Q4 2019 Earnings Call
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Good evening. Thank you for joining eat trades fourth quarter 2019 earnings conference call. Joining the call today are Chief Executive Officer, Michael PZ, and Chief Financial Officer, Ted Turner.
Today's call will include forward looking statements. These statements reflect management's current estimates or beliefs and are subject to risks and uncertainties that may cause actual results to differ materially. The company will also discuss non-GAAP financial measures during the call.
For a reconciliation of such non-GAAP measures to the most comparable GAAP measures and for additional discussion of risks and uncertainties that may affect future results. Please refer to the company's earnings release furnished on form 8-K, along with the risk factors described in the company's filings with the FCC as a reminder, all of these documents are also available at about.
Got you trade Dot com.
This call will present information as of December 31st 2019, and January 20, Threerd 2020, the company disclaims any duty to update forward looking statements made during the call except as required by law.
This call is being recorded and a replay will be available via phone and webcast. Later this evening at about E trade dotcom.
No it wasn't recordings or copies of this call their authorized or may be relied upon with that I will now turn the call over to Mr. piece.
Good evening and thank you for joining us on our fourth quarter and full year earnings call.
The past 12 months were historic for our industry and will no doubt be remembered as one of the most significant periods of sector wide disruption.
The less our business proved its power and we delivered solid business and financial results marked by our strongest year ever for retail trades derivative trains corporate services client wins and customer cash growth and we generated net new assets just shy of the from record.
We tactically shifted capital deployment to optimize value amid a challenging interest rate backdrop, returning the greatest amount of capital to our shareholders ever with 1.2 billion in repurchases and dividends.
Throughout here at the tea leaves the bar on our commitment to the customer delivering significant enhancements across digital properties, including a fully integrated tool set for active traders with the launch of our award winning how retreat platform followed by a continuous series of differentiating functionality, including increased customization charting enhancements.
NAMIC alerts comprehensive idea generation tools and paper trading to name a few.
We also meaningfully bolstered our mobile offering with the launch of a revamped iOS app, while also diving deeper into the voice assistance space with our integration of Google Assistant.
On the institutional side, we launched the trade advisor network or a referral program and brought it up to marching speed across all our branches and National sales Center.
We further strengthened our top rated corporate services platform with first of its current technology across tax reporting SPP share withholding and trade clearance automation well also unveiling a groundbreaking alliance with an innovative SPP startup karber Edison to help employees nationwide get the most out of company sponsored stock plans.
Yeah.
To cap off the year, we laid the groundwork for a comprehensive financial wellness offering that transcends stock plans through our acquisition of gratified, a leading student loan benefit administrator.
Our teams laser focused on delivering great experiences to our customers, we're seeing some well deserved validation, earning the number one online brokerage designation by Kipp once you're in August as well as banners for number one rated mobile options and web based platform by stock brokers Dot com.
Offering tangible proof of how our value proposition competes and wins against much larger players.
There's much to be proud of as we reflect on the year, but 2019 will also be remembered for the tectonic shifts in the competitive environment.
As zero commissions became table Stakes and the two largest players in our direct industry announced the intent to merge.
Both of these dynamics, having covered opportunity for each rate the former level the landscape for digital brokerage customers by removing price from the equation.
Allowing our superior value proposition to shine break and the merger presents a unique opportunity to take market share, which we must fees with deliberate measures.
Huge transactions like these lead to significant assets in motion and we will serve as the alternative for those who fee or they could get lost in the shuffle in a Mega company, where personalized service is not a priority for all customer tiers.
We will lean into this opportunity with the firepower of you trade iconic blend our industry, leading platform and our best in class service teams to firmly plant our flag as the choice for the digitally coined and perhaps disaffected trainer investor for advisor.
Shifting to broader market conditions after relatively flat performance in the spring summer the S&P 500 roared back in the fourth quarter with a 9% increase capping a full year total return of 30%, which serves as the second strongest year for equities in the last two decades.
Well equity markets remain robust questions around global trade tensions in the middle East and uncertainty heading into us election year have caused retail sentiment to begin to wane as evidenced by record customer net buying activity in 2017 in 2018 reversing to net selling in the last six months of 2019.
Despite a more reserved retail investor we continue to grow at a healthy pace as the breadth of offerings ranged from Robo advisory to derivative trading and managed products to fully advice solutions allows our customers to navigate markets both good and bad.
Furthermore, the diversity of our corporate service channel provides a healthy flow of accounts assets and deposits across the market conditions.
Moving to operating results for the quarter, we generated 6 billion of net new assets in Q4, our strongest organics quarter ever.
For the full year, we generated $15 billion of net inflows just shy of the record year from 2018.
We generated darts of 331000 and derivative darts of 111000 both records.
The increased engagement is very encouraging, particularly within derivatives and while we no longer generate commissions on stock and upgrades strong customer engagement portends well for our other sources of revenue.
Customer trading momentum continues to build in 2020 with both year to date, dark and derivative darts up over 35% from last quarter's level, which is partially benefiting from smaller trade sizes on average.
Corporate services had another stellar period as total assets ended at 296 billion.
We generated record corporate services proceeds of 35 billion in 2019, almost double what it was three years ago, which helped contribute to the overall strong net asset flows into retail.
We expect the net new asset in deposit growth contribution from corporate services to continue to accelerate given the significant number of clients in assets. We've won over the past several periods.
For the year, we implemented 24 billion in stock plan assets a record year, following 23 billion and implementations in 2018.
And last but certainly not least we generated 6 billion of customer cash growth in Q4, a company record Chad will speak to the cash dynamics in more detail, but the growth illustrates the power of our multichannel platform to generate deposits.
Looking forward I'd like to highlight our key priorities for the new year.
First we will seize the opportunity to gain share amid the meaningful shifts in the industry, namely Commission reductions and the merger of our peers.
We will advance alright offering.
Third we will broaden our corporate services offering to encompass financial wellness.
Fourth we will continue to enhance our industry, leading digital solutions as we execute on our retail growth plan.
And fifth as always we will balance growth opportunities with expense discipline.
To expand on each of these points in a bit more detail, we see a huge opportunity from anticipated industry consolidation, even with the best executed combinations all customers will not be satisfied with their experience being chosen for them and we aim to win every dissatisfied relationship that comes out of the emeritus.
Great Schwab transaction.
The team is highly focused on this near term opportunity and we are deploying incremental resources across sales and marketing this extends across retail where the opportunity a significant right into the institutional channel where the potential is arguably even greater.
And advisory services, we are diligently working to integrate our a offering to connect third party advisors to our Bakken Middle office by summer.
This channel remains critical to retaining relationships through our referral network, but even more timely it allows us to present the cost of the alternative for advisors or unhappy with the proposed merger of our peers, we see clear opportunity here as evidenced by the number of our ways that have reached out to us.
In corporate services, we're capitalizing on our industry leadership position and broadening our offering to encompass holistic financial wellness of whats gratify will serve as our springboard.
He trade serves many of the leading firms in the U.S., including roughly half of public technology and healthcare companies many of which are hiring graduates from advanced educational programs with heavy debt burdens.
This is one of the most pressing generational problems of our time and is driving the increase necessity for employers to provide a benefit that helps their best and brightest employees positioned themselves for financial independence.
As has been a true hot topic with both current and prospective corporate clients and legislative proposals recommending favorable tax treatment of tuition payment and student loan pay down is only advancing the discussion.
We are fortunate to add this leading provider to our platform further enriching the value that we can deliver.
Shifting to our digital offering we have much in store as we evolve each rate into a more fully integrated provider of financial services over the past year. We are focused on improving ease of use particularly around mobile and have created a more customized and personalized interface.
As we enter 2020, our retail goal center on deepening customer relationships.
Now moving customer acquisition developing a more analytical approach to our customer interactions and offers and expanding brand residents beyond trading.
Some of the specific initiatives include improving the integration of our brokerage in banking streamlining our transaction capabilities and enhancing our value proposition for digital advice.
And finally, we seek to balance growth with expense discipline, we have a highly efficient business model that is geared to operating leverage we will remain diligent in keeping our overhead low and reaping the benefits of our digital first platform. However, we will not constrain ourselves when it comes to investing for growth and we recognize the opportunity.
Created in the marketplace by the proposed Ameritech Schwab merger as such we are revising our 2020 expense guidance the at or below 1.6 billion from approximately 1.5 billion.
Our original thinking post commission cuts was to reduce advertising and marketing development expenses substantially into 2020.
We now see clear opportunity for growth and anticipate marketing spend closer to last years level.
Additionally, we've accelerated the growth in our financial consultant for us from approximately 410 today to a goal of more than 450 by year end 2020 and in excess of 500 by 2021.
This buildout is key to taking full advantage of the growth opportunity that is now squarely in front of us.
We've also accelerated the onboarding of sales and service personnel in our advisor services team to take advantage of what has become an even more present opportunity.
Furthermore, we've realigned our technology prioritization to deliver more quickly for advisor services, while making sustained progress on our retail growth plan.
Lastly, while purely environmental we are forecasting better volumes in 2020, and therefore will have higher variable costs in associated expense categories.
As always we will continue to be dynamic in our spending and shift as necessary to respond to the operating in revenue environments.
In closing 2019 was a year of twists and turns to say the least but the results demonstrate that we navigated them definitely.
As we look to 2020, we could not be more excited for what the future holds we have the right team on the ground to further develop our industry, leading platforms and we have a proven history of finding in integrating inorganic opportunities to evolve our company, we will leverage our strengths on both these fronts as we entered the new decade.
We could not accomplish our mission and vision and uphold our values without the hard work dedication of our more than 4000 associates.
Core to our culture pretty trade is an emphasis on diversity and inclusion and I'm exceptionally proud of the progress we have made on that front.
We were recently named the diversity champion finalist in the investment news excellence and diversity and inclusion awards and just this past week, we earned a perfect score on the HRC corporate equality index, where we were highlighted for our inclusive healthcare benefits and deep involvement in the LGBTQ community.
I firmly believe that an emphasis on inclusion serves as a differentiator in recruiting and retaining the best and brightest talent in the industry and what comes to our status as an employer I'm pleased to also note that we were named one of the best places to work in 2020 by Glassdoor and the only online broker recognized within the top 80 companies.
Before passing the call to Chad I would like to take a moment to express my gratitude to our former Chief risk Officer, Paul brand out for his more than decade of service with the company.
All built a best in class enterprise functionality trade enterprise risk continuity trade and is finally embarking on a much deserved retirement.
Paul has served as both a mentor and the business, particularly over various points in my career and we are fortunate as an organization have benefited from his expertise.
After meeting with a number of qualified candidates, we ultimately decided to leverage our defensive talent and tapped our corporate controller and principal accounting officer, Brent limited to BRC Aro.
Brent has built a more than 20 year career pretty trade through diligence integrity and hard work and I look forward to having and take the same approach to the risk function.
I will now turn the call over to chat to walk through the financial results.
Thanks, Mike for the quarter, we reported net income available to common shareholders of 172 million or 76 cents per diluted share included in the quarter was a 19 million pretax or six cents per share benefit to provision for loan losses offsetting this as a 14 cents negative impact made up.
Of 21 million and restructuring and acquisition related expenses tied to the closure of the New York office severance from organizational changes driven by cost containment initiatives and expenses related to the purchase of gratify as well as 8 million in impairment of certain technology assets and $11 million of higher tax expense related to the revaluation.
In of deferred taxes.
Before walking through earnings in detail I'll spend a moment on customer deposit trends given the several moving pieces to modeling the impacts of cash on earnings.
Q4 represented a record quarter for customer cash growth topping off our strongest year ever for deposit growth.
There were several driving forces and many should continue to contribute to strong or accelerated deposit growth overtime first we experienced strong traction in our premiums savings banking product, which grew to $8 billion during the year and further enables us to retain high value relationships.
We have additional projects in our pipeline focused on enhancements to our retail banking experience, which should enable further growth of our banking offering.
Second our leadership in corporate services and record implementations over the past few years contributed meaningfully to deposit growth as our customers generated record proceeds in 2019.
By their very nature corporate services relationship serve as an evergreen pipeline of deposit growth.
As all participant activity ultimately manifests itself as deposit flows into the retail channel.
Over the past three years retail deposits source from corporate services have grown at a 9% annualized pace.
For more than double the growth rate of our other deposits.
That pace of customer cash formation should only accelerate considering the nearly doubling of stock plan awards over the past three years currently falling through the corporate services machine.
And lastly, with respect to customer net purchase activity with history as a guide we assume customers will be net buyers over time, although not at the pace we experienced in 2017 in 2018.
A simple moderation of net buying behavior should support strong future cash growth.
Customer cash growth has continued at a strong pace in 2020 with balances already up approximately $1 billion.
Shifting to core results net interest income decreased by 40 million sequentially as our average interest, earning assets remained relatively flat and NIM contracted by 27 basis points.
Balance sheet asset levels held steady as we directed deposit growth off balance sheet, creating flexibility that allowed us to return a greater amount of capital to shareholders.
The decline in NIM was driven by three fed fund cuts in the back half of the year and normalization of securities lending revenue and growth in our relatively higher rate premium savings product.
Our blended deposit rate decreased six basis points to 28 basis points as we modestly lowered sweep rights on the heels of the October fed cuts and realize the full benefit of Q3 pricing changes. This was partially offset by the growth in PSS AG.
We expect the blended deposit rate, which includes on and off balance sheets brokerage and bank deposits and customer payables to be around 31 basis points in Q1.
Moving to 2020 balance sheet dynamics with the current reinvestment rate at 270, 250 to 275 basis points and off balance sheet rates around 180 basis points. We're right on the line between deploying capital for on balance sheet customer deposit growth or directing deposits off balance sheet to free cash.
Capital for incremental share buybacks.
Each alternative provides attractive EPS outcomes. Accordingly, we are remaining tactically flexible in our decision, making growing assets when attractive yields are available while remaining committed to our buyback program.
Given these dynamics, we're guiding NIM for 2020 of around 300 basis points with the following assumptions first we assume fed funds rates remained stable throughout the year.
Second we assume margin balances remained flat at current levels, which are currently in line to where they finished the year third our guidance assumes a flat balance sheet throughout the year with customer deposit growth directed off balance sheet. This maintain some level of new asset purchases as we backfill turnover in our investment secure.
Ladies and the run off of our loan book finally.
We expect to continue to shift premium savings deposits off balance sheet as we began doing in the fourth quarter and bringing lower cost brokerage sweep deposits back in their place. This rotation of moving PSC off while bringing brokerage sweep on well costs. Some geographic shifts to the model and you should expect to see compression in.
In the blended net fee, we earn on off balance sheet deposits from third parties with a corresponding improvement to net interest income given the movement of relatively lower cost deposits on to our balance sheet.
We assume.
We assume that we shift a substantial portion of premium savings off balance sheet by the end of Q1, but our actual distribution of deposits will depend on market conditions.
Returning to the PNM now.
Commission revenue of 56 million was down 66 million sequentially driven by the commission cuts in line with the expected impact we guided to last quarter.
Fees and service charges were up 18 million quarter over quarter, driven by an increase in off balance sheet fee income and other volume related revenue.
Third party cash increased by 6.2 billion as we essentially directed all deposit growth off balance sheet.
Average yield on third party cash was 162 basis points net of deposit costs.
This was comprised of third party brokerage sweep deposit fees of 179 basis points.
Bank sweep deposit fees of six basis points, and third party money market fees of 53 basis points.
For Q1, we anticipate gross fees from off balance sheet brokerage and bank sweep deposits will be around 180 basis points.
After accounting for the cost of deposits, we anticipate generating net fees of approximately 165 to 170 basis points on brokerage and five to 10 basis points on banking deposits swept to third parties.
For the quarter gains on securities were 14 million well within our guidance range of around $10 million to $15 million.
Shifting to expenses total noninterest expenses of 446 million were up 47 million sequentially driven in part by the previously discussed onetime items normalizing for these items expenses were still elevated as we tactically invested in sales and marketing efforts.
Our effective tax rate in the quarter was 32%, which was higher than our anticipated 27% rate driven by the revaluation of state deferred taxes. This also drove our full year rate closer to 28%, we anticipate a 27% tax rate in 2020.
Moving to capital we executed on 176 million of share repurchases in Q4 and have utilized 586 million of our $1.5 billion share repurchase authorization, we continuously assess and market conditions to use capital most efficiently and we'll aggressively deploy capital to grow the balance sheet.
If we began to see signs of a steepening yield curve.
With our assumption of holding the balance sheet flat, we would anticipate executing a minimum of 200 million of repurchases in the first quarter.
We finished the quarter was $645 million of corporate cash, reflecting 550 million in subsidiary dividends less the 176 million used to repurchase our stock and 32 million paid in common dividends.
Finally, after completing our review of the new accounting standard for current expected credit losses also known as Cecil we anticipate that we will receive a benefit to opening retained earnings of approximately $80 million effective the beginning of Q1.
And with that I will turn the call back to the operator for QNX.
Thank you so to register question press to one followed by the for you will hear three tone prompts the acknowledges the request. If your question has been answered and you would like to withdraw your registration Crystal one followed by the three so again for questions press one for anew keypad.
And our first question is from rich Repetto with Piper Sandler and that lines open.
And.
Hi, Mr. a better your lines open go ahead.
They are rich.
Okay. So we'll proceed to the next so next question is from Stephen to back with Wolfe Research and that lines open.
Hi, good evening.
As David sorry.
Hedging loss. Thanks, So I want to start off with the question on M&A growth, we saw some nice acceleration in fourth quarter in December in particular.
In addition to share gains from some of the legacy Zero Commission players that Mike I think you had spoken to pretty recently I'm. Just wondering given the incremental investment are you seeing any opportunity or improved that it made due to the stronger client acquisition following the merger specifically.
Yes, we are where I.
I would I would categorize the shifted in India sort of and in a.
I'm coming out of the third quarter into the fourth quarters driven by multiple factors one.
It is the zero commissions have improved the value proposition substantially versus a lot of the financial technology players.
The the merger itself has created some degree of inflows, but I'd also like to highlight.
That we've been more aggressive both on the marketing and sales side.
I have been positioning our offering very effectively and have seen a broad base lift across both our FCS as well as which is coming in and new customer as well as additional assets coming in from customers that are already here.
Thanks, and just one follow up on expenses. So based on the 2020 expense guidance. It sounds like the incremental investments are focused on yes. As you put a number of select our unique growth opportunities presented by the merger Im just trying to reconcile has there been any change in your commitment to deliver on the efficiencies that were maybe.
Contemplated as part of the original one and a half billion target and how quickly can you dial that back or manage that spend if we do in fact enter a tougher environment. We have a portfolio of of expense initiatives that we are assigned teams to and are working on.
Those were those those per many of those predated some of the recent work.
To try and take advantage of the market opportunity. That's in front of US that work is ongoing we anticipate those expense savings will be put forward to increase our growth and to take advantage of the opportunity. That's in front of us as I highlighted in the prepared remarks, when we array after the condition.
Given with the the market environment felt like we look it looked like we'd be pulling back substantially on advertising and market development Whitten wouldn't want to ramp sales growth so much.
Merger, plus just the change in the environment seeing the market come back.
And customers engage in a very very real way with the market as shape that differently.
Thats why we why we are taking the expense guidance to 1.6.
Helpful color, Mike Thanks for taking my questions.
So as a reminder to register for question isn't one for on your telephone.
Next question is from Weldments with Goldman Sachs. Please go ahead.
Hi, guys good evening.
Anyway.
Maybe I'll start on the corporate services business of Morgan Stanley was emphasizing some of the fast that theyve seen on the Solyom platform in their appetite to grow the business can you can you talk about the competitive environment, whether you've seen some stiffer competition and corporate services from them or others more recently and how you're thinking about that into next year.
We're very happy with the progress that we've made in corporate services.
We continue to improve the functionality of that platform. We think the acquisition of gratify really extends us into a new space that will but we think will be one of the fastest emerging benefits categories. There.
You see the importance of corporate service to us to US we highlighted the 35 billion of proceeds it's a record last year, we feel good really good about the pipeline and in terms of the companies that were talking with we believe our product truly makes their life easier companies that signed with us can actually reduce their costs around.
One of the plan because the software is so powerful so at this point, we couldn't be happier with where we are.
Understood and maybe I'll follow up on the net new asset growth. So this is one of the better month that we've seen.
In terms of flows into the advisory services platform can you just talk about.
The momentum there and sustainability of the that flow level and just on what we can kind of expect heading into next year as referral business wrap up thanks sure as he is as you saw in prior periods. There was some weakness coming pass some of the larger advisors that came that came with the TCPA acquisition that had some really poor.
Performance and we're losing the underlying advisor was losing assets and so those were coming through to our asset totals.
We've gotten past that we've added 20, plus new advisors to the platform.
And we've we've sort of made that Turner and we're seeing that build so if you normalize the period for the for the sale of the S business, which is that alternative custody business.
We actually had really good flows up 300 million in the period. So we're happy with what we're seeing the referral program is now up and running.
Scaling across the national sales centers, the branches and we're going to be rolling it out soon to executive services. So we're seeing flows build there we're seeing solid advisor interest and we're making great progress on getting the technology to where we think it needs to be.
Understood. Thanks for taking my question.
Next question is from that.
Please go ahead.
Yes. Good evening can you hear me guys, Eritrea, giving us yes, I apologize for the technical problems. There Hey, My first question. My first question is on trading and.
If you look at the reduction in commission revenue, it's less than the 75 million plus you've had an uptick in payment for order flow as well quarter over quarter like fixed vote.
Hi.
Double digits. So I guess the question is is it reasonable say that the trading activity is outpacing your expectations and I didn't hear a January to date number and I could have missed that but just an idea how resilient. Thus you think this trading activity and do we have the right or do I have the right view that it is.
Is outpacing some of.
The initial guidance so the 75 million per quarter decline, yes, I'll turn it over to Chad for some of the details rich but the.
January to dates up about 35%.
From where the prior quarter was so we're off to a great started the year, we are seeing trade sizes, the little bit smaller, but overall this is a great environment, we're seeing really good volumes, so, but I will turn it over to Chad to give a little bit more color on payment for order flow trade volumes and items.
Rich. So this 75 million that we quoted as a quarterly number behind the scenes. We we think the quarter came in pretty close to as expected around that number but to your point of volumes that we saw in Q4 are offsetting that a bit and thats a bit of the dynamic you're seeing there also note that we didnt.
We didnt lower commissions until the first week into the quarter, So thats, giving a little bit of benefit there as it relates to volumes in port payment for order flow you can see that trending pretty much in line with our with the increased volumes. We saw in Q4 to my point, there is a bit of share size, which may be.
Impacting quality slightly, but but still a really positive story and in Q4, you can see derivatives up a lot, which we do still earn a commission on and pain for flow and then that is also up 35% in in January to date.
So so nice trend, we're seeing there on the active trader side as well.
Got it and my follow up would be Mike.
In industry Conference you sort of met you stated that.
You trade Haddon turned away any offers you also.
Change the change of control I guess payouts to.
Named Executive officers, So I guess I'm, just wondering like what's the message you trying to send to invest and what should we read through on this.
Well sure the change of control payments has been in the investor dialogue for quite some time now it has intensified in recent in recent months.
We decided we would just take the issue off the table.
Thats, what we did there in terms of the comments from the conference I have nothing to add to them here. This evening. It was it was an attempt to set the record straight which I believe I did.
Okay. Thank you.
Again to register question its own one for on your telephone next questions from Craig Siegenthaler with Credit Suisse. Please go ahead.
Thanks, Good evening, everyone getting Craig.
I have another one here in the are a business.
With the RF technology integration completion scheduled for two Q what are your expectations for net new assets in the already channel for the second half of this year.
Well, we are let's just start from kind of where we are today I think we've worked through some of the problems with some of the clients today, but talked about as some of the previous question. We're building building quite nicely. We're signing advisors. The referral program is scaling I think this business is on a solid trajectory to continue to accelerate.
Yes, there are some larger national advisors that are waiting for the technology is complete so that they can connect the way they want to.
Also so that you don't have to go through a separate conversion I think those will start to build more materially in the second half of the year, specifically into late Q3 and through Q4.
And I guess, you just hit on that but you did announce it two very large are a signed up to the platform like over a year ago. So is the expectation that those two large iras, we'll allocate business tier or a platform in threeq to Fourq you.
There are already allocating as theyre, they're part of the referral program, so they're receiving referred assets.
And so theyre, they're already on the program up and running but when we get passed the conversion. There are additional assets that we will that will come over to our platform as well.
Thank you Mike.
Next question is from Devin Ryan with JMP Securities. Please go ahead.
Great Good evening, guys any Devon.
First one just on the competitive backdrop, so clearly.
Very good flows in the quarter and.
Sure moving forward the competition is going to fight hard to retain their customer. So im just curious where you're seeing people compete today.
The were for the most portal zero.
Beyond commissions is it margin lending rates or anywhere else in the model where.
People are finding on price.
I guess, probably retain customers from you guys.
Well, David I mean margin has been an area that is been very competitive for a long time I wouldn't describe the dynamics around margin today is being any more competitive than it has been.
For the more sophisticated larger balance margin customers. It has always been at an area, where you have to look at the complete profitability picture of the customer and decide sort of the riskiness profile of the margin account as to what you're going to award or give that customer in negotiation. If they are trying to negotiate the margin rate.
Broadly speaking we're in a position now where most of the revenue received indirect to the client meaning the plant.
The client earns a rate on cash and then we earned an additional spread on it the clients order is not is not a charge to the client. We're just we're just earning a payment for that order from a market center. So as you kind of look what's directly observable in terms to the client is exactly margin rates and option commissions and then maybe.
A few other fees and service charges, which are not really often charges unless the certain activity occurs so.
So I think it's a small set of clients that are observing that direct charges I think it's getting more and more difficult to disrupt on the basis of price.
Got it okay.
Just a follow up.
It seems like you have some evidence on the strong ROI from the ramp in advertising, maybe in the fourth quarter and so thats, giving some confidence.
With the acquisition, but I guess I'm curious on what's changing in the thinking on financial consultants and really feeling like the head count ramp there.
As necessary and it's going to have a strong pay off and if you can just how you're thinking about the ROI on that as well.
Sure as we look at kind of the analysis of financial consultants in terms of just the stats of what a consultant can bring in from an asset and what sort of revenue comes in.
And then you look at sort of the assignment universe of clients in terms of how many clients have an active relationship.
And then compare that over even into the corporate services World and what we can touch from there.
If we can just linearly hold those production rates constant and add financial consultants, we create the opportunity to grow faster.
That opportunity was there before anything occurring this quarter, but I think getting them in place until growth in that number has always been part of our plan, but getting them in place sooner getting them in the market today with the opportunity set is there is what we're clearly accelerating and that's driving some of the expense build.
Okay, great. Thank you.
Next question is from Chris Harris with Wells Fargo. Please go ahead.
Thanks, guys.
A question on the.
NIM guide for 2020.
I thought I heard you say it is going to be some deposits moving around some higher cost deposits going off balance sheet.
Lower cost deposits on balance sheet, and that's part of the NIM.
How will that affect your off balance sheet yield for 2020.
Sure so.
As I mentioned, we were going to earn a 180 basis points on a gross basis and then just for the purposes. A modeling we gave you two different rates off.
So on the brokerage side, you would expect that net rate to be in the 165 to 170 basis point range and then the banking deposit us off balance sheet rate to be in the five to 10 basis point range. So thats to your point given you've added a map of how that's going to compress the off balance sheet number.
Assumption for the 300, approximately 300 basis points of NIM for the year on a flat balance sheet.
Does assume that premium savings moves off at least a significant portion of it in Q1, which is what is supporting the 300 basis point NIM, while giving a bit more compression off so depending on how you model growth that gives you a bit of the components of how to think about it.
Okay. Thanks for that and then with respect to advisor sounds like some good momentum. There. However, the platform is new theres not a really long track record. There do you think advisors that are not happy with the Schwab ameritrade merger are going to be willing to kind of look past.
Well I mean, we're focusing on leveraging the platform in the technology strength of the platform, which is a completely open architecture setting that allows sort of the latest risk management or other items to be connected directly specifically modeling is a key central advantage.
We're going to apply the same principles here that we applied in corporate services, we're going to listen to the advisors were going to we're going to put in place the technology that truly makes their life easier.
What do advisors want to do they want to spend their time and client acquisition. They want to get clients in the door. They don't want to spend time on middle and back office burden, we're going to listen to them, we're going to do the things that makes their life truly easier and keeps amount of acquiring clients. So I do think we're going to get good residents around the platform.
Thank you.
Next question is from Brennan Hawken with CBS .
Good afternoon, guys. Thanks for taking my questions.
Great.
Hey, So all you think you referenced Mike in your prepared remarks about.
Incorporating financial wellness into your corporate services offering.
And.
You are you guys just made the acquisition of gratify, so that clearly fits in does it go beyond gratify or is that the.
The expansion and if it goes beyond.
Can you let us know what your plans are what you need to develop in order to in order to.
Complete that.
At offering sure the acquisition of Gratify gives us the most capable platform in the space.
To manage student loan refinance and student loan pay down benefits and have to pay down benefits in particular that we're hearing most from from our customers in the corporate services channel, It's a great opportunity for us to add that platform.
You know at a reasonable price tag that gives us something that we can scale very very quickly in the marketplace. There are other areas that are very important to financial wellness. Some of them. We're in today in terms of products and services on our website from retirement planning and things like that that we can leverage from a planning and tool set.
But when you get into kind of other areas such as for one K. you know there probably best approached from from ups from an area of partnership.
Working actively with a larger player in the space in how to go to market together.
Other areas that are out there going to be things like HSC accounts and items like that.
Those are clearly also probably addressed through partnership but there are also technology innovators in that space as well so from our standpoint, we were going to build a complete financial wellness offering we've got a lot of this in house in what we need gratify gives us one missing piece Theres a couple others and we have active plans really on.
Addressing those largely through partnerships, but possible acquisition as well.
Cool.
It really helps thanks, thanks for that Mike.
And then when you talk about ramping up salespeople and Fcs.
We have you laid out a plan to ramp not only in 2020, but also 2021. So when we think about modeling out the expenses out to 2021 should we continue to see some.
Some further growth.
With the idea of expense growth be that.
So when we go from your original plan of 1.5 that a moves up to 1.6.
Should should that pace of growth and sustain into 2021.
And.
I think it was touched on earlier, but I'm not sure I got the answer how are you thinking about they then ROI or how do you think about the revenue.
Results from these investments and calibrating.
Turn on that investment.
Well, let chet talk a little bit about expense planning in the long term model I think a lot of it is how we look at sort of finding productivity to fund to fund investment growth and what that results too in a in an overall expense growth rate, but I'll, let Chad cover the details of that how we think about that ROI. This.
Hey, Brian so.
Mike hit on that well if you look over time first off just on the long term earnings.
We believe that that low single digit operating expense growth does support the upper single digit revenue growth that we expect overtime clearly that can ebb and flow of in any given period, but thats the way to look at it as you step from 2020, all the way through 2023 in 2024 now to mikes point around being efficient.
And harvesting additional efficiencies to invest I would use this last quarter as a prime example of that if you look at our metrics you will see that our headcount is down quarter over quarter. If you looked in more detail behind the scenes at individual areas in the business. What you would find is areas that are down significantly year over year.
For two then allow other areas to be up significantly year over year as we invest that's a model that we've used historically fairly well.
Back when we used to use the operating margin framework as a guide of how do we make sure. We're harvesting efficiencies. We're a digital only from and so we do have an ability to do that fairly well. So for example on the FC side being able to continue to use operating leverage through technology and other efficiencies to then be able to drive revenue generating head count growth is something built.
Inside of our model I would use that low single digits as an example of what that looks like overtime.
Awesome, Thanks for the color.
Next question is from Mike carrier with Bank of America Merrill Lynch. Please go ahead.
Great. Thanks for taking the question.
You mentioned the strong deposit growth from the corporate services business and he said, 9% on just given the larger base as well as more focused have you guys retain those assets.
Can you provide any metrics maybe either the trend in the conversion rate or the retention rate just to gauge that potential over the next few years.
Yes, first I would highlight just that the the long term model in the way we built it does not have any sort of meaningful shift in retention rate that 15% of retained proceeds 12 months.
Post post sale as though is the number that we still use.
Seth and team added a great slide to the Investor deck page 21, I would point you there to give you a good sense of how corporate services contributes over time, we've talked for a long time about the ability over time not necessarily in any given period, because there are zogenix factors, but over time to be able to get deposit growth in that upper single digit rate.
Change the slide does a good job of laying that out where you can see as I mentioned that corporate services from 2016 to 19 is growing at a CAGR of 9% while the remaining businesses at four that's an example of how as that business has scaled and grown at an outsize pace it contributes meaningfully to cash growth over.
Time, given the implementation wins, we saw in 2018 as well as 2019 record levels you could expect that that acceleration would be will contribute to that higher overall cash growth in the out years.
Okay, and then just one more on the cash I think you mentioned like that that the net on the retail side in terms of cash versus clients like buying.
The guide you're trying to balance out versus the last couple of years.
Any thing that's driving I mean from one standpoint.
Maybe it makes sense because there has been more uncertainty on other hand, just given the strong markets like typically in that backdrop, you would see clients putting more cash to work Im just curious if you're seeing anything within the numbers on that makes you think that trend continues.
I think that in terms of what we've seen in 17 and 18 was an area where there was consistent increases in retail engagement.
Meaning that money coming into the market clients coming into the market quickly moving balances and redeploying them with some of the ebbs and flows of volatility the geopolitical risk the election items trade you name it.
We're seeing a more balanced approach customers are still engaged but they're they're stepping to fit to the sidelines quicker.
And moving into cash and that's resulting in net selling number thats coming into the into year end here look I'm sure with a 30% gain some of the selling that we've seen as is.
Somewhat tax related.
But overall I think it's I think it's a bit of a shift into a more into a more risk manager risk balanced approach within the client set.
Alright, Thanks, a lot.
Our next question is from.
KBW. Please go ahead.
Hi, Good evening, maybe just a follow up on the really strong trends and trading activity.
How much of that you believe it's is it related directly to the eliminating commissions.
This is the market environment.
Do you think there could be still upsides the activity levels. Even from these January levels. The strong January levels as clients continue to kind of acclimate to listen to your commission well.
Well I think certainly we are seeing clients trade more and I think that falls into a couple of different categories. One is clients breaking up their trades in the smaller sizes that that's not necessarily adding a whole lot of value if any.
I'd also just clients trying to trade intraday more position more the active traders taking more advantage of the lower commission rate.
That is it more sustained effect in terms of the overall volume level I think thats, probably something thats here to stay, but probably not going to grow too much from these levels.
As clients or have pretty much adjusted to their trading styles to what's going on.
And just adds another one me on the market disruption kind of assets in motion potentially with dish, while Mary trade merger.
And with respect to the opportunity for your advisor channel specifically can you just give some more details around 1000 message that youre going to be going off the market looking over the next year to kind of capture some opportunity.
Any color you can also in terms of inbound calls that you've been fielding.
Related directly to the deal sure I mean, I talked a little bit in the prepared remarks, we used the word anyone is sort of disaffected I mean, certainly we want to be a strong presence in the marketplace for that but Theres also just another effect.
When I talked a little bit about this in the past to think of sort of.
Three physical locations and on it on the intersection of two street corners of three different companies that do the same thing and one closes the natural just pickup in sort of mind share or customer mindset that you're going to get from that over time is going to be continuous and it's not necessarily whose disaffected its just.
We are that branded alternative in the marketplace with one of the most iconic brands in the space, we will benefit even if no. One is this affected just because the number at properties has been reduced we want to be front and center. We want to have art sales personnel are toolsets, our digital experience exam.
Exactly where we want it could be to capture the entirety of that opportunity.
Thank you.
Next question is from Bryant bundled with Deutsche Bank. Please go ahead.
Great. Thanks, very much for taking my questions, maybe just to continue on that the make.
What are you thinking about for the in your ambition in.
Winning over customers from from the merger over the next few years and.
Is it typically we've seen attrition rates around 5% for for some deals and then schwab as a 4% target for there for this do you think this merger could.
Deliver attrition rate that that's potentially much higher than that and then just over.
Just the timeframe of that typically we see these have been in bunches do you see this happening over multiple year timeframe.
Yes look I think 4% to 5% to get estimate for something where it's managed very well the best conversions. The best integrations at 4% range is probably a good number.
But certainly you can look at other ones that didn't go so well in those numbers can go quite higher so theres theres opportunity beyond that but I think thats. It thats a reasonable size of the opportunity, but I really want to say don't just think of it as that net finite flow. It's also just the number of large branded players in the marketplace and we should.
Pickup from that just from the evolution of customer mindset as when they're looking for provider in the space and it's just an increase in the overall natural growth rate, we want to take advantage of that so it's both elements. There now on the advisor side I think theres a lot more consternation in the market. If you will you can just.
I see it if you take a look at any of the Ri publications that are out there a lot of the smaller mid medium size on raise are concerned and there is concern that there's going to be changes around referral flows and greater degrees of internalization.
We want to be.
Place a place in the market that has a very strong platform leaves with technology makes the advisors life easier provides excellent service to all tiers of advisors and that's what we're building Thats our mission for our institutional channels. So we.
We think thats going to resonate quite well over time, we thought that was going to resonate well before this acquisition. This is just going to add to that.
Okay. Thanks, Thanks for that and then maybe just along those lines on economically as you try to protect us customers.
Is that more coming from cash offers that will increase the AD marketing spend where do you see yourself competing more on things like margin rates.
And deposit pricing and then are you thinking more about targeting options customers given your options the strength of your options platform.
Or is it is not so directly focused on that area.
Look I don't have a specific answer to that I would say that I would describe it. This way cash offers are here to stay they've been come part of the industry.
And I think that Thats, something it's just always going to be part of it for the less the larger clients, especially because they've come to expect it and that sort of locks in an amount of that that always needs to be sort of funded and put into year end to your advertising and market development. We've got a great option platform of course, we're going to position.
Our option platform as aggressively in the marketplace as we can.
We're always out in doing education trying to get our customers to understand the option market to grow into option trading.
I think it's an area of strong retail growth and then we'll continue to be for a number of years.
Thank you.
Last question is from Michael Cypress with Morgan Stanley . Please go ahead.
Hey, good afternoon. Thanks for taking the question just on the are a solid business I think today you have over 200, our AA $20 billion assets are so I guess once you get passed the conversion in the second quarter, just curious whats the asset or ARIA capacity at the platform. Once you get to the conversion and how much would you need to spend in order to materially.
The increase that capacity say, if another 20 or $50 billion wanted to come online in the third quarter.
How much would you need to spend to accommodate that just have that that is.
Yes that is the beauty of the integration in conversion once we connect to our core middle and back office systems. Our scale ability of the are a business is directly in line with the scalability of our main business, we operate with significant excess capacity, obviously for trade volumes and extremely high volume days, which.
Come every now and then we've got a solid amount of capacity for client accounts and and items like that we're going to scale. This business in the same way, it's not something that would be if we had to add compete power to for the amount of growth, it's not a cost, but I'm really worried about if we were to see growth at those levels.
Okay, and just a follow up question on the technology front, you've talked about some of the high level. The some of the analytical approach as you referenced earlier, just hoping you could dig in a little bit more flush that out around some of the animal approaches on customer offers that you have in the marketplace, how you're approaching that today and how might you evolve your approaches around.
Clinics around customers over the next couple of years sure. We are we are investing in data and analytics across the company.
We want to learn about our customers what they are what they want with the best product set to put in front of them is how to customize our experience better.
I'd say, we have been on this journey for a little bit, but we're really starting to ramp now much more in sort of into those insights using those insights to drive business using it to inform our marketing strategy, how and where we place offers how and where we place our advertisements things like that so it's it's it's taking.
A much more data and scientific approach to that to the problem of marketing and that we have ever taken really in the past.
Great. Thank you.
Okay and no further questions. So I'll turn the call that.
Sure. Thank you all for joining Us Tonight.
We will talk to you again soon thank you.
So that does conclude our conference call for today, we thank you for participating in you may now disconnect.
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