Case Study: The Rise and Evolution of Charles Schwab | Môn Business - Trường Cao đẳng Kinh tế Kế hoạch Đà Nẵng
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lOMoAR cPSD| 58097008 4 CHARLES SCHWAB
This case was prepared by Charles W. L. Hill of the
School of Business, University of Washington, Seattle. C4-1 INTRODUCTION
of 204,000 trades a day in 2000 to 112,000 trades a
day in 2002. In 2003, Schwab’s revenues and net
income fell sharply, and the stock price tumbled
In 1971, Charles Schwab, who was 32 at the time, set up his
from a high of $51.70 a share in 1999 to a low of
own stock brokerage concern, First Commander. Later he
$6.30 in early 2003. During this period, Schwab
would change the name to Charles Schwab & Company, Inc.
expanded through acquisition into the asset
In 1975, when the Securities and Exchange Commission
management business for high-net-worth clients
abolished mandatory xed commissions on stock trades,
with the acquisition of U.S. Trust, a move that
Schwab moved rapidly into the discount brokerage business,
potentially put it in competition with independent
offering rates that were as much as 60% below those offered
investment advisors, many of whom used Schwab
by full commission brokers. Over the next 25 years, the
accounts for their clients. Schwab also entered the
company experienced strong growth, fueled by a customer-
investment banking business with the purchase of
centric focus, savvy investments in information technology, Soundview Technology Bank.
and a number of product innovations, including a bold move
In July 2004, founder and chairman Charles into online trading in 1996.
Schwab, who had relinquished the CEO role to David
By 2000, the company was widely regarded as one of the
Pottruck in 1998, red Pottruck and returned as CEO.
great success stories of the era. Revenues had grown to $7.1
Before stepping down in 2008, he refocused the
billion and net income to $803 million, up from $1.1 billion
company on its discount brokering roots, selling off
and $124 million, respectively, in 1993. Online trading had
Soundview and U.S. Trust. At the same time, he
grown to account for 84% of all stock trades made through
pushed for an expansion of Schwab’s retail banking
Schwab, up from zero in 1995. The company’s stock price had
business, allowing individual investors to hold
appreciated by more than that of Microsoft over the prior 10
investment accounts and traditional bank accounts
years. In 1999, the market value of Schwab eclipsed that of
at Schwab. Schwab remains chairman of the
Merrill Lynch, the country’s largest full- service broker, company.
despite Schwab’s revenues being over 60% lower.
In 2007–2009, a serious crisis gripped the
The 2000s proved to be a more dif cult environment for
nancial services industry. Some major nancial
the company. Between March 2000 and mid-2003, share
institutions went bankrupt, including Lehman
prices in the United States tumbled, with the technology-
Brothers and Washington Mutual. The widely heavy NASDAQ index losing
watched Dow Industrial Average Index plunged from C-50
over 14,000 in October 2007 to 6,600 in March 2007.
80% of its value from peak to trough. The volume of
Widespread nancial collapse was only averted when
online trading at Schwab slumped from an average
the government stepped in to support the sector lOMoAR cPSD| 58097008 Case 4 Charles Schwab C-51
with a $700-billion loan to troubled companies. C4-2a Industry Background
Almost alone amongst major nancial service rms,
Schwab was able to navigate through the crisis with
In 2016, there were 3,816 broker-dealers registered
relative ease, remaining solidly pro table and having
in the United States, down from 9,515 in 1987. The
no need to place a call on government funds. By
industry is concentrated, with some 200 rms that
2010–2017, the company was once again on a
are members of the New York Stock Exchange
growth path, fueled by expanded offerings including
(NYSE) accounting for 87% of the assets of all
the establishment of a marketplace for exchange
broker-dealers, and 80% of the capital. The 10
traded funds (EFTs). Schwab’s asset base expanded
largest NYSE rms accounted for around 57% of the
at around 6% per annum during this period, and by
gross revenue in the industry in 2016, up from 48%
early 2018 it was managing almost $3.4 trillion in
in 1998. The consolidation of the industry has been
client assets. In 2017, Schwab reported record net
driven in part by deregulation, which is discussed in
income of $2.18 billion on record revenues of $8.62 more detail below.
billion. The major strategic question going forward
Broker-dealers make money in a number of ways. They
was how to continue to grow pro tably in what
earn commissions (or fees) for executing a customer’s order
remained a price-competitive environment for
to buy or sell a given security (stocks, bonds, option brokerage rms.
contracts, etc.). They earn trading income, which is the
realized and unrealized gains and losses on securities held
and traded by the brokerage rm. They earn money from
underwriting fees, which are the fees charged to corporate C4-2 THE SECURITIES
and government clients for managing an issue of stocks or
bonds on their behalf. They earn asset management fees, BROKERAGE
which represent income from the sale of mutual fund
securities, from account supervision fees, or from INDUSTRY1
investment advisory or administrative service fees. They earn
margin interest, which is the interest that customers pay to
the brokerage when they borrow against the value of their
securities to nance purchases. They earn other securities
A security is a nancial instrument such as a stock,
related revenue comes from private placement fees (i.e., fees
bond, commodity contract, stock option contract,
from private equity deals) subscription fees for research
or foreign exchange contract. The securities
services, charges for advisory work on proposed mergers and
brokerage industry is concerned with the issuance
acquisitions, fees for options done away from an exchange
and trading of nancial securities, as well as a
and so on. Finally, many brokerages earn nonsecurities
number of related activities. A broker’s clients may
revenue from other nancial services, such as credit card
be individuals, corporations, or government bodies.
operations or mortgage services.
Brokers undertake one or more of the following
functions: assist corporations to raise capital by C4-2b Industry Groups
offering stocks and bonds; help governments raise
capital through bond issues; advise businesses on
Historically, brokerage rms have been segmented into ve
their foreign currency needs; assist corporations
groups. First, there are national, full-line rms, which are the
with mergers and acquisitions; help individuals plan
largest full-service brokers with extensive branch systems.
their nancial future and trade nancial securities;
They provide virtually every nancial service and product that
and provide detailed investment research to
a brokerage can offer to both households (retail customers)
individuals and institutions so that they can make
and institutions (corporations, governments, and other
more informed investment decisions.
nonpro t organizations such as universities). Examples of
such rms include Merrill Lynch and Morgan Stanley. Most of
these rms are headquartered in New York. For retail
customers, national, full-line rms provide access to a
personal nancial consultant, traditional brokerage services, lOMoAR cPSD| 58097008 C-52 Case 4 Charles Schwab
securities research reports, asset management services,
corporations and governments tend to issue more securities,
nancial planning advice, and a range of other services such
which increases underwriting income. Also, low interest
as margin loans, mortgage loans, and credit cards. For
rates tend to stimulate economic growth, which leads to
institutional clients, these rms will also arrange and
higher corporate pro ts, and thus higher stock values. When
underwrite the issuance of nancial securities, manage their
interest rates decline, individuals typically move some of
nancial assets, provide advice on mergers and acquisitions,
their money out of low-interest-bearing cash accounts or
and provide more detailed research reports than those
low-yielding bonds, and into stocks, in an attempt to earn
normally provided to retail customers, often for a fee.
higher returns. This drives up trading volume and hence
Large investment banks are a second group. This group
commissions. Low interest rates, by reducing the cost of
includes Goldman Sachs. These banks have a limited branch
borrowing, can also increase merger and acquisition activity.
network and focus primarily on institutional clients, although
Moreover, in a rising stock market, corporations often use
they also may have a retail business focused on high-net-
their stock as currency with which to make acquisitions of
worth individuals (typically individuals with more than $1
other companies. This drives up drives up merger and
million to invest). In 2008, Lehman Brothers went bankrupt,
acquisition activity, and the fees brokerages earn from such
a casualty of bad bets on mortgage-backed securities, while activity.
the large bank, J.P. Morgan, acquired Bear Stearns, leaving
The 1990s were characterized by one of the
Goldman Sachs as the sole stand-alone representative in this
strongest stock market advances in history. This class.
boom was driven by a favorable economic
A third group are regional brokers, which are fullservice
environment, including falling interest rates, new
brokerage operations with a branch network in certain
information technology, productivity gains in
regions of the country. Regional brokers typically focus on
American industry, and steady economic expansion,
retail customers, although some have an institutional
all of which translated into growing corporate pro ts presence. and rising stock prices.
Fourth, there are a number of New York City-based
Also feeding the stock market’s advance during
brokers who conduct a broad array of nancial services,
the 1990s were favorable demographic trends.
including brokerage, investment banking, traditional money
During the 1990s, American Baby Boomers started management, and so on.
to save for retirement, pumping signi cant assets
Finally, there are the discounters, who are primarily
into equity funds. The percentage of household
involved in the discount brokerage business and focus on
liquid assets held in equities and mutual funds
executing orders to buy and sell stocks for retail customers.
increased from 33.8% in 1990 to 66.9% in 1999,
Commissions are their main source of business revenue.
while the number of households that owned
They charge lower commissions than full-service brokers, but
equities increased from 32.5 to 50.1% over the same
do not offer the same infrastructure, such as personal nancial period.
consultants and detailed research reports. The discounters
Adding fuel to the re, by the late 1990s, stock
provide trading and execution services at deep discounts
market mania had taken hold. Stock prices rose to
online via the Web. Many discounters, such as Ameritrade
speculative highs rarely seen before as “irrationally
and E*Trade, do not maintain branch of ces. Schwab, which
exuberant” retail investors, who seemed to believe
was one of the rst discounters and remains the largest, has a
that stock prices could only go up, made increasingly
network of brick-andmortar of ces, as well as a leading online
risky and speculative “investments” in richly valued presence.
equities.2 The market peaked in late 2000 as the
extent of overvaluation became apparent. It fell
signi cantly over the next 2 years as the economy C4-2c Earnings Trends
struggled with a recession. This was followed by a
Industry revenues and earnings are volatile, being driven by
recovery in both the economy and the stock market,
variations in the volume of trading activity (and
with the S&P 500 returning to its old highs by
commissions), underwriting, and merger and acquisition
October 2007. However, as the global credit crunch
activity. All of these tend to be highly correlated with changes
unfolded in 2008, the market crashed, falling
in the value of interest rates and the stock market. In general,
precipitously in the second half of 2008 to return to
when interest rates fall, the cost of borrowing declines, so
levels not seen since the mid-1990s. The market has lOMoAR cPSD| 58097008 Case 4 Charles Schwab C-53
since recovered, and by 2016 almost 60% of the C4-2d Deregulation
nancial assets of U.S. households was once again
held in equities and mutual funds.
The industry had been progressively deregulated
since May 1, 1975, when a xed commission
The long stock market boom of the 1990s drove
structure on securities trades was dismantled. This
an expansion of industry revenues, which for
development allowed for the emergence of
brokerages that were members of the NYSE, grew
discount brokers such as Charles Schwab. Until the
from $54 billion in 1990 to $245 billion in 2000. As
the bubble burst and the stock market slumped in
mid-1980s, however, the nancial services industry
was highly segmented due to a 1933 Act of
2001 and 2002, brokerage revenues plummeted to
Congress known as the Glass-Steagall Act. This Act,
$144 billion in 2003, forcing brokerages to cut
which was passed in the wake of widespread bank
expenses. By 2007, revenues had recovered again
failures following the stock market crash of 1929,
and were a record $352 billion. In 2008, the nancial
erected regulatory barriers between different
crisis hit, and industry revenues contracted $178
sectors of the nancial services industry, such as
billion. In that year the industry lost $42.6 billion.
commercial banking, insurance, saving and loans,
By 2016, with the stock market booming again,
and investment services (including brokerages).
revenues were back up to $276 billion and the
Most signi cantly, Section 20 of the Act erected a
industry booked $27 billion in net income.
wall between commercial banking and investment
The expense structure of the brokerage industry
services, barring commercial banks from investing
is dominated by two big items: interest expenses
in shares of stocks, limiting them to buying and
and compensation expenses. Together these
selling securities as an agent, prohibiting them from
account for about three-quarters of industry
underwriting and dealing in securities, and from
expenses. Interest expenses re ect the interest rate
being af liated with any organization that did so.
paid on cash deposits at brokerages; they rise or fall
In 1987, Section 20 was relaxed to allow banks to earn up
with the size of deposits and interest rates. As such,
to 5% of their revenue from securities underwriting. The limit
they are generally not regarded as a controllable
was raised to 10% in 1989 and 25% in 1996. In 1999, the
expense (because the interest rate is ultimately set
Gramm-Leach-Bliley (GLB) Act was passed nalizing the repeal
by the U.S. Federal Reserve and market forces).
of the Glass-Steagall Act. By removing the walls between
Compensation expenses re ect both employee
commercial banks, broker-dealers, and insurance companies,
headcount and bonuses. For some brokerage rms,
many predicted that the GLB Act would lead to massive
particularly those dealing with institutional clients,
industry consolidation, with commercial banks purchasing
bonuses can be enormous, with multimilliondollar
brokers and insurance companies. The rational was that such
bonuses being awarded to productive employees.
diversi ed nancial services rms would become one stop
Compensation expenses and employee headcount
nancial supermarkets, cross-selling products to their
tend to grow during bull markets, only to be rapidly
expanded client base. For example, a nancial supermarket
curtailed once a bear market sets in.
might sell insurance to brokerage customers, or brokerage
The pro tability of the industry is volatile and
services to commercial bank customers. The leader in this
depends critically upon the overall level of stock
process was Citigroup, which was formed in 1998 by a
market activity. Pro ts were high during the boom
merger between Citicorp, a commercial bank, and Traveler’s,
years of the 1990s. The bursting of the stock market
an insurance company. Since Traveler’s had already acquired
bubble in 2000–2001 bought a period of low pro
Salomon Smith Barney, a major brokerage rm, the new
tability, and although pro tability improved after
Citigroup seemed to signal a new wave of consolidation in
2002, it did not return to the levels of the 1990s.
the industry. The passage of the GLB Act allowed Citigroup to
The nancial crisis and stock market crash of 2007– start cross-selling products.
2009 resulted in large losses for the industry, but
However, industry reports suggested that crossselling
pro ts have since improved since.
was easier in theory than in practice, in part because
customers were not ready for the development.3 In an
apparent admission that this was the case, in 2002, Citigroup
announced that it would spin off Traveler’s Insurance as a lOMoAR cPSD| 58097008 C-54 Case 4 Charles Schwab
separate company. At the same time, the fact remained that
San Francisco, a world away from Wall Street, First
the GLB Act had made it easier for commercial banks to get
Commander was a conventional brokerage that charged
into the brokerage business, and there were several
clients xed commissions for securities trades. The name was
acquisitions to this effect. Most notably, in 2008, Bank of
changed to Charles Schwab the following year.
America purchased Merrill Lynch, and J.P. Morgan Chase
In 1974, at the suggestion of a friend, Schwab
purchased Bear Stearns. Both of the acquired enterprises
joined a pilot test of discount brokerage being
were suffering from serious nancial troubles due to their
conducted by the Securities and Exchange
exposure to mortgage-backed securities.
Commission. The discount brokerage idea instantly
appealed to Schwab. He personally hated selling,
particularly cold calling. the constant calling on
actual or prospective customers to encourage them C4-3 THE GROWTH OF
to make a stock trade. Moreover, Schwab was
deeply disturbed by the con ict of interest that SCHWAB
seemed everywhere in the brokerage world, with
stock brokers encouraging customers to make
The son of an assistant district attorney in California, Charles
questionable trades in order to boost commissions.
Schwab started to exhibit an entrepreneurial streak from an
Schwab also questioned the worth of the
early age. As a boy, he picked walnuts and bagged them for
investment advice brokers gave clients, feeling that
$5 per 100 pound sack. He raised chicken in his backyard,
it re ected the inherent con ict of interest in the
sold the eggs door to door, killed and plucked the fryers for
brokerage business and did not empower
market, and peddled the manure as fertilizer. Schwab called customers.
it “my rst fully integrated businesses.”4
Schwab used the pilot test to ne-tune his model
As a child, Schwab had to struggle with a severe case of
for a discount brokerage. When the SEC abolished
dyslexia, a disorder that makes it dif cult to process written
mandatory xed commission the following year,
information. To keep up with his classes, he had to resort to
Schwab quickly moved into the business. His basic
Cliffs Notes and Classics Illustrated comic books. Schwab
thrust was to empower investors by giving them the
believes, however, that his dyslexia was ultimately a
information and tools required to make their own
motivator, spurring him on to overcome the disability and
decisions about securities investments, while
excel. Schwab gained admission to Stanford, where he
keeping Schwab’s costs low so that this service could
received a degree in economics, followed by an MBA from
be offered at a deep discount to the commissions Stanford Business School.
charged by full-service brokers. Driving down costs
Fresh out of Stanford in the 1960s, Schwab embarked
meant that, unlike full-service brokers, Schwab did
upon his rst entrepreneurial effort, an investment advisory
not employee nancial analysts and researchers who
newsletter, which grew to include a mutual fund with $20
developed proprietary investment research for the
million under management. However, after the stock market
rm’s clients. Instead, Schwab focused on providing
fell sharply in 1969, the State of Texas ordered Schwab to
clients with third-party investment research. These
stop accepting investments through the mail from its citizens
“reports” evolved to include a company’s nancial
because the fund was not registered to do business in the
history, a smatter of comments from securities
state. Schwab went to court and lost. Ultimately, he had to
analysts at other brokerage rms that had appeared
close his business, leaving him with $100,000 in debt and a
in the news, and a tabulation of buy and sell
marriage that had collapsed under the emotional strain.
recommendations from full-commission brokerage
houses. The reports were sold to Schwab’s
customers at cost (in 1992, this was $9.50 for each C4-3a The Early Days
report plus $4.75 for each additional report).5
Schwab soon bounced back. Capitalized by $100,000 that he
A founding principle of the company was a desire
borrowed from his Uncle Bill, who had a successful industrial
to be the most useful and ethical provider of nancial
company of his own called Commander Corp, in 1971
services. Underpinning this move was Schwab’s
Schwab started a new company, First Commander. Based in
belief in the inherent con ict of interest between
brokers at full-service rms and their clients. The lOMoAR cPSD| 58097008 Case 4 Charles Schwab C-55
desire to avoid a con ict of interest caused Schwab
Schwab began to realize that the branches
to rethink the traditional commission based pay
served a powerful psychological purpose—they
structure. As an alternative to commission-based
gave customers a sense of security that Schwab was
pay, Schwab paid all its employees, including its
a real company. Customers were reassured by
brokers, a salary plus a bonus that was tied to
seeing a branch with people in it. In practice, many
attracting and satisfying customers and achieving
clients would rarely visit a branch. They would open
productivity and ef ciency targets. Commissions
an account, and execute trades over the telephone
were taken out of the compensation equation.
(or later, via the Internet). But the branch helped
The chief promoter of Schwab’s approach to
them to make that rst commitment. Far from being
business, and marker of the Schwab brand, was
a drain, Schwab realized that the branches were a
none other than Charles Schwab himself. In 1977,
marketing tool. People wanted to be “perceptually
the rm started to use pictures of Charles Schwab in
close to their money,” and the branches satis ed
its advertisements, a practice it still follows today.
that deep psychological need. From 1 branch in
The customer-centric focus of the company led
1975, Schwab grew to have 52 branches in 1982,
Schwab to think of ways to make the company
175 by 1992, and 430 in 2002. The next few years
accessible to customers. In 1975, Schwab became
bought retrenchment, however, and Schwab’s
the rst discount broker to open a branch of ce and
branches fell to around 300 by 2008.
to offer access 24 hours a day, 7 days a week.
By the mid-1980s, customers could access Schwab in
Interestingly, however, the decision to open a
person at a branch during of ce hours, by phone day or night,
branch was not something that Charles Schwab
by a telephone voice recognition quote and trading service
initially embraced. He wanted to keep costs low and
known as TeleBroker, and by an innovative proprietary online
thought it would be better if everything could be
network. To encourage customers to use TeleBroker or its
managed by telephone. However, Schwab was
online trading network, Schwab reduced commissions on
forced to ask his Uncle Bill for more capital to get
transactions executed this way by 10%, but it saved much
his nascent discount brokerage off the ground.
more than that because doing business via computer was
Uncle Bill agreed to invest $300,000 in the
cheaper. By 1995, TeleBroker was handling 80 million calls
company, but on one condition: He insisted that
and 10 million trades a year, 75% of Schwab’s annual volume.
Schwab open a branch of ce in Sacramento and
To service this system, in the mid-1980s. Schwab invested
employ Uncle Bill’s son-in-law as manager!6
$20 million in four regional customer call centers, routing all
Reluctantly, Schwab agreed to Uncle Bill’s demand
calls to them rather than branches. Today, these call centers
for a show of nepotism, hoping that the branch have 4,000 employees.
would not be too much of a drain on the company’s
Schwab was the rst to establish a PC-based online trading business.
system in 1986, with the introduction of its Equalizer service.
What happened next was a surprise; there was
The system had 15,000 customers in 1987, and 30,000 by the
an immediate and dramatic increase in activity at
end of 1988. The online system, which required a PC with a
Schwab, most of it from Sacramento. Customer
modem, allowed investors to check current stock prices,
inquiries, the number of trades per day, and the
place orders, and check their portfolios. In addition, an “of
number of new accounts, all spiked upwards. Yet
ine” program for PCs enabled investors to do fundamental
there was also a puzzle here, for the increase was
and technical analysis on securities. To encourage customers
not linked to an increase in foot traf c in the branch.
to start using the system, there was no additional charge for
Intrigued, Schwab opened several more branches
using the online system after a $99 sign-up fee. In contrast,
over the next year, and each time noticed the same
other discount brokers with PC-based online systems, such
pattern. For example, when Schwab opened its rst
as Quick and Riley’s (which had a service known as “Quick
branch in Denver, it had 300 customers. It added
Way”), or Fidelity’s (whose service was called “Fidelity
another 1,700 new accounts in the months
Express”) charged users between 10 cents and 44 cents a
following the opening of the branch, and yet there
minute for online access depending on the time of day.7
was a big spike up in foot traf c at the Denver
Schwab’s pioneering move into online trading was in branch.
many ways just an evolution of the company’s early
utilization of technology. In 1979, Schwab spent $2 million, lOMoAR cPSD| 58097008 C-56 Case 4 Charles Schwab
an amount equivalent to the company’s entire net worth at
money in an account where it accumulates tax free
the time, to purchase a used IBM System 360 computer, plus
until withdrawal at retirement. The legislation
software, that was left over from CBS’s 1976 election
establishing IRAs had been passed by Congress in
coverage. At the time, brokerages generated and had to
1982. At the time, estimates suggested that IRA
process massive amounts of paper to execute buy and sell
accounts could attract as much as $50 billion in
orders. The computer gave Schwab a capability that no other
assets within 10 years. In actual fact, the gure turned
brokerage had at the time: take a buy or sell order that came out to be $725 billion.
in over the phone, edit it on a computer screen, and then
Initially, Schwab followed industry practice and
submit the order for processing without generating paper.
collected a small fee for each IRA. By 1986, the fees
Not only did the software provide for instant execution of
amounted to $9 million a year, not a trivial amount
orders, it also offered what were then sophisticated quality
for Schwab in those days. After looking at the issue,
controls, checking a customer’s account to see if funds were
Charles Schwab himself made the call to scrap the
available before executing a transaction. As a result of this
fee, commenting that “It’s a nuisance, and we’ll get
system, Schwab’s costs plummeted as it removed paper from
it back.”9 He was right; Schwab’s No-Annual Fee IRA
the system. Moreover, the cancel and rebill rate—a measure
immediately exceeded the company’s most
of the accuracy of trade executions—dropped from an optimistic projections.
average of 4 to 0.1%.8 Schwab soon found it could handle
Despite technological and product innovations,
twice the transaction volume of other brokers, at less cost,
by 1983, Schwab was strapped for capital to fund
and with much greater accuracy. With 2 years, every other
expansion. To raise funds, he sold the company to
broker in the nation had developed similar systems, but
Bank of America for $55 million in stock and a seat
Schwab’s early investment had given it an edge and
on the bank’s board of directors. The marriage did
underpinned the company’s belief in the value of technology
not last long. By 1987, the bank was reeling under
to reduce costs and empower customers.
loan losses, and the entrepreneurially minded
By 1982, the technology at Schwab was well ahead of
Schwab was frustrated by banking regulations that
that used by most full-service brokers. This commitment to
inhibited his desire to introduce new products.
technology allowed Schwab to offer a product that was
Using a mix of loans, his own money, and
similar in conception to Merrill Lynch’s revolutionary cash
contributions from other managers, friends, and
management account (CMA), which was introduced in 1980.
family, Schwab led a management buyout of the
The CMA account automatically sweeps idle cash into money
company for $324 million in cash and securities.
market funds and allows customers to draw on their money
On September 22, 1987, Schwab went public
by check or credit card. Schwab’s system, known as the
with an IPO that raised some $440 million, enabling
Schwab One Account, was introduced in 1982. It went
the company to pay down debt and leaving it with
beyond Merrill’s in that it allowed brokers to execute orders
capital to fund an aggressive expansion. At the time,
instantly through Schwab’s computer link to the exchange
Schwab had 1.6 million customers, revenues of $308 oor.
million, and a pre-tax pro t margin of 21%. Schwab
In 1984, Schwab moved into the mutual fund business,
announced plans to increase its branch network by
not by offering its own mutual funds, but by launching a
30% to around 120 of ces over the next year. Then,
mutual fund marketplace, which allowed customers to invest
on Monday, October 19, 1987, the U.S. stock market
in some 140 no-load mutual funds (a “no-load” fund has no
crashed, dropping over 22%, the greatest 1-day
sales commission). By 1990, the number of funds in the decline in history.
market place was 400 and the total assets involved exceeded
$2 billion. For the mutual fund companies, the marketplace
offered distribution to Schwab’s growing customer base. C4-3b October 1987–1995
For its part, Schwab kept a small portion of the
After a strong run up over the year, on Friday, October 16, the
revenue stream that owed to the fund companies
stock market dropped 4.6%. During the weekend, nervous from Schwab clients.
investors jammed the call centers and branch of ces, not just
In 1986, Schwab made a gutsy move to eliminate
at Schwab, but at many other brokerages, as they tried to
the fees for managing individual retirement
place sell orders. At Schwab, 99% of the orders taken over
accounts (IRAs). IRAs allow customers to deposit
the weekend for Monday morning were sell orders. As the lOMoAR cPSD| 58097008 Case 4 Charles Schwab C-57
market opened on Monday morning, it went into free fall. At
to give advice—which was the business of the advisors.
Schwab, the computers were overwhelmed by 8 a.m. The
Schwab immediately saw an opportunity here. Financial
toll-free number to the call centers was also totally
advisors, he reasoned, represented a powerful way to
overwhelmed. All customers got when they called were busy
acquire customers. In 1989, the company rolled out a
signals. When the dust had settled, Schwab announced that
program to aggressively court this group. Schwab hired a
it had lost $22 million in the fourth quarter of 1987, $15
marketing team to focus explicitly on nancial planners, set
million of which came from a single customer who had been
apart a dedicated trading desk for them, and gave discounts unable to meet margin calls.
of as much as 15% on commissions to nancial planners with
The loss, which amounted to 13% of the
signi cant assets under management at Schwab accounts.
company’s capital, effectively wiped out the
Schwab also established its Financial Advisors Service, which
company’s pro t for the year. Moreover, the inability
provided clients with a list of nancial planners who were
of customers to execute trades during the crash
willing to work solely for a fee, and who had no incentive to
damaged Schwab’s hard-earned reputation for
push the products of a particular client. At the same time, the
customer service. Schwab responded by posting a
company stated that it wasn’t endorsing the planners’
two-page ad in The Wall Street Journal on October
advice, which would run contrary to the company’s
28, 1987. On one page there was a message from
commitment to offer no advice. Within a year, nancial
Charles Schwab thanking customers for their
advisors had some $3 billion of client’s assets under
patience, on the other an ad thanking employees management at Schwab. for their dedication.
Schwab also continued to expand its branch network
In the aftermath of the October 1987 crash,
during this period, at a time while many brokerages, still
trading volume fell by 15% as customers, spooked
stunned by the October 1987 debacle, were retrenching.
by the volatility of the market, sat on cash balances.
Between 1987 and 1989, Schwab’s branch network increased
The slowdown prompted Schwab to cut back on its
by just 5, from 106 to 111, but in 1990 it opened an
expansion plans. Ironically, however, Schwab added
additional 29 branches, and another 28 in 1991.
a signi cant number of new accounts in the
By 1990, Schwab’s positioning in the industry had
aftermath of the crash as people looked for cheaper
become clear. Although a discounter, Schwab was by no ways to invest.10
means the lowest price discount broker in the country. Its
Beset by week trading volume through the next
average commission structure was similar to that of Fidelity,
18 months, and reluctant to lay off employees,
the Boston-based mutual fund company that had moved into
Schwab sought ways to boost activity. One strategy
the discount brokerage business, and Quick & Reilly, a major
started out as a compliance issue within Schwab. A
national competitor (see Exhibit 1). While signi cantly below
compliance of cer in the company noticed a
that of full-service brokers, the fee structure was also above
disturbing pattern. A number of people had given
that of deep-discount brokers. Schwab differentiated itself
other people limited power of attorney over their
from the deep-discount brokers, however, by its branch
accounts. This in itself was not unusual—for
network, technology, and the information (not advice) that it
example, the middle-aged children of an elderly gave to investors.
individual might have power of attorney over an
account—but the Schwab of cer noticed that some
individuals had power of attorney over dozens, if not hundreds, of accounts.
Further investigation turned up the reason.
Schwab had been serving an entirely unknown set
of customers, independent nancial advisors who
were managing the nancial assets of their clients
using Schwab accounts. In early 1989, some 500
nancial advisors managed assets totaling $1.5
billion at Schwab, about 8% of all assets at Schwab.
The advisors were attracted to Schwab for a number of
reasons, including cost and the company’s commitment not lOMoAR cPSD| 58097008 C-58 Case 4 Charles Schwab
In 1992, Schwab rolled out another strategy aimed at
customers’ names. Many fund managers did not like this,
acquiring assets—OneSource, the rst mutual fund
because it limited their ability to build a direct relationship
“supermarket.” OneSource was created to take advantage of
with customers, but they had little choice if they wanted
America’s growing appetite for mutual funds. By the early
access to Schwab’s customer base.
Average Commission Price on 20 Trades Averaging $8,975 Each Type of Broker Deep-Discount Brokers $ 54 Average Discounters $ 73 Banks $ 88
Schwab, Fidelity, and Quick & Reilly $ 92 Full-Service Brokers $ 206
Source: E. C. Gottschalk, “Schwab Forges Ahead as Other Brokers Hesitate,” The Wall Street Journal, May 11, 1990, p. C1.
1990s, there were more mutual funds than individual
OneSource quickly propelled Schwab to the
equities. On some days, Fidelity, the largest mutual fund
number three position in direct mutual fund
company, accounted for 10% of the trading volume on the
distribution, behind the fund companies Fidelity and
New York Stock Exchange. As American Baby Boomers aged,
Vanguard. By 1997, Schwab customers could choose
they seemed to have an insatiable appetite for mutual funds.
from nearly 1,400 funds offered by 200 different
But the process of buying and selling mutual funds had never
fund families, and Schwab customers had nearly $56
been easy. As Charles Schwab explained in 1996:
billion in assets invested through One Source.
“In the days before the supermarkets, to buy a mutual
fund you had to write or call the fund distributor. On Day Six,
you’d get a prospectus. On Day Seven or Eight you call up and C4-3c 1996–2000: eSchwab
they say you’ve got to put your money in. If you’re lucky, by
In 1994, as access to the Web began to diffuse
Day Ten you’ve bought it . . . It was even more cumbersome
rapidly throughout America, a 2-year-old start-up
when you redeemed. You had to send a notarized
run by Bill Porter, a physicist and inventor, launched redemption form.”11
its rst dedicated website for online trading. The
OneSource took the hassle out of owning funds. With a
company was E*Trade. E*Trade announced a at
single visit to a branch of ce, a telephone call, or a PC-based
$14.95 commission on stock trades, signi cantly
computer transaction, a Schwab client could buy and sell
below Schwab’s average commission, at the time
mutual funds. Schwab imposed no fee at all on investors for
$65. It was clear from the outset that E*Trade and
the service. Rather, in return for shelf space in Schwab’s
other online brokers such as Ameritrade offered a
distribution channel and access to the more than 2 million
direct threat to Schwab. Not only were their
accounts at Schwab, Schwab charged the fund companies a
commission rates considerably below those of
fee amounting to 0.35% of the assets under management. By
Schwab, but the ease, speed, and exibility of trading
inserting itself between the fund managers and customers,
stocks over the Web suddenly made Schwab’s
Schwab changed the balance of power in the mutual fund
proprietary online trading software, Street Smart,
industry. When Schwab sold a fund through One Source, it
seem limited. (Street Smart was the Windowsbased
passed along the assets to the fund managers, but not the
successor to Schwab’s DOSbased Equalizer lOMoAR cPSD| 58097008 Case 4 Charles Schwab C-59
program). To compound matters, talented people
personnel in Schwab to slow down or even derail
left Schwab for E*Trade and its brethren, which they
the web-based initiative. As Pottruck later put it:
saw as the wave of the future.
“The new enterprise was going to use a
At the time, deep within Schwab, William
different model for making money than our
Pearson, a young software specialist who had
traditional business, and we didn’t want the
worked on the development of Street Smart, quickly
comparisons to form the basis for a measurement
saw the transformational power of the Web and
of success or failure. For example, eSchwab’s per
believed that it would make proprietary systems like
trade revenue would be less than half that of the
Street Smart obsolete. Pearson believed that
mainstream of the company, and that could be seen
Schwab needed to develop its own web-based
as a drain on resources rather than a response to
software, and quickly. Try as he might, though,
what customer would be using in the future.”12
Pearson could not get the attention of his supervisor.
Pottruck and Schwab understood that unless eSchwab
He tried a number of other executives, but found
was placed in its own organization, isolated and protected
support hard to come by. Eventually, he approached
from the established business, it might never get off the
Anne Hennegar, a former Schwab manager that he
ground. They also knew that if they did not cannibalize their
knew who now worked as a consultant to the
own business with eSchwab, someone would do it for them.
company. Hennegar suggested that Pearson meet
Thus, they set up a separate organization to develop
with Tom Seip, an executive vice president at
eSchwab, headed by Beth Sawi, a highly regarded marketing
Schwab who known for his ability to think outside of
manager at Schwab who had very good relations with other
the box. Hennegar approached Seip on Pearson’s
managers in the company. Sawi set up the development
behalf, and Seip responded positively, asking her to
center in a unit physically separated from other Schwab
set up a meeting. Hennegar and Pearson turned up facilities.
expecting to meet just Seip, but to their surprise in
eSchwab was launched in May 1996, but without the
walked Charles Schwab, his COO, David Pottruck,
normal publicity that accompanied most new products at
and the vice presidents in charge of strategic
Schwab. Schwab abandoned its sliding scale commission for
planning and the electronic brokerage arena.
a at rate commission of $39 (which was quickly dropped to
As the group watched Pearson’s demo of how a
$29.95) for any stock trade up to 1,000 shares. Within 2
web-based system would look and work, they
weeks 25,000 people had opened eSchwab accounts. By the
became increasingly excited. It was clear to those in
end of 1997, the gure would soar to 1.2 million, bringing in
the room that a web-based system based on real
assets of about $81 billion, 10 times the assets of E*Trade.
time information, personalization, customization,
Schwab initially kept the two businesses segmented. and interactivity all advanced Schwab’s
Schwab’s traditional customers were still paying an average
commitment to empowering customers. By the end
of $65 per trade while eSchwab customers were paying
of the meeting, Pearson had received a green light
$29.95. While Schwab’s traditional customers could make to start work on the project.
toll-free calls to Schwab brokers, eSchwab clients could not.
It soon transpired that several other groups within
Moreover, Schwab’s regular customers couldn’t access
Schwab had been working on projects similar to
eSchwab at all. The segmentation soon gave rise to
Pearson’s. These were all pulled together under the
problems. Schwab’s branch employees were placed in the
control of Dawn Lepore, Schwab’s chief information
uncomfortable position of telling customers that they
of cer, who headed up the effort to develop the
couldn’t set up eSchwab accounts. Some eSchwab customers
webbased service that would ultimately become
started to set up traditional Schwab accounts with small
eSchwab. Meanwhile, signi cant strategic issues
sums of money so that they could access Schwab’s brokers
were now beginning to preoccupy Schwab and
and information services, while continuing to trade via
Pottruck. They realized that Schwab’s established
eSchwab. Clearly the segmentation was not sustainable.
brokerage and a webbased brokerage business
Schwab analyzed the situation. The company’s leaders
were based on very different revenue and cost
realized that the cleanest way to deal with the problem
models. The web-based business would probably
would be to give every Schwab customer online access,
cannibalize business from Schwab’s established
adopt a commission of $29.95 on trading across all channels,
brokerage operations, and that might lead
and maintain existing levels of customer service at the lOMoAR cPSD| 58097008 C-60 Case 4 Charles Schwab
branch level, and on the phone. However, internal estimates
Schwab implemented the change of strategy on January
suggested that the cut in commission rates would reduce
15, 1998. Revenues dropped 3% in the rst quarter as the
revenues by $125 million, which would hit Schwab’s stock.
average commission declined from $63 to $57. Earnings also
The problem was compounded by two factors. First,
came in short of expectations by some $6 million. The
employees owned 40% of Schwab stock, so they would be
company’s stock had lost 20% of its value by August 1998.
hurt by any fall in stock price; second, employees were
However, over much of 1998 new money poured in. Total
worried that going to the Web would result in a decline in
accounts surged, with Schwab gaining a million new
business at the branch level, and hence a loss of jobs there.
customers in 1998—a 20% increase—while assets grew by
An internal debate ranged within the company for much
32%. As the year progressed, trading volume grew, doubling
of 1997, when Schwab’s revenues surged 24% to $2.3 billion.
by year end. By the third quarter, Schwab’s revenues and
The online trading business grew by more than 90% during
earnings were surging past analysts’ expectations. The
the year, with online trades accounting for 37% of all Schwab
company ultimately achieved record revenues and earnings
trades during 1997, and the trend was up throughout the
in 1998. Net income ended up 29% over the prior year, year.
despite falling commission rates, aided by surging trading
Looking at these gures, Pottruck, the COO, knew that
volume and the lower cost of executing trades over the Web.
Schwab had to bite the bullet and give all Schwab customers
By year-end, 61% of all trades at Schwab were made over the
access to eSchwab (Pottruck was now running the day-to-day
Web. After its summer lows, the stock price recovered,
operations of Schwab, leaving Charles Schwab to focus on his
ending the year up 130% and pushing Schwab’s market
corporate marketing and PR role). His rst task was to enroll
capitalization past that of Merrill Lynch.14
the support of the company’s largest shareholder, Charles
Schwab. With 52 million shares, Schwab would take the
biggest hit from any share price decline. According to a
C4-3d 2000–2004: After the Boom
Fortune article, the conversation between Schwab and
In 1998, Charles Schwab appointed his long-time
Pottruck went something like this:13
number two, David Pottruck, co-CEO. The
appointment signaled the beginning of a leadership
Pottruck: “We don’t know exactly what will happen. The
transition, with Schwab easing himself out of day-to-
budget is shaky. We’ll be winging it.” Schwab: “We can
day operations. Soon Pottruck had to deal with some always adjust our costs.”
major issues. The end of the long stock market boom
Pottruck: “Yes, but we don’t have to do this now. The whole
of the 1990s hit Schwab hard. The average number
year could be lousy. And the stock!”
of trades made per day through Schwab fell from
Schwab: “This isn’t that hard a decision, because we really
300 million to 190 million between 2000 and 2002.
have no choice. It’s just a question of when, and it will be
Re ecting this, revenues slumped from $7.1 billion to harder later.”
$4.14 billion and net income from $803 million to
$109 million. To cope with the decline, Schwab was
Having got Schwab’s founder to agree, Pottruck formed a
forced to cut back on its employee headcount, which
task force to look at how best to implement the decision. The
fell from a peak of nearly 26,000 employees in 2000
plan that emerged was to merge all the company’s electronic
to just over 16,000 in late 2003.
services into Schwab.com, which would then coordinate
Schwab’s strategic reaction to the sea change in
Schwab’s online and off-line business. The base commission
market conditions was already taking form as the
rate would be $29.95, whatever channel was used to make a
market implosion began. In January 2000, Schwab
trade— online, branch, or telephone. The role of the
acquired U.S. Trust for $2.7 billion. U.S. Trust, a 149-
branches would change as they started to focus more on
year-old investment advisement business, managed
customer support. This required a change in incentive
money for high-net-worth individuals whose
systems. Branch employees had been paid bonuses on the
invested assets exceed $2 million. When acquired,
basis of the assets they accrued to their branches, but now
U.S. Trust had 7,000 customers and assets of $84
they would be paid bonuses on assets that came in via the
billion, compared to 6.4 million customers and
branch or the Web. They would be rewarded for directing
assets of $725 billion at Schwab.15 clients to the Web. lOMoAR cPSD| 58097008 Case 4 Charles Schwab C-61
According to Pottruck, widely regarded as the
but objectivity, not in uenced by corporate
architect of the acquisition, Schwab made the
relationships, investment banking, or any of the
acquisition because it discovered that high net above.”17
worth individuals were starting to defect from
Critics of this strategy were quick to point out
Schwab for money managers like U.S. Trust. The
that many of Schwab’s branch employees lacked
main reason: As Schwab’s clients grew older and
the qualications and expertise to give nancial
richer, they needed institutions that specialized in
advice. At the time the service was announced,
services that Schwab didn’t offer—including
Schwab had some 150 quali ed nancial advisers in
personal trusts, estate planning, tax services, and
place, and planned to have 300 by early 2003.
private banking. With baby boomers starting to
These elite employees required a higher salary than
enter middle to late middle age, and their average
the traditional Schwab branch employees, who in
net worth projected to rise, Schwab decided it
many respects were little more than order takers
needed to get into this business or lose high-net-
and providers of prepackaged information. worth clients.
The Schwab Private Client service caused further
The decision, though, began to bring Schwab
grumbling among the private nancial advisors af liated with
into con ict with the network of 6,000 or so
Schwab. In 2002, there were 5,900 of these. In total their
independent nancial advisors that the company had
clients amounted to $222 billion of Schwab’s $765 billion in
long fostered through the Schwab Advisers
client assets. Several stated that they would no longer keep
Network, and who funneled customers and assets
clients’ money at Schwab. However, Schwab stated that it
into Schwab accounts. Some advisors felt that
would use the Private Client Service as a device for referring
Schwab was starting to move in on their turf, and
people who wanted more sophisticated advice than Schwab
they were not too happy about it.
could offer to its network of registered nancial advisers, and
In May 2002, Schwab made another move in
particularly an inner circle of 330 advisers who have an
this direction when it announced that it would
average of $500 million in assets under management and 17
launch a new service targeted at clients with more
years of experience.18 According to one member of this
than $500,000 in assets. Known as Schwab Private
group, “Schwab is not a threat to us. Most people realize the
Client, and developed with the help of U.S. Trust
hand holding it takes to do that kind of work and Schwab
employees, for a fee of 0.6% of assets Private Client
wants us to do it. There’s just more money behind the
customers could meet face to face with a nancial
Schwab Advisors Network. The dead wood is gone, and rms
consultant to work out an investment plan and
like ours stand to bene t from even more additional leads.”19
return to the same consultant for further advice.
In 2003, Schwab stepped down as co-CEO, leaving
Schwab stressed that the consultant would not tell
Pottruck in charge of the business but staying on as
clients what to buy and sell—that was still left to the
chairman). In late 2003, Pottruck announced that Schwab
client. Nor would clients get the legal, tax and estate
would acquire Soundview Technology Group for $321
planning advice offered by U.S. Trust and
million. Soundview was a boutique investment bank with a
independent nancial advisors. Rather, they got a
research arm that covered a couple of hundred companies
nancial plan and consultation regarding industry
and offered this research to institutional investors such as and market conditions.16
mutual fund managers. Pottruck justi ed the acquisition by
To add power to this strategy, Schwab
arguing that it would have taken Schwab years to build
announced that it would start a new stock rating
similar investment research capabilities internally. His plan
system. It would be not the work of nancial analysts
was the have Soundview’s research bundles for Schwab’s
but rather the product of a computer model, retail investors.
developed at Schwab, to analyze more than 3,000
stocks on 24 basic measures such as free cash ow,
sales growth, insider trades, and so on, and then
assigns grades. The top 10% get an A, the next 20%
a B, the middle 40% a C, the next 20% a D, and the
lowest 10% an F. Schwab claimed that the new
system was “a systematic approach with nothing lOMoAR cPSD| 58097008 C-62 Case 4 Charles Schwab
C4-3e 2 004–2008: The Return of
C4-3f The Great Financial Crisis and Charles Schwab Its Aftermath
The Soundview acquisition proved to be Pottruck’s undoing.
The great nancial crisis that hit the nancial services industry
It soon became apparent that it was a huge mistake. There
in 2008–2009 had its roots in a bubble in housing prices in
was little value to be had for Schwab’s retail business from
the United States. Financial service rms had been bundling
Soundview. Moreover, the move had raised Schwab’s
thousands of home mortgages together into bonds, and
operating costs. By mid-2004, Pottruck was trying to sell
selling them to investors worldwide. The purchasers of those
Soundview. The board, disturbed by Pottruck’s vacillating
bonds thought that they were buying a solid nancial asset
strategic leadership, expressed their concerns to Charles
with a guaranteed payout—but it turned out that the quality
Schwab. On July 15, 2004, Pottruck was red, and 66-year-old
of many of the bonds was much lower than indicated by
Charles Schwab returned as CEO.
bond-rating agencies such as Standard & Poor’s. Put
He moved quickly to refocus the company. Sound view
differently, there was an unexpectedly high rate of default on
was sold to the investment bank UBS for $265 million.
home mortgages in the United States.
Schwab reduced the workforce by another 2,400 employees,
At the top of the housing bubble, many people
closed underperforming branches, and removed $600
were paying more than they could afford to for
million in annual cost. This allowed him to reduce
homes. Banks were only too happy to lend them
commissions on stock trades by 45%, and take market share
money because they assumed, incorrectly as it
from other discount brokers such as Ameritrade and E*Trade.
turned out, that if the borrower faced default, the
Going forward, Schwab reemphasized the rm’s traditional
home could be sold for a pro t and the balance on
mission—to empower investors and provide them with
the mortgage paid off. The aw in this reasoning was
ethical nancial services. He also reemphasized the
the assumption that the underlying asset—the
importance of the relationships that Schwab had with
house—could be sold, and that home pricing would
independent investment advisors. He noted: “Trading has
continue to advance. There had been massive
become commoditized. The future is really about competing
overbuilding in the United States. By 2007, home
for client relationships.”20 One major new focus was the
prices were falling as it became apparent that there
company’s retail banking business. Established in 2002, it had
was too much excess inventory in the system. The
been a low priority for Pottruck. Now Schwab wanted to
net result: many supposedly high-quality mortgage-
make the company a single source for banking, brokerage,
backed bonds turned out to be nothing more than
and credit card services—one that would give Schwab’s
junk, and prices for these bonds fell precipitously.
customers something of value: a personal relationship they
Institutions holding these bonds had to write down
could trust. The goal was to lessen Schwab’s dependence on
their value, and their balance sheets started to
trading income, and give it a more reliable earnings stream
deteriorate rapidly. As this occurred, other nancial
and a deeper relationship with clients.
institutions became increasingly reluctant to lend
In mid-2007, Schwab’s reorientation back to its tradi
money to those institutions seen as being
tional mission reached a logical conclusion when U.S. Trust
overexposed to the housing market. Suddenly, the
was sold to Bank of America for $3.3 billion. Unlike in the
banking system was facing a major credit crunch.
past, however, Schwab was no longer earning the bulk of its
As the crisis unfolded, several major nancial
money from trading commissions. As a percentage of net
institutions went bankrupt, including Lehman
revenues, trading revenues (mostly commissions on stock
Brothers (a major player in the market for mortgage-
trades) were down from 36% in 2002 to 17% in 2007. By
backed securities) and Washington Mutual (one of
2007, asset management fees accounted for 47% of Schwab’s
the nation’s largest mortgage originators). AIG, a
net revenue—up from 41% in 2002—while net interest
major insurance company which had built a big
revenue (the difference between earned interest on assets
business in the 2000s selling default insurance to the
such as loans and interest paid on deposits) was 33%, up
holders of mortgage-backed securities, faced
from 19% in 2002.21 Schwab’s overall performance had also
massive potential claims and had to be rescued from
improved markedly. Net income in 2007 was $1.12 billion, up
bankruptcy by the U.S. government, which took an
from a low of $396 million in 2003.
80% stake in AIG in return for providing loans worth
$182 billion. The government also created a $700- lOMoAR cPSD| 58097008 Case 4 Charles Schwab C-63
billion fund—the Troubled Asset Relief Program—
by 2011 as more and more customers transacted
that banks could draw upon the shore up their
online with the company. Despite this decline,
balance sheets and meet short-term obligations.
Schwab has concluded that a physical retail
While these actions managed to arrest the most
presence remains a powerful means of gathering in
serious crisis to hit the global nancial system since
new accounts and holding onto existing accounts.
the Great Depression of 1929, they could not stave
Rather than open more storefronts, however, which
off a severe, prolonged recession and a major
entails signi cant costs, the company has opted for
decline of the market value of most nancial
a different strategy; it has decided to open institutions.
additional retail branches using independent
Almost alone among major nancial institutions,
operators in what amounts to a franchise system.
Schwab sailed through the nancial crisis with
The ultimate goal is to triple the branch network to
relative ease. The rm had steered well clear of the
around 1,000. Detractors worry that Schwab risks
feeding frenzy in the U.S. housing and mortgage
diluting its powerful brand if the independent
markets. Schwab did not originate mortgages, and
operators do not offer the same level of service that
nor did it hold mortgage-backed securities on its
people have become accustomed to at traditional
balance sheet. Schwab had no need to draw on
Schwab branches. For its part, Schwab executives
government funds to shore up its balance sheet.
have stated that it is their intention that a client
The company remained pro table, and although
walking into an independently owned Schwab
revenues and earnings did fall from 2007 to 2009,
branch will not know the difference and would get
the balance sheet remained strong.
the same service and products as at company-
By 2010, Schwab was once more on a growth owned branches.22
path, although extremely low interest rates in the
Second, Schwab has made a big push into the exchange
United States and elsewhere limited its ability to
traded fund business (EFTs). EFTs are passively managed
earn money from the spread between what it paid
index funds, such as an S&P 500 index fund. EFTs have grown
to depositors and the amount it could earn by
into a $4 trillion-dollar industry since the rst EFT was
investing depositors’ money on the short-term
introduced 25 years ago. EFTs are attractive because they
money markets. Some 40% of Schwab’s revenues
trade like stocks on a regulated exchange while providing
are tied to interest rates, and as long as interest
diversity within a single investment product. Since EFTs are
rates remain very low, Schwab’s ability to earn pro t
passively managed, expense ratios are typically lower than
here is limited. On the other hand, earnings could
those for actively managed mutual funds. Schwab started to
expand signi cantly if rates return to pre-crisis
offer EFTs in the 2000s, and in 2013 it announced the launch levels.
of Schwab EFT OneSource trading platform. Modeled on
Charles Schwab stepped down as CEO on July
Schwab’s successful mutual fund market place, this provides
22, 2008, passing the reins of leadership to Walter
access to more than 200 EFTs and offers $0 online trade
Bettinger, although Schwab continues to be
commissions. Schwab will make money from charging fund
involved in major strategic decisions as an active
distribution fees, as it does with mutual funds.
chairman. Under Bettinger, the company has
charted a conservative course. The main goal has
been to grow the net asset base of the rm by
attracting more clients. The stellar performance of C4-4 CONCLUSION
Schwab though the nancial crisis, and its continuing
strong brand, has certainly helped in this regard.
As of 2018, Schwab seemed to be ring on all cylinders. During
From 2008 to 2016, Schwab has generated 5 to 8%
2017, the company increased its assets under management
annual growth in its asset base. To keep doing so
by $199 billion, to $3.4 trillion. The total client assets under
going forward, the company has launched couple of
management had doubled in just 6 years. Some 1.4 million other initiatives.
new accounts were opened at Schwab in 2017, the highest
First, in 2011, it announced a plan to expand its
number in 17 years. Schwab was pro table, boasted one of
physical retail presence. Schwab’s branches had
the lowest cost structures in the industry, and was gaining
declined in number from 400 in 2003 to around 300
market share from competitors. Twice as many assets were lOMoAR cPSD| 58097008 C-64 Case 4 Charles Schwab
transferred in from rivals during 2017 as were transferred
The top-line goal was to continue to grow the business by out.
offering low costs, excellent customer service, and a wide
range of investment options. The company articulated ve principles to guide its lOMoAR cPSD| 58097008 Case 4 Charles Schwab C-65 September 27, 1988, p. 1.
Reinvented the Brokerage Industry.
pansion, Tighten Belt Because of Post Technology, pp. 19–20. Fortune pp. 52–59.
Reinvented the Brokerage Industry,
Reinvented the Brokerage Industry, Fortune