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Charles Schwab Corp.

Charles Schwab Corp.

101 Montgomery St.
San Francisco, California 94104-4122
(415) 627-7000
Fax: (415) 627-8538

Public Company
Incorporated: 1971
Employees: 4,600
Sales: $909 million
Stock Exchanges: New York Midwest Philadelphia Pacific
SICs: 6211 Security Brokers and Dealers; 6282 Investment Advice; 6719 Holding Companies, Nec

The Charles Schwab Corp., through its operating subsidiary Charles Schwab & Company, Inc., is the largest discount stock broker in the United States. It also deals in securities, investments, and other low-cost financial services.

Charles Schwab, the companys founder, had received an M.B.A. degree from Stanford University and had been working for a small California investment advisor when, in 1971, he founded his own company. He and two partners created a stock mutual fund that soon had $20 million in assets. However, they ran into trouble with securities regulators, when it was learned that they had failed to register the fund. This error temporarily forced Schwab out of business, but he soon reopened a small money-management firm in San Francisco.

On May 1, 1975, the U.S. Congress deregulated the stock brokerage industry by taking away the power of the New York Stock Exchange to determine the commission rates charged by its members. This opened the door to discount brokers, who took orders to buy and sell securities, but did not offer advice or do research the way larger, established brokers like Merrill Lynch did. This presented an opportunity to win individual investors well enough versed in the stock market not to need the advice offered by established brokers. Schwab quickly took advantage of deregulation, opening a small San Francisco brokerage, financed primarily with borrowed money, and buying a seat on the New York Stock Exchange.

The new discount brokers, whose commissions might be only 30 percent of the rates before deregulation, were scorned by the old-line brokerages. During his first few years as a discount broker, Schwab had to contend with bad publicity generated by the older firms, some of whom threatened to break their leases if landlords allowed Schwab to rent offices in the same building.

Schwab fought back by buying newspaper ads featuring his photograph and asking customers to contact him personally, helping to build the firms credibility. Possibly the most important early decision made by Schwab was to open branch offices around the United States. He reasoned that even investors not needing advice would prefer doing business through a local office instead of a toll-free telephone number. The move won customers and helped differentiate Schwab from the large number of discount firms appearing after deregulation.

Over the next few years Schwab did several things to pull away from the pack. The company offered innovative new services including the ability to place orders 24-hours a day. It bought advanced computer systems to quickly deal with huge volumes of orders. And it continued its heavy advertising, seeking to project an upscale image. Top executives were given expensive foreign cars, and an interior design staff was commissioned to help showcase certain new branches. Some industry analysts maintain that with these measures Schwab helped bring discount brokering into the mainstream of financial institutions.

However, the firms rapid expansion was costly. Partly as a result of this, and partly because sales were dependent on the sentiments of small investors, profits were erratic. To raise money Schwab sometimes turned to employees and larger customers. By 1980 Schwab was by far the largest discounter. That year, in part to fund further expansion, Schwab decided to take the company public. The offering was called off, however, when some problems caused by the attempted conversion to a new computer system proved an embarrassment to the company. Raising sufficient capital in private became more difficult, partly because of the erratic earnings. Finally, in 1983, Schwab arranged for San Franciscos Bank of America to acquire the company for $55 million in Bank of America stock. Bank of America also agreed to supply Schwab with capital. It loaned Schwab $50 million over the next three years, but Schwab remained one of the most highly leveraged brokerages.

The sale to Bank of America may have provided needed capital, but it fettered the company with banking regulations. Schwab wanted to offer new, proprietary lines of investments including Charles Schwab mutual funds. However, federal law at the time forbid banks and their subsidiaries from underwriting such securities. Although Schwab initially sought to challenge the law, as its wording contained some ambiguities, Bank of America did not want to irritate banking regulators. Tensions between Schwab and its parent were further exacerbated because Bank of America was experiencing difficulties, and the price of its stock was falling, making Schwabs stake in it worth less.

Schwab introduced the Mutual Fund Marketplace in 1984 with an initial investment of $5 million. The Marketplace allowed customers to invest in 250 separate mutual funds and switch between them using Schwab as the bookkeeper. All of a customers mutual fund accounts were put on a single monthly statement. The companys profile was further raised in 1984 when Schwabs book How to be Your Own Stockbroker was published. In it Schwab presented himself as a populist fighting against Wall Street stockbrokers in the name of the average investor. He contended that there is an inherent conflict of interest when a firm owns stock in inventory, writes favorable research recommendations on those stocks, and has commissioned salespeople sell those stocks to the public. At the same time, the company was moving into an elegant new headquarters building in downtown San Francisco.

In 1985 Schwab had 90 branches and 1.2 million customers, generating $202 million in revenue. Though it was far larger than its leading discount competitors, it was small compared with the largest retail brokerages, which had over 300 branches. The firm was growing in other ways, however. It offered personal computer software called the Equalizer, which allowed investors to place orders via computer as well as call up stock information and obtain research reports.

In 1987, Charles Schwab and a group of investors bought the company back from Bank of America for $238 million. Seven weeks later, he announced plans to take the company public. The buyback had resulted in $200 million of debt, and the public offering was partly designed to eliminate some of this debt. It was also intended to raise money for further expansion. Schwab wanted to increase the number of branches to 120, including offices in Europe.

The discount brokerage business had grown intensely competitive. Discounters handled a significant amount of retail equity trades by 1987, but hundreds of firms had entered the field, including banks, savings and loans, and mutual fund companies. Since Schwab was clearly the player to beat in discounting, competitors advertisements specifically offered rates lower than Schwabs. Nevertheless, at this time Schwab had 1.6 million customers, about five times as many as its nearest competitor, Quick & Reilly Group. In 1987 the firm had sales of $465 million and profits of $26 million, twice the industrys average profit margin. To achieve this success, Schwab was spending about $15 million a year on advertising.

Schwab was already doing well in its expanded product line. Mutual Fund Marketplace had attracted $1.07 billion in client assets by year-end 1986. The company was also offering Individual Retirement Accounts, certificates of deposit, money-market accounts, and Schwab One cash-management accounts. Despite these successes, Schwab was badly hurt by the stock market crash of October 1987. By mid-1988, trading volume had fallen to about 10,400 trades a day, a 40 percent drop from the months before the crash. Schwab cut costs to maintain profitability, cutting managerial pay anywhere from five to 20 percent and laying off employees. Charles Schwab cut his own pay 20 percent for six months, and put branch expansion plans on hold. The firm also raised its trading commission ten percent, so that it needed only 8,000 trades a day to break even, down from 12,000 trades. Even with the cost-cutting, the firms 1988 earnings plummeted 70 percent to $7.4 million on sales of $392 million.

However, by 1989 Schwab was expanding again. It bought Chicago-based Rose & Co. for $34 million from Chase Manhattan, and as the fifth-largest discount broker in the United States, Rose & Co. brought Schwab 200,000 new customers at a cost of about $70 each. With the purchase, Schwab controlled about 40 percent of the discount market, though discounters made only eight percent of all retail commissions. Over the long run, Schwab realized its best strategy was to win customers from the full-service brokers. To help create more independent stock investors, it pioneered a service called Telebroker that let customers place stock orders and get price quotes from any touch-tone telephone 24 hours a day. It also released a new version of the Equalizer. The software had already sold 30,000 copies at $169 each since its introduction.

Individual investors returned to the stock market in 1989, and the firms income surged to $553 million, with profits of $18.9 million. Income was further helped by an increase in client assets, from $16.8 billion in 1987 to $25 billion in early 1990. Commissions accounted for 70 percent of revenue, down from 85 percent in 1987.

Throughout the 1980s, Schwab updated its Mutual Fund Marketplace to allow customers to switch among funds in different families by a telephone. Customers paid a commission ranging from .6 percent to .08 percent, with a minimum of $29. Analysts were generally positive, pointing out that the amount of interest lost from having a check in the mail would pay for most of the services commission fees. In 1991 Schwab also acquired Mayer & Schweitzer, an over-the-counter stock market maker, getting itself into a new and lucrative market.

Meanwhile Schwab was opening branch offices at a furious pace17 in 1992 aloneand doubling the amount of money it spent on advertising. Schwabs aggressive stance helped raise its share of the discount market to 46 percent as it attracted more than 40,000 new accounts a month. In 1992 Schwab acquired its first corporate jet, spending $12 million on a model with enough fuel capacity to reach London, where it was opening its first European branch. These additional costs helped drag down third-quarter earnings in 1992 when stock trading temporarily tapered off. The dip was a reminder that the company was still highly dependent on commissions, and caused its stock to drop 20 percent.

Schwab cut advertising by 20 percent and took other steps to slow the growth of its costs. It made a greater share of new branch offices into bare bones operations with only one broker. Schwab already paid its 2,500 brokers less than other discounters, an average of $31,000 a year, compared with $50,000 at Fidelity Brokerage Services and $36,000 at Quick & Reilly. The firm also continued searching for ways to become less dependent on commissions. The introduction in July of

1992 of a way to trade mutual funds by eight outside fund companies, resulting in no sales fee, attracted more than $500 million in assets within two months and over $4 billion by July of 1993; it was thus the most successful first-year pilot of any new service in Schwabs history.

During 1992 Schwab customers opened 560,000 new accounts at its 175 branch offices, while assets in customer accounts grew 38 percent to $65.6 billion. Revenue soared to $909 million, with record profits of $81 million. As a result of these successes, Schwab announced plans to open 20 more branch offices in 1993 and several proprietary mutual funds. Schwab remained dependent on commissions, but was working steadily to ease its dependency even as it rapidly increased its customer base, largely at the expense of full-service brokerages.

Further Reading

Bianco, Anthony, Charles Schwab vs. Les Quick, Business Week, May 12, 1986.

Heins, John, How Now, Chuck Schwab? Forbes, June 15, 1987.

, After Cost Cuts, What? Forbes, May 1, 1989.

Oliver, Suzanne L., One-Stop Shopping, Forbes, November 11, 1991.

Shao, Maria, Suddenly the Envy of the Street is Schwab? Business Week, March 19, 1990.

Siconolfi, Michael, Schwabs Profit Stumbles Amid Rise in Expenses Coupled with Less Trading, Wall Street Journal, September 29, 1992.

Scott M. Lewis

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Charles Schwab Corp


Although it wasn't the first company to offer securities trading over the Internet, Charles Schwab & Co. Inc.the principal operating subsidiary of the Charles Schwab Corp.was the leading online brokerage firm at the end of the 20th century. More than 3.3 million of the company's 6.6 million active accounts were online accounts, representing nearly half of the company's client assets.


When Schwab began offering securities trading over the Internet in April 1996, it was the leading discount brokerage firm in the United States. The firm's brokers were paid salaries rather than commissions, and customers paid fixed fees rather than commissions when they bought and sold stocks and other securities. Schwab's first online trading venture was called e.Schwab and was set up as a separate business unit with its own dedicated personnel. Under the company's two-tier pricing system, customers could make trades for a fixed fee of $29.95, but only if they traded online. In addition, they were limited to one phone call per month to a broker or customer representative. Customers who wanted a higher level of service had to pay a higher fee that was still less than that charged by the full-service brokerages.

Although Schwab pioneered the bare-bones discount brokerage and was for many years little more than an order-taker for independent investors, the company had begun offering some level of service to its customers by 1996. Catering to the wave of baby boomers who were planning for their retirement, Schwab employees were now willing to discuss investment objectives with their clients and suggest investment strategies to reach those goals. An important part of the company's customer service initiative was the expansion of its branch network, which made it convenient for customers to come in and talk with a Schwab broker. Schwab also offered 24-hour staffing at its customer service call centers. As long as Schwab was able to distinguish itself from other discount brokerages on the basis of customer service, it wouldn't compete solely on the basis of price. Its $29.95 online charge was not the lowest in the industry, nor was its minimum regular commission of $39.00

By the end of 1997 online trading accounted for $81 billion in client assets for Schwab, but the company realized its two-tier pricing system was creating a long-term problem. The company's traditional customers were resentful that they weren't getting the lower fees, while the company's online customers didn't like the lack of service. As a result, in January 1998 Schwab took the bold step of offering the $29.95 flat fee to everyone, along with access to whatever help and information the company could provide. Although the decision meant an immediate $150 million loss of earnings, it also resulted in increased trading volume and the addition of more new accounts. For 1998 Schwab's client assets increased by 40 percent, new accounts rose by 20 percent, and net income rose 30 percent to $348.5 million. Total revenue reached $2.16 billion.

Once the pricing issue was settled, Schwab was more committed than ever to improving customer service. By 1999 Schwab's Web site was offering extensive research, including analyst reports, company reports, insider-trading reports, industry research, live CEO interviews, and a stock screening service. Most of the services were offered free to investors, although the stock screening tool was free only to those with $100,000 in assets or who made at least 12 trades per year. In addition to providing research and analytical tools, Schwab began offering e-mail alerts that would tell investors when a stock or mutual fund reached a pre-set high or low. Later in the year, wireless e-mail alerts to pagers and cell phones were offered and the company introduced after-hours trading. In mid-1999 Schwab Chief Information Officer Dawn Lepore told Business Week that the company's Web site was receiving 76 million hits a day. The company's customer service strategy was paying off. Schwab had captured 42 percent of all assets invested in online trading accounts, and it added 1.3 million Internet accounts between January 1998 and June 1999.

As part of its strategy to attract new customers over the Internet, Schwab teamed up with Internet portal Excite Inc. (which eventually became Excite@ home) to create MySchwab, a personalized Web page service that was available to customers and non-customers alike. Using the co-branded MySchwab site, individuals could create their own personalized Web page with their favorite links and receive customized investment information, including lists of stocks to watch, access to breaking news stories, general business and technology news, and access to popular content such as sports, travel, and shopping. Schwab hoped that MySchwab would attract many non-customers and allow them to sample the company's products and services.


In February 2000 Schwab announced it would acquire CyBerCorp. Inc., a closely held electronic trading technology and brokerage firm based in Austin, Texas, for about $488 million. The acquisition was designed to enhance services offered to very active traders. CyBerCorp., which would operate as a subsidiary, allowed traders to scan multiple electronic communications networks, market makers, and market specialists for the best prices and then place orders. The company also provided customers with streaming quotes and news. To further attract very active traders, Schwab announced it would reduce fees to $19.95 per trade once a customer made more than 30 trades in a quarter. The fee would be further reduced to $14.95 per trade once a customer exceeded 60 trades in a quarter. Analysts noted that the new fee structure, along with the acquisition of CyBerCorp., made Schwab more appealing to day traders.

Schwab's largest acquisition of the year was U.S. Trust Corp., which Schwab acquired in June 2000 in a stock swap valued at $2.7 billion. The two companies would each retain their separate brand identities. U.S. Trust Corp. offered personalized asset management services, primarily to wealthy clients. Its minimum account balance was $400,000. The acquisition was notable in several respects, one being that it required the approval of the Federal Reserve Board. In order to complete the transaction Schwab had to apply to the Federal Reserve Board to become a bank holding company, and then convert to a financial holding company. It was the first financial conglomerate created under the Gramm-Leach-Bliley Act, which eased restrictions on the combination of securities firms, banks, and insurers. The combined companies would have client assets totaling $913 billion and net revenue of $4.5 billion. By August 2000 Schwab's client assets surpassed $1 trillion, then fell to $961 billion in September and $944 billion in October.

A significant segment of Schwab's client assets consisted of advisor-managed accounts, which accounted for $243 billion of Schwab's $944 billion in client assets in October 2000. Some 6,000 independent investment advisors used Schwab for trading and custody of their clients' investments. The acquisition of U.S. Trust enabled Schwab to further promote the use of its services by independent investment advisors by offering them access to U.S. Trust's administrative trustee services. In addition, Schwab gave them access to U.S. Trust research and Webcasts with U.S. Trust analysts. Later in the year Schwab acquired Chicago Investment Analytics Inc., which produced software to select securities based on quantitative analysis. Following the acquisition Schwab made Chicago Investment Analytics' investment tools available to the independent investment advisors who used Schwab for trading and custody. An annual fee of $8,000 was required to become part of Schwab's program for independent investment advisors.

Throughout 2000 Schwab continued to automate as many processes as possible to reduce costs. For investment advisors, Schwab gave them access to external markets, not only through CyBerCorp.'s systems and high-speed connectivity, but also through an extranet that provided access to resources that enabled them to automate many paper-based functions. At its Web site Schwab introduced features that allowed customers to automate processes such as funds transfers and password changes, which previously required a phone call or visit to a branch office. Schwab estimated that bringing these functions online saved at least $50 million a year in costs, and that its Web site was handling the equivalent volume of three or four call centers. Even as Schwab automated more functions and encouraged its customers to use its Web site, the company continued to expand its branch office network. Some 50 new branch offices were opened between June 1999 and June 2000, for a total of 356 offices. A company spokesperson told InternetWeek, "We do 88 percent of our trades online, but 70 percent of our accounts are opened at a branch office."


Schwab had doubled its workforce to 25,500 full-time employees during the bull market surge from 1998 through the end of 2000. When stocks tumbled in February 2001, the company announced plans to cut 11 to 13 percent of its workforce in the second quarter, including 2,000 to 2,300 employees who would be laid off and another 600 to 900 who would leave through attrition. In February 2001, Schwab's clients lost a combined $83.4 billion as the total value of client assets dropped to $845 billion. The average account balance sank to $111,000 from a peak of about $137,400 in August 2000. Trading volume was down about one-third from the same month the previous year.

While Schwab remains the leading online brokerage firm with an estimated 22 percent of all Internet trades, investors perceive it as a well-diversified financial services firm. Its branch office network makes it a "click-and-mortar" type of company, and the acquisition of U.S. Trust helped to diversify its revenue sources. As a result, the company is not as dependent on online trading for its continued success as other pure-play online brokerages.


Anderson, Amy L. "Schwab Offers Trust, Custody Services for Advisors." American Banker. December 1, 2000.

"Capital Briefs: Schwab Deal to Buy U.S. Trust Wins Federal Reserve Approval." American Banker. May 2, 2000.

Gorham, John. "Charles Schwab, Version 4.0." Forbes. January 8, 2001.

"Schwab, Going Upscale, Steps on Some Toes." Business Week. December 11, 2000.

"Schwab-U.S. Trust Merger Completed." San Francisco Business Times. June 9, 2000.

Schwartz, Jeffrey. "Schwab Reaps Benefits of Early Net Investments." InternetWeek. June 12, 2000.

SEE ALSO: Ameritrade Holding Corp.; Datek Online Brokerage Services LLC; E*Trade Group Inc.

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