July 17, 2012

TD Ameritrade Q3 Earnings Fall, but Net New Client Assets Up 23%

RIA custody operations report record growth in breakaway brokers: 324 added in fiscal YTD

TD Ameritrade President and CEO Fred Tomczyk TD Ameritrade President and CEO Fred Tomczyk

TD Ameritrade Holding Corp. (AMTD) announced Tuesday that in its third quarter of fiscal 2012 it had net income of $153.8 million, or 28 cents per diluted share, on revenue of $667.25 million. That compares to the year-ago period when the company had net income of $157.39 million, or 27 cents a share, on net revenue of $684.7 million. 

In announcing the earnings, TD Ameritrade President and CEO Fred Tomczyk noted that the company has “continued its organic growth momentum despite the difficult operating environment,” pointing to net new client assets of $9.7 billion in the quarter ended June 30, a 23% increase over the same period in the prior fiscal year. Fiscal year-to-date net new client assets rose at an annualized 11% to $30.7 billion, though net new client assets fell from the $10.8 billion recorded in the second quarter.

CFO Bill Gerber said in a statement that the results constituted a “strong quarter despite lower trading volumes and a difficult interest rate environment," and pointed to a decline in expenses, saying  “our disciplined approach to expense management and allocating resources prudently to support our growth will continue to be a priority."

In an earnings conference call, Tomczyk spoke cautiously about prospects for an increase in trading activity, saying that within the current market and economic environment, it will "take some kind of event or action by our leaders to bring investors back into the market."

Peter Dorsey, head of sales for TD Ameritrade Institutional.As for its RIA custody business, Pete Dorsey (right), TD Ameritrade Institutional’s managing director, reported that TDAI had added 120 breakaway brokers to its platform in the third quarter and 324 breakaways in the fiscal year to date, increases of nearly 50% and 23%, respectively, over the same periods in the prior year.

In an interview, Dorsey said he was “pretty confident” that TDAI would finish the year with a record number of breakaways added to its platform. In what Dorsey called a “very, very competitive market,” he said TDAI was “winning more than our fair share” of breakaways. He cited TD’s “conflict-free” platform, its open-architecture approach to technology and its “targeted marketing” efforts for those wins.

Of those 324 breakaway brokers, Dorsey said 27% joined existing TDAI RIA firms as “tuck-ins,” with the remainder “hanging up their own shingle” as independent RIAs. Those forming their own firms tended to be larger practices, with around $100 million in assets under management, while the tuck-ins tended to be smaller practices.

The breakaways are coming from both the full-service wirehouses and “semi-independent” brokerage firm models. Further, he said the retention contracts signed by many wirehouse brokers during the 2008 financial crisis have been expiring over the past six to nine months, leading many to consider the independent model. Many of those brokers’ clients are also pushing them toward the independent model, he said.

Existing RIA firms that are successful in adding tuck-ins do so, he said, not simply to add assets, but because the principals of the acquiring firms know the acquisition will be accretive to earnings and a cultural fit, and because they feel confident in being able to manage the additional assets and clients. That means that existing RIA firms who want to grow through these tuck-ins often “have to kiss a lot of frogs,” Dorsey said, before finding a breakaway broker who will meet those criteria.

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