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.

LEADING DISCOUNT BROKER OFFERED INTERNET TRADING IN 1996

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.

SCHWAB CONTINUED TO REDEFINE ITSELF, 2000-2001

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."

BEAR MARKET LED TO CUTBACKS, 2001

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.

FURTHER READING:

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.