the kind of environment that drives increased client trading activities.

April trades to date are currently averaging 454,000 per day. Those large are trading remain quite active. Clients placed the record 222,000 derivative trades per day and features were a record 12% of DARTs. Futures trading approvals were up 18% from the same quarter a ago.

Mobile was a record 18% of trades, up 31% year-over-year. Daily and average and weekly client logins by a mobile devices reach out 15% from last year and we average more than 2300 new users per day in the quarter.

Now let's turn to invest on product fees on Slide 6. Investment product fees totaled $88 million for the quarter or 10% of net revenues. As we said earlier, fee based investment balances ended the quarter at a record $161 billion. Average investment product fee balances were $153 billion for the quarter.

This is down slightly from last year driven primarily by lower mural fund balances which reflects the pull back in the markets in January and February than later recovered in March. Net flows into Amerivest and AdvisorDirect did slow during the quarter and wide at the market environment similar to what we saw from our existing RIAs.

Now let's turn to Slide 7, while we are half way through 2016 fiscal year and the story for us remains one of strong execution. The markets started the calendar year with a technical correction of -- surrounding the global economy. I will also remind you that we said volatility would return once the Fed started to pull back on its stimulus and that has played out and yet despite this is tough environment, we delivered strong earnings growth. Trading showed strength in light of the volatile market.

Client interest and options in future is continue to increase as does mobile adoption, trends that an ongoing investor engagement.

Our sales opportunities and pipelines remains strong and we remain focused on growing our third revenue stream. Efforts continue to redesign the Amerivest sale and post-sale experience based on feedback from our clients. We've returned approximately $322 million to our shareholders during the quarter through a combination of cash dividends and the repurchased of $8 million shares. Expenses have remained uncheck for the first six months of the year.

As we took a more conservative disciplined stance given the uncertainty in the market. As a result, operating expenses were down 1% year-over-year. We expect to remain disciplined on that front. Although expenses will increased a bit in the second half of the year due to some projects spend and work necessary to comply with the Department of Labor's fiduciary rule.

The final role well assure in the biggest change to the brokers industry in many years. It is a long complex document with many areas open to interpretation. At the outset it appears result of deal well has addressed many of their concerns raised through public comments. For example, we were happy to see that they eliminated the list of permitted assets in the best interest contract exception which not allows investors to trade options in RIAs as appropriate.

However, the details around the application of the fiduciary standards and its associated obligations still need to be more fully analyzed and understood. RIA role over an education, our two areas that we are focused on and we are investigating the best ways for us to sell to and to service RIA clients in light of the new rule.

For now we're engaged in a process to review and analyze this 1,000 plus page rule, how would impacts of business model and how would impacts our clients. We continue to believe that our business model is in a relatively good position not only to comply, but to identify opportunities in this new environment. We've remain supportive of the DLOs intent to creating and trading this rule that advisors act in the best interest of their clients when giving investment advice in the retirement accounts. We will update you on the next quarter on our progress.

Now in closing, now we have entered the second half of our fiscal year this time to start looking ahead. We will remain focused on executing our strategy to deliver strong organic growth and continuing to grow our long term earnings power and we will also to begin our annual planning process for fiscal 2017. Tim Hockey and our executive leadership team will be engaged this quarter in reviewing where we are and what we need to do to allocate resources and focus for 2017 and beyond. Aligning our business model with DOL rule will be part of that process, but as we do another years we will also consider our current organic growth strategy and how we can best position TD Ameritrade for a long term growth and success.

And with I will turn the call over to Steve.

Steve Boyle: Executive Vice President, Chief Financial Officer:

Thank you, Fred and good morning everyone. As Fred is already noted the March quarter was a volatile and uncertain one for the market. We remained focused on what we control and delivering good results. Record trades per day, strong net new assets particularly from retail benefits from the December interest rate increase and continued expense discipline drove about 15% increase year-over-year and free tax income.

So with that let's begin with the financial overview on Slide 8. We'll start with the year-over-year comparisons. Overall, revenue was up $43 million or 5% to $846 million. On line one transaction based revenue was $360 million, up $10 million or 3% due to higher trades per day.

Average trades per day were up 33,000 or 7% due to higher volatility, but average commissions per trade were lower due to mix. Oil and -- events drove higher futures volumes. The number of retail clients trading Futures & Forex increased 23% year-over-year which led to a 34% increase in futures trade per day. We also saw a lower options contracts per trade and a higher percentage institutional trades which carry a lower average commission rate.

On line two asset based revenue was up $31 million or 7% primarily due to net balance growth offset by overall income compression.
As the benefit of the Fed hike was more than offset by mix principally lower stock lending revenue and lower margin balances. Both are begin to recover but remained below peak levels. On line five operating expenses excluding advertising totaled $422 million for the quarter, down 1%. We will continue to manage expenses closely.

We would expect quarterly total operating expenses would relatively level with the March quarter as seasonal declines in marketing will be offset by an increased investments in the business and DOL related expenses.

On line ten, pretax income was $330 million, up 15% year-over-year, with pretax margins of the strong 39%. The effective tax rate for the quarter was 38%, up somewhat due to favorable prior year settlement. All of this resulted in earnings per share of $0.38, up $0.03 or 9% from last year. Key ratios remain strong.

On line fourteen, returned equity was 17% for the quarter and on line seventeen and eighteen, our EBITDA was $387 million or 46% of revenue.

Now I will move to year-to-date comparisons. On line four, revenue was up $38 million or 2%. Transaction based revenue was down 3% due to lower commission rates. Asset based revenue increased 6% due to IDA both balances and rates and investment product fees.

On line seven, operating expenses were down $9 million or 1% due to continued expense discipline. On line ten, pretax income was up 6%. The effective tax rate was 37% versus 36% last year. On line thirteen, earnings per share was up $0.05 or 7% to $0.78.

Let's now take a more detailed look at our spread-based revenue starting with Slide 9. Spread-based revenue was $382 million, up 8% year-over-year. However, for the fourth consecutive quarter we experienced the sequential increase in spread-based revenue, primarily due to IDA balance growth and the benefits of the December rate move. Net stock lending revenue declined $9 million sequentially to $32 million for the quarter.

As we have noted several times predicting stock lending is very difficult by the higher volatility in fewer IPOs are two factors.

Average margin balances declined sequentially from $12.3 billion to $11.6 billion, primarily due to the market impact on buying power and investor sentiment. Margin balances ended the quarter $11.3 billion. Net interest margin declined sequentially which may be a surprise given the Feds rate increase in December. We realized the anticipated benefits from margin loan pricing and IDA for yield, but those benefits were mitigated by lower stock lending revenue and lower margin balances which are high spread products.

Said in other way had stock lending revenue and margin balances has been flat sequentially. Overall spared based NIM would have been approximately 1.49% up from 1.45% in the December quarter and revenue would have been in line with our $50 million to $80 million annualized guidance.

Now let's take a closer look at the IDA on Slide 10. Year-over-year average IDA balances were up $9 billion or 12% to $84 billion, and net yield increased as well driving revenue up 15%. Sequentially average balances increased 5% driven primarily by the institutional channel as RIAs move clients out of the market into cash. Although we are announcing institutional coming down partially replaced by retail increases.

Net yield increased slightly as floating balances, realize the benefits of the December rate move as expected. Of the 25 basis point move, 12.5 basis points were paid to TD Bank with the management fee and floating rate balances is now at 20 basis points as a result of the move. This is important to note as we will only have to share 5 basis points on further moves since we are near in the 25 basis point management fee cap on floating balances. Strong institutional floating growth in the quarter resulted in the slightly lower duration and lower average yield it was however revenue positive.

Finally on March 15 the FDIC issued the press release announcing that final rule to increase the deposit insurance fund. This will impact our IDA net yield beginning in July of this year in the last for eight quarters. The additional FDIC fee to us will be two in the quarter basis points or $4 million to $5 million pretax per quarter dampening expected IDA yield growth.

Now let's turn to the next Slide to discuss interest rate sensitive assets. Interest rate sensitive balances were at a record $112 billion up $11 billion or 11% from last year. This increase is primarily due to growth in the IDA. Cash as a percentage of total client asset ended the period at 15%.

Now let's turn to the final Slide. We continue to focus on what we can control. We produced good results as our strong profit margins and disciplined expense control met that the revenue growth we experienced in the quarter all resulted in improved pretax income. Operating expenses declined 1% versus the prior year.

Net new assets were solid in the quarter driven by record retail asset gathering while the institutional sales pipeline remains strong. We reported record trading as a result of high entry day volatility and our ability to provide our clients with ongoing investor education and reliable diverse trading platforms to execute their individual strategies in a variety of market conditions. Investment product fees declined a bit overall during the quarter as compared to the prior quarter, driven by market uncertainty but we remain committed to grow in the third revenue stream.

We have teams in place analyzing the new fiduciary rule and its related exceptions. We are considering how as many detail and requirements will impact our business. We will keep you updated as we move from assessing to effecting changes in line with the role. We've returned $322 million to shareholders this quarter through cash dividends and share repurchases which we pay $28.78 per share on average.

Year to date we have returned a 101% of our cash earnings which is above our annual target of 60% to 80%. We will likely end up near to the high end of that range for the full year of share repurchases are expected to slow.

In conclusion we have had a good quarter and strong first half of the year driven by focusing on what we can control. We're pleased with what we have done and expected to deliver solid second half of the year positioning us well as we move into fiscal 2017. But we still have a lot of work to do.

And now I will turn the call back over to the operator for Q&A.

Question & Answer

Operator:

We will now begin the question and answer session. To ask a question you may press star then one on your telephone keypad. If you are using a speaker phone please pick up your handset before pressing the keys. To withdraw your question please press star then two.

As a reminder the company has a long list of covering analysts and has asked that you limit yourself to two questions. At this time we will pause momentarily to assemble our roaster. The first question comes from Mike Carrier of Bank of America. Please go ahead.

Michael Carrier: Bank of America:

Hi thanks guys. You may be I guess is either Fred or Steve, just your comments on the -- role I just wanted to get some sense Fred I think when you mentioned the expense in a level we typically see the normal moderation in advertising, but there are some investment spend to kind of prepare for DOL. Just wanted to get a sense on what that's going to be focused on maybe what expense lines and then more importantly is what's the duration or how long do you expect that investment spend to be in there adversely that is starting to moderate and then I am sure it's too early but any like revenue impact on the positive or negative side given the DOL.

Fred Tomczyk:

I think you are right Mike it's a little early get the revenue impact. I just think as there is too many areas open to interpretation in a such long complex document having said that we do think our business model is in a relatively good position inside the overall brokerage industry to adjust to this and we do see opportunity relative to other players in the market. So we see opportunity here as much as anything in the long-term, but it will take a bit of time to that to show off (audio issue) numbers. Now let Steve answer the expense and investment question.

Steve Boyle:

Yes. So we've incorporated the increased level of DOL spend in our 2016 guidance that we just gave. We think the initial impact of DOL is going to be ramping up some internal staffing and some small consulting expense to get the scope of the rule any major implementation efforts would be in 2017 and we will be gearing up as we get towards the implementation date and as you know we will be giving 2017 guidance later in the year.

Michael Carrier:

Okay, that's helpful and then just as a follow-up on the IEA you just given the pressure may be the spread just given the margin loan trends and stock borrow. I know these are tough to predict, but I guess just any I know trend in both of those I guess balances or activity rates when you look at say January, February versus what we are seeing in March and April.

I guess just trying to get a sense of how much of that pressure was during the period of kind of kiosk versus how much is may be normalize somewhat?

Steve Boyle:

Sure, so I would say three points. So on the IDA we largely saw the increase in revenue that we expected. We're seeing a little bit of pressure on the IDA yield simply because we had a big increase in balances that pretty much all when it's a floating rates so that brings the margin or the IDA yield percentage down a little bit from what you might have expected. But we largely got the revenue that we expected in the IDA yield.

That the two key items as you mentioned really are stock lending revenue and margin revenue and so if you think about stock lending that tends to move up and down with inversely with volatility and so we did see a big deep early in the quarter and we've seen that start to come back not quite the peak levels that we saw last year, but pretty good bounce back. Margin balances as you can see dropped and were down on an average ended period and during the quarter. Our expectation is those will intend to come back as client balances come back and so our expectations will see that later in the year, but we haven't quiet seen that yet. So that's something that we will have to watch for.

Fred Tomczyk:

Tells a bit about a 30 day lag in that number.

Michael Carrier:

Okay, thanks a lot.

Operator:

The next question comes from Rich Repetto of Sandler O'Neill. Please go ahead.

Richard Repetto: Sandler O'Neill & Partners:

Hey good morning Fred, good morning Steve. I guess the follow-on up on the expenses and you did mentioned that there is DOL investment in there. But when you look at the normal drop in advertising somewhere be in $20 million to $25 million of the run rate of this quarter and I am just trying to see whether the combined just a little bit more detail on the increase in expenses because if you guiding to flat it seems like are you saying that the combined investment and the advised products and DOL is $20 million to $25 million per quarter.

Steve Boyle:

Yes. So essentially we saw some really positive timing items in the early part of the quarter. We do have some additional incremental investments that we are going to do in the second half of the year. But I think if you sort of step back and look at it well even with adding in the DOL which wasn't in our original guidance and making some of these incremental investment.

We will still be at that the low end of our range for guidance for the year. So I think maybe looking at 2% year-over-year increase in expenses so still fairly modest, but definitely a ramp up in the second half on the non-marketing piece versus what we've seen previously.

Richard Repetto:

Okay. So what we are saying is that it is going to corporate $20 million to $25 million.

Steve Boyle:

Yes.

Richard Repetto:

Okay and the other question would be on the revenue capture. We understand the increased mix of futures do you expect with the trading activity the levels we are seeing now that couldn't materially low we bound back to levels or any color and I guess revenue capture so far or what you would expect.

Steve Boyle:

Yes. So as you mentioned the commission per trade is largely on next side and we would expect if we don't have the elevated levels of trading that we will see some bounce back in the commissions per trade as we move forward during the year.

Fred Tomczyk:

-- is come down Rich what's also we will an increase have a tenancy of increase option contracts per trade which helps with the $0.75 per contract commission and the order flow -- revenue.

Richard Repetto:

Got it. Okay. Thank you guys.

Operator:

The next question comes from Devin Ryan of JMP Securities. Please go ahead.

Devin Ryan: JMP Securities:

Hey, thanks. Good morning. Just a questions on the RIA pipeline just wants to get little more perspective there, and really as it relates to the DOL and just curious do you guys have the sense that we could see a pause in movement from an independent firms just as people are trying to get a better perspective around how the DOL is going to impact their business and almost trying to figure that out right now so I am just curious if you are expecting any kind of timing delays or you hearing anything on that front.

Fred Tomczyk:

I think in the longer term we would expect increase migration to RIA model because it's clearly I think the world is moving too much more fiduciary rule. We've now got that up RIAs, the FCC continues to study this whole topic they acknowledges that its complicated so I don't expect anything in the short-term. But I think all the uncertainty and how different firms deal with it may cause in the long-term of shift, but keep in mind in the short-term I think this all creates uncertainty. So I don't disagree with you on the short-term it may slow a few things down.

Devin Ryan:

Okay, thanks that helpful and then just with respect to capital management, appreciate the significant buyback I am just curious I mean is that so we you just view that more as a function of opportunity this quarter and where the stock was or just a some other view around alternatives for capital?

Steve Boyle:

I think you should look at that as basically I was just executing the strategy of we've been running for quite a while. We've said when we started the year where we are going to return 60% to 80% and I think if you look at our track record over history we've been opportunistic pull backs and I think that's all what you saw on the quarter but we would expect to be part will be between 70% and 80% return for the year. Following an unusual situation happening between now and the another fiscal year.

Devin Ryan:

Got it. Understood. Hey, great thanks I will hop back in the queue.

Operator:

The next question comes from Conor Fitzgerald of Goldman Sachs. Please go ahead.

Conor Fitzgerald: Goldman Sachs:

Thanks for taking my questions. First just on the IDA yield, the yield curve is under a little bit of pressure here I guess and how low would reinvestment yield is have to get for you to kind of change your duration exemption strategy?

Fred Tomczyk:

Yes. So Conor I think there is two things really to think about there. One is that we want to continue to be consistent overtime we don't pulling, we have dramatically in and out of the market I think as the yield curve flat since we are looking at the sort of incremental lift that you are getting from going out longer on the curve and our potentially looking at moving a little bit shorter in terms of our duration one of that's higher flow to we are extending a little bit shorter on the curve, but we haven't made any decisions at this point.

Conor Fitzgerald:

Thant's helpful, thanks. And then just on RIA roll overs can you give us a sense of how important those are for you in terms of net new asset growth.

Steve Boyle:

So but we don't disclose that number. But I think if you look at our overall binary assets they are about $225 billion and with over half of that being in the RIA channel. But new assets it's about 30% as well.

Conor Fitzgerald:

Okay. That's very helpful. Thank you.

Operator:

The next question comes from Ken Hill of Barclays.
Please go ahead.

Kenneth Hill: Barclays:

Hey good morning guys.

Fred Tomczyk:

Good morning.

Kenneth Hill:

First question here is on the investment product as you guys had some give and takes here for the quarter between money market fee waivers kind of coming off and some of the market headwinds I just wondering if you could size each one of this I mean in particular the money market fee waivers how we can think about that from a revenue impact have Fed funds might move higher.

Fred Tomczyk:

Yes. Money market fee waivers are pretty modest number for us.

Steve Boyle:

I think we only have was $5 billion in money market funds.

Kenneth Hill:

And if any color there on the impacts on the market might ahead on the quarter.

Fred Tomczyk:

Yes. So there was pretty significant and that's the big driver in the quarter that the just the average money market balance is deep during the quarter. If you look from 231 to 331 money market balances were essentially flat. So as the mutual funds were essentially flat and so that I think you will see those balance fees recover overtime.

Kenneth Hill:

Okay just had one on acquisition so the FA insight transaction you guys did back in February I don't know if that's closed just yet. But I am just wondering you to talk about that from how that's going to impact the advisors going forward maybe how they might use that platform and maybe what benefits they could see from it.

Fred Tomczyk:

That was pretty minor trend transactions and we just saw as an opportunity to add some data and analytics to RIAs to help and to be more successful in their business. So there was much more of a capability acquisition around data and analytics and helping them to be more successful on what they do, but it was very small.

Kenneth Hill:

Okay. Thanks for taking my question.

Operator:

The next question comes from Dan Fannon of Jefferies. Please go ahead.

Daniel Fannon: Jefferies:

Thanks. Good morning, Steve I guess one more question on expenses with the DOL I you just thinking about your original guidance and what you are saying today to the rule come in earlier than expected or is there changes in the rule than what you've thought to that do you won't incorporating I guess in your full year guidance earlier.

Steve Boyle:

Yes. When we issued the guidance back in October we wouldn't really sure what the impact of DOL would be and so I think we mentioned on a couple of calls that we had not included anything for that, and so now that we've had a good idea of size and we have updated that in our guidance.

Daniel Fannon:

Okay, and then another comment on the call you mentioned reduced retail attrition in the quarter I guess anything you can point to competitively are any changes that you guys are doing to kind of reduce that rate?

Fred Tomczyk:

We continue to rollout and revised the distribution model on the retail side. We've introduced what we called PC SICs which basically are targeted at or more higher end clients, and the increased touch and relationship from those people has definitely improved attrition. Now attrition now on the retail side is goes low as I have seen it in my tenure from being here. So we made very good progress in that compared to where we start we are down over half in terms of percentage of client assets living each quarter divided by beginning assets.

Daniel Fannon:

Great, thanks.

Operator:

The next question comes from Chris Harris of Wells Fargo. Please go ahead.

Christopher Harris: Wells Fargo:

Thanks guys. Another follow up question on IDA yield. Putting the FDIC charges side for a minute if we don't get another rays out of the Fed and rates kind of stay where we are where they are. Is there a lot of downside in that yield at this point or is it pretty firmed around here around 110 basis points?

Steve Boyle:

Yes. I think it's pretty firm I wouldn't expect the big increase but I wouldn't expected to big decrease in it.

Christopher Harris:

Okay, great. And just a one follow up on the Amerivest are there any pent up key deferrals that we should know about if there are can you help us of the magnitude of that?

Fred Tomczyk:

So, despite a choppy quarter all the Amerivest portfolios ended a positive for the quarter. So we are essentially starting the six months or the two consecutive quarter clock over again so there is nothing pent up.

Christopher Harris:

Got you. Thank you.

Operator:

The next question comes from Brian Bedell of Deutsche Bank. Please go ahead.

Brian Bedell: Deutsche Bank:

Hi. Good morning, Fred just little bit more in the DOL can you talk a little bit more about I know it's early but how you are call center employee competition and practice is might change may be just talk about which is the degree that you would license more of those employees and then may be just talk a little bit about the self-directed nature of the retail client base and whether you see any change in how site from the active traders have their retail client base would be impacted from the DOL and how are you service that from the again from that retail Ameritrade side.

Fred Tomczyk:

So first of all of our call center people that interact with clients are licensed and so that we made that change probably seven or eight years ago. I have stuck to that in fact and when we started our call centers today you have six months to get license.

So they all have fairly severance license that's the first point. With respect to anything we might do and while it's still very early the easiest way to do with at least in early stages as basically to have the separate call center that deals with IRA clients, but we haven't made that decision.

I think you are right I think that's a risk of sort of stepping into this a little more of and probably sure at this point given the uncertainty there is I think that's a look at the world and three buckets the self-directed client, the advice clients and then the -- fiduciary clients and so I think you we look at that in the three buckets here and as I think it's a little early but I think on the existing book its largely self-directed and we don't see a big change although I think we've once we go through it all what we present to them and how we presented to them I think needs to be far true.

Brian Bedell:

Okay, great, and then maybe just one more on that from the advisory side may be just your opinion longer-term do you think the wire house is because of DOL shift their model more towards fiduciary model and that impacts the breakaway broker trend over the long-term?

Fred Tomczyk:

I really don't know the answer of that question. I think that's the complicated subject I am not going to try to guess where the wire house is go here. I think it's between capital formation and IPOs and all that kind of stuff fixed income I think that's the hard decision for them and I wouldn’t offer sort of a prediction or what they do I will do at this point. I think on a relative basis we are in a very good position to deal with and I think for them there are much more difficult decisions to make.

Brian Bedell:

Okay, great, fair enough. Thanks very much.

Operator:

The next question comes from Chris Shutler of William Blair. Please go ahead.

Christopher Shutler: William Blair:

Hey guys good morning. On the expenses one how with DLO I think you are saying that you are going to ramping internal staffing and some small consulting expense any major implementation efforts to be in '17. But and we know the new advisory offering I think you have been spending on that for a while. So I am still not quite clear why there would be $30 million to $40 million drop or increase rather than expense rather than what relatively what you seen in the second half of last couple of years.

Steve Boyle:

Yes. So I think it is the timing of project spend over the year and some incremental project spend to try to ramp up some efforts both in investments and new people as well as in technology and software.

Christopher Shutler::

Okay and then the on the stock lending balance could you give us the quarter end balance or give us an update number there.

Fred Tomczyk:

Yes. So I mean it's really more on the rate and then the balance and so I don't think we give out a daily balance on that but we have seen the daily revenue and stock lending bounce backs -.

Christopher Shutler:

Okay. Thank you.

Operator:

The next question comes from Mac Sykes of Gabelli. Please go ahead.

Mac Sykes: Gabelli:

Good morning and thank you for taking my question. Its two parts, first, not to go back to the DOL but just little more insight first more of a macro question and more micro Fred I am still under the new DOL rule could you see an open architecture gaining further the competitive advantage against competitors that may have more of a proprietary relay more on proprietary products and then secondarily as the things phases in overtime you do have an open architecture. Do you see the industry in general and perhaps eliminating the amount of managed products on the platforms whether it relates to higher fees, less competitive performance or may be a liquid asset classes.

Fred Tomczyk:

On the first question we do see as wider reasons why our business model is easier to adjust to with having the open architecture of the -- because there is clearly and the DOL was sort of a biased against complex of interest particularly with respect to how you are compensate your people. So anybody that's got differential compensation or advantages compensation or presentation, our proprietary products versus non-proprietary products I think that's an adjustments we're going to have to make we don't have to make that adjustment.

So I think the right on a relative basis we think we are in advantageous position. With respect to the industry I think if you look overtime there has been years ago a shift through a much more open architecture model in fact you're seeing some asset managers that you see today that are big in the market used to be part of a wire house or a bank and there is no longer that way. So I think some of those firms may start to think about that in a different way. Having said that people that are good asset managers and have good proprietary product priced on a product on their shelf and are feel it to be neutral I think there will be relatively fine as long as your cost or reasonable and your performance is good.

But I think you've going to be able defend why you are selling that and an IRA. But in a run about way I just one of the reasons why we would say that are run a relative basis our business model is in the good position to deal with the DOL.

Mac Sykes:

Thank you.

Operator:

The next question comes from Doug Mewhirter of SunTrust. Please go ahead.

Douglas Mewhirter: SunTrust:

Hi, good morning. One quick numbers question and one bigger picture question. First with the business mix your average revenue per transaction is going down as you've said. It looks like your I guess your clearing cost per transaction also go down, is there a co-relation there? Or there those two and related and it was a coincidence?

Fred Tomczyk:

Yes. So there is co-relation that. The clearing cost on some of the products that we saw in this quarter would be the depth lower particularly futures and maybe that is live I got the microphone just give a little bit of clarification seeing the all other questions on expenses. So we would expect the expenses in the last two quarters for the year to be somewhere in the range between if this is excluding average I think somewhere in the range of 435 to 445 so hope that clears up to the modeling a little bit.

I am sorry what was your second question?

Douglas Mewhirter:

The second question cam you talked about organic growth with your existing RIA clients -- a little bit the quarter mainly because while possibly because of the market volatility now that S&P 500 is hitting new highs in the total basis and volatility drop are you seeing sort of a return to RIAs sort of getting traction again now that their clients are little bit come down going into the second half of the year.

Fred Tomczyk:

I think we are seeing very early signs of that. I think the main thing that cause people to pause in the quarter was the technical correction in the market. So in January and February we saw the market go down 10% when that happens basically people and advisor money tend to call up and make sure that wonder what's going on should they hold their money else for already tends to have more time depending why don't as you stick with their investment strategy for the long term and so last time goes into selling was the comeback in the market in March. We are starting to see in April and May are April so far anyway that early signs of that coming back but I think it's a little early to sort of call on the -- , but we would expect that will come back and its depending on market conditions.

Douglas Mewhirter:

Hey great thanks for taking my questions.

Operator:

And we have a question from Patrick O'Shaughnessy of Raymond James. Please go ahead.

Patrick O'Shaughnessy: Raymond James:

Hey good morning guys. So I think your futures franchise I think is relatively distinct amongst your competitors. It seems to be a fair amount larger than most the other big online brokerages futures business. To what extent do you have pricing power there, because obviously it's a lower average commission per trade than your other products is that something where you have room to increase pricing given the value that you are providing?

Fred Tomczyk:

Early on when keep in mind when we started this business we probably that four years ago so that has been built from scratch. When we set the pricing and we reviewed about two or three years ago we are at the high end of the markets here given and most people that offers futures trading are more institutional type firm so we saw an opportunity to bring it to retail clients and people trading options in particular we will have a tendency to wait into futures. With respect of pricing power I am not convened we have pricing power there we did make one change a few years ago base of you to the past through the clearing expenses and how that the price be straight price as opposed to then having to net off the clearing expenses we pass them through. But another not I it's not something that we will look at having a lot of pricing power right now.

Steve Boyle:

I think we look at it as largely incremental so this is mostly trading that probably won't be happening we didn't have that futures -- so that people are doing off hours trading and more energy trading so we look at it's an incremental benefit.

Fred Tomczyk:

I think it's the product is the product is right for the market environment. I think about the price of energy and what's happened there and then how much of the market is moving overnight based on events happening in other parts of the world and so just during the quarter roughly two-thirds of the futures trades were on stock index futures.

Patrick O'Shaughnessy:

All right. Thank you very much.

Operator:

The next question comes from Bill Katz of Citi. Please go ahead.

Bill Katz: Citi:

Okay, thanks so much. Just want to come back to the expense discussion yet again I apologies for that. How much and maybe I misses and I apologies again, how much of the sequential change in guidance reflects just timing of expenditures that was delayed in Q calendar first quarter into the second half of the year versus DOL and I guess the second part of the question is as look out to next year are you anticipating another step up of expenses to deal the implementation of DOL or with a level out of this point.

Fred Tomczyk:

Yes. So couple of things I'd said that within the project expenses there is both the timing element to that's started slow in the beginning in the year and it's ramping up towards the end of the year as well as some incremental things that we are taking on and then on the DOL I would expect probably that the '17 level of spend will be higher than '16 but we haven’t made that assessment or given any guidance on that yet.

Bill Katz:

Okay, and then just a step back I think one of your peers recently linked up with one of the asset managers to sort of outsource sort of online as allocation model what's your latest thinking as you works through robot advisor and sort of just that will technologies opportunity.

Fred Tomczyk:

Well we continue we continue to believe that the Amerivest is the core of our money management strategy. When you think about what are building out we are building out an enhanced experience including goal, setting a goal planning, performance tracking against that goal, embedding education, portfolio allocation systems, account linking and live person in charge so we are building on a lot of functionality inside Amerivest and so that will be is our core engine. We continue to believe that for the broadest part of the market is the combination of the technology and with some human help that has the right model. Having said that, the engine itself is built in a away and will be built in the away basically allows us to scale up and down in the market whether we wondering who is the human being or you don't want to who is a human being.

We will continue to access the situation, look at the competitive trends, look at what our clients are telling us and if we think we need to make an adjustment and large globally then we will make that decision at the appropriate time. But right now we are very focused on hybrid model we think that's the right model and in fact some of the once that are being called robots in the market today they are having the most success. We will call hybrids as a very different from the true robot.

Bill Katz:

Okay. Thank you very much.

Operator:

This concludes our question-and-answer session. I'd like to turn the conference back over to Fred Tomczyk, Chief Executive Officer for any closing remarks.

Fred Tomczyk:

Thank you and thank you everyone for joining us today. Clearly we thought we had a pretty good quarter and we had good expense discipline. I think we are trying to tell you we are going to increase our expenses as bit from here. We have some things we want to invest in one of them is the department of labor.

It is what we would say is the biggest change in the brokerage industry in many years somewhat say the regulation of commissions which is over 40 years. So we want to take that seriously and make sure that we are adjusting our business model not to just comply, but also take advantage of it and I think that's started to reflected in some of our views about the balance of the year. With that we will see you in July. Thank you and take care.

Operator:

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