When the Fed Funds Rate Gives You Lemons, Make Lemonade
Stop me if you've heard this one. Economists predict that the Fed funds rate will remain near zero percent for the remainder of the year … and the next year … and the next year.
Financial services firms have been operating in a financial "Groundhog Day" of sorts for nearly five years — one that, at TD Ameritrade, has a direct impact on almost 50 percent of our revenue stream. In that kind of environment, the pure CFO in me wants to bring down the hammer and say, "No more spending!" But, the realistic CFO in me manages to say that simply pulling back when you have financial strength and momentum on your side could be detrimental to the long-term health of the business — especially in an environment that, by the time all is said and done, will have affected us for eight (if not more) years.
Managing expenses to drive the maximum amount of revenue is the mandate that we as CFOs are challenged with in this difficult economic environment. This usually means helping your business partners focus their spending on the "must" haves versus the "nice-to-haves." Self-funding initiatives, or moving money from the non-urgent or inefficient, can help you fund new ideas or investments in growth without growing the overall cost to the company, particularly when you have top-line revenue pressures.
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The key is to tie investments to the long-term growth of your company. If you're going to keep growing, you can't be afraid to invest — or to defend those investments to shareholders and others who might criticize that decision. You need a well-laid out plan that shows how your investments are tied to growth, what you're willing to give up or reallocate to fund them, and you need to hold the management team accountable for spending their dollars as they promised.
Interest rates have been near zero since December 2008, but we haven't stopped investing at TD Ameritrade. We targeted opportunities in marketing, sales and technology — investments that have a revenue trajectory associated with them. We increased our capacity, built out our sales teams and updated our client acquisition strategy. As a result, organic growth has never been better. Sales in both our retail and institutional channels are at record highs. We have grown net new client assets at double-digit rates for four years in a row — growth that's helping us mitigate the impact of the environment on our revenue. We've earned three credit rating upgrades. We held expenses flat from 2011 to 2012 — and we're on track to do the same in 2013.
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We know that not every investment will perform to expectations, so we look to our business leaders to make the call when it's time to pull back and reallocate. We have programs set up throughout the company to identify and eliminate waste, or impediments to growth. Within finance, we just have to get granular. I sit with my team and go through the expenditures for each area of the company — looking for areas that may be candidates for savings. You can't do it any other way than getting into the details. That's where most opportunities lie. We have found that general edicts of 3 percent to 5 percent cuts across the board aren't successful. It's about identifying inefficiencies and redeploying resources.
Each of our business partners has his or her own goals and objectives. They want to increase their reach, improve the client experience, or maybe increase headcount to generate more output. They might see this business unit or that one getting more money to invest, while they're being asked to cut back. CFOs often times have to make difficult decisions that aren't popular, but they are for the greater good. If you can't control the top line, then they you need to control expenses in order to make sure that the bottom line is adequate for the revenue you expect to generate.
The same could be said for our budgetary issues in Washington. Politics aside, when this topic came up at the first CNBC CFO Summit breakfast on Feb. 26, there were a lot of heads nodding. At the heart of government spending are four programs that require an enormous amount of resources: Social Security, Medicare and Medicaid, and defense. Each of these areas can be tweaked — inefficiencies identified and resources reallocated. It's not rocket science. You can't change the deal for people currently depending on these programs, but you have to change the trajectory of where expenses are going.
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Someone recently asked me to compare the life of a CFO in a good economic environment to life in a bad one. I think we worry a bit more when times are tough — there are longer nights and more difficult conversations to have. But the truth is that a culture of disciplined expense management makes sense in any environment. We must still watch how resources are spent. The number of investments might increase, or take on new, non-traditional forms, but we must still hold our partners accountable.
I often think about my parents and grandparents — people who lived through the Great Depression. Their lean approach to money followed them throughout their lives, well after the "tough times" were behind them. The life of a CFO is never an easy one. We might sing and dance a little more when times are good, but we're still responsible for one simple task: manage expenses to drive the maximum amount of revenue.
So, I like to keep my hammer close at hand — just in case I need to remind anyone of that.
—By Bill Gerber, executive vice president and CFO, TD Ameritrade Holding