BIOGRAPHY:

Charles Schwab, founder and chief executive of Charles Schwab & Co., is said to have brought the stock market to the masses.

When considering the activities of various companies, we inevitably talk about their position on the stock exchange. In such cases, the stock exchange looks like a self-evident background created to support the life of firms. So today is the story of a stockbroker and what it costs him to create this very environment for enterprise. Charles Schwab, founder and CEO of Charles Schwab & Co., is said to have brought the stock exchange to the masses.

It is unknown whether Schwab has been planning a repeated “image change” for his company since its early days, or whether his passion for change has only awakened in recent years, but the skill with which he carries out these metamorphoses explains the reason why his brokerage firm was named Forbes magazine “Company of the Year”. Charles Schwab (left) and David Pottruck were very warm to all sorts of technical innovations from the very beginning. Today, Charles Schwab Corporation, which began as an ordinary discount broker*, provides a wide range of financial services to private investors, independent investment managers and other institutions. Through its broker-dealers, the company serves approximately 6 million active customer accounts in both the United States and several other countries. It has a network of more than 300 representative offices, offices, call centers, automated telephone systems and Internet structures.

Solidity and efficiency:

Four years after graduating from Stanford University, Schwab and his two partners published a newspaper called Investment Indicator, dedicated to investment issues. Its subscription cost $84 per year. In 1971, Schwab borrowed $100,000 from his uncle to launch his first brokerage firm, First Commander Corp.

Three years later, when the US Securities and Exchange Commission announced a pilot period to change brokerage rules, Schwab took the opportunity to offer his services as a discount broker. In 1974, he hoped to capitalize on investor disillusionment with full-service firms such as Merrill Lynch, Smith Barney and PaineWebber. After all, his company charged lower fees for bidding, and Schwab brokers received salaries and bonuses – so everyone was happy and there were no grounds for conflict of interests.

In the 1980s, Schwab made a number of real breakthroughs: the creation of the mutual fund supermarket OneSource, which made mutual funds that charge no commission for selling shares to investors accessible to the masses; for the first time in the industry, provided the ability to place orders and receive quotes every day, around the clock; began to conduct seminars and publish publications teaching people basic stock exchange operations; conducted a marketing campaign to promote independent investment management.

Best of the day:

From its earliest days, the company was an avid proponent of the use of information technology. In 1979, Schwab spent more than 500 thousand dollars to establish the information processing process. In 1984, the company could trade online using software called Equalizer (later Windows-based StreetSmart), even though there were still few customers interested in electronic trading. In 1986, Schwabline debuted – a terminal for downloading the necessary market information and printing it out.

In 1995, Charles Schwab once expressed confidence that brokerages would soon move to the Internet. That same year, company co-founder David Pottruck came across data that the number of PCs sold in the United States exceeded the number of televisions sold. Pottruck concluded that computer-assisted trading had the potential to become a key business. David bought a PC for all of Schwab’s vice presidents and taught himself how to type so he could use the company’s email system. He took on the username Electric.Dave and became known for occasionally sending mass messages of encouragement to employees. The attack on the Network has begun. Schwab’s company did not waste any time and went online earlier than most of its competitors, which made it stand out from everyone else.

Path of formation:

The first chapter of Schwab’s entry into the world of e-commerce was written in late 1995. Then the company’s CIO, Dawn Lepore, received several letters from one of the research groups subordinate to her. Scientists suggested that she familiarize herself with an experimental version of communication software for Schwab computer systems.

Lepore made an appointment with the engineers and came to it immediately along with Charles Schwab. For the show, the developers chose a very simple application for carrying out exchange trading on the Internet. After demonstrating the technology, all scientists were included in the team to develop software for online trading. The group’s work was kept secret from the firm’s competitors; gradually it grew to 30 people and was separated into an independent division – e.Schwab. In mid-1996, the e.Schwab system was fully prepared for operation. Its launch was not widely publicized: it was publicly announced only at the company’s annual meeting of shareholders.

Despite this “English arrival”, the new service was instantly recognized as a success. In the first 2 weeks, 10 thousand accounts were opened within the framework of the project – this was the company’s annual plan! By the end of 1997, the number of all accounts – e.Schwab and regular Schwab – had grown to 1.2 million. Online assets increased 94% to $81 billion, about 10 times that of rival E-Trade. Schwab management was preparing to celebrate the victory.

However, the clients did not show the same wild joy. They had their own demands: remove e.Schwab (since managing an account in this system was not easy: one free call per month and further communication by email), cancel the double payment system (transaction costs on e.Schwab and on Schwab are different) , introducing a single tariff of $29.95 per transaction.

Since transaction fees accounted for nearly half of Schwab’s revenue, the move to a single, low-cost transaction cost would cut Schwab’s annual revenue by $125 million. And in general it was difficult to predict the consequences of this step for the well-being of the company. But Schwab and Pottruck had no choice, and they decided to take this step.

As a result, on January 15, 1998, Schwab was ready to face a “bright future.” And although the radical measures taken by the company at first, as expected, led to a decrease in income and a drop in the company’s stock price, by the fourth quarter of the same year the situation had returned to normal and income began to increase again.

In August 1999, the volume of assets in client accounts at Schwab exceeded a trillion dollars.

Schwab veterans could not understand why, against the backdrop of the long-awaited growth in the company’s income indicators, its management refused to advertise or in any way focus on reducing the cost of services – to $ 29.95 per transaction. In fact, during this time, Charles Schwab realized that the Internet was most effective and attractive for business due to its wide capabilities in the provision of services. Yes, price is of great importance for active traders who were among the first to use the Network for trading. But in the heart of the market, where Schwab makes his money, the key concepts are not speed, low cost and originality, but simplicity, reliability and, especially, information content.

Movement to the masses at a new stage:

In the mid-1990s, the Internet still seemed like a novelty to many. So when Schwab launched the company’s first website and began providing online brokerage services in 1995, it seemed like a fool’s errand. But today it is already known that it completely justified itself. Between 1996 and 1998, the number of Schwab accounts increased from 600,000 to 2.2 million, and online assets grew from $42 billion to $174 billion.

On January 10 of this year, Schwab entered into a partnership agreement with another experienced player – Steve Case, CEO of America Online. The companies signed a long-term agreement under which Schwab will provide its content and services through AOL. And while the brokerage firm’s client base isn’t exactly small—Schwab today boasts 7.4 million accounts and $961 billion in client assets—the deal allows it to extend its services to AOL’s 25 million users.

What happened in the kingdom:

It is clear that, having carried out complete internal restructuring twice, Schwab was able to decide on further changes. In its early days, Schwab was a pure discount broker. Seventeen years later, the firm was more of an asset gatherer thanks to its successful OneSourse project, which lured mutual fund investors to work for Schwab.

In the “third phase” Schwab becomes an Internet company. Started just 5 years ago. Today, 85% of trades take place online; in other words, approximately one in five online trades in the industry are done on Schwab. Despite the youth of its online business, the company survived the dot-com crash of 2000. At the time, E-Trade shares were down 75% from the firm’s high, while Schwab was down just 37%.

In Phase 4, Schwab is becoming more of a full-service brokerage than ever before. Last year’s deal with U.S. Trust and several other recent moves paved the way for the company to move into the business of providing advisory and other services, a notable departure for a firm that has long sought to distance itself from the “infamy of the stock market.”

David Pottruck, who shares the title of chief executive with Charles Schwab, confidently argues for the need for the company’s ongoing changes. As Schwab’s clients become increasingly wealthy, doing business becomes more difficult. Consequently, clients begin to feel the need for help and advice. If the company doesn’t help them, they will find another one.

In fairness, it should be noted that David Pottruck is not inferior to Charles Schwab in character: he is active, assertive and active, he knows how to realize the most ambitious ideas of “Chuck”. At least Pottruck is no less famous on Wall Street. Having worked in the financial services industry for nearly 30 years, Pottruck is Charles Schwab’s right-hand man on day-to-day matters. He even looks like a man born for big battles: the physique of a fighter, a broken nose – the consequences of studying in the mathematics department at the University of Pennsylvania. But in Pottruck’s case, appearances are certainly deceiving: this man talks about management strategy at the level of a highly qualified specialist and speaks with a soulfully soft voice.

Why is Schwab rebuilding his farm, which in all respects can be considered an ideal machine for making a profit? Today, Schwab’s retail assets total a trillion dollars—three times what it was five years ago! At least before the latest market upheaval, his company dealt with $500 million in new assets each day and opened about 6,000 new accounts. Salomon Smith Barney, a leading investment marketer, estimates that Schwab’s net income for 2000 was $758 million, with annual net income of $5.9 billion.

The shareholders were generously rewarded. After a difficult moment in 1987, when the threat of missing out on $15 million in margin from a speculator in Hong Kong loomed, potentially costing the company its business position, Schwab shares rose 22,000%. Tough and purposeful Charles Schwab achieved the receipt of all his money, which threatened to disappear forever. His 20 percent stake in Schwab is now valued at $7.5 billion.

Treason? Change for the good:

When deciding to include consulting in the list of its services, the company enters a critical situation. Over the years, Schwab has emphasized that his brokers work for a salary, not a commission, and do not try to sell clients any additional services. Anyone who tried to break this rule would be fired. Now Schwab and Pottruck are promoting a different theory. They want to rely on guaranteed sources of income for their business, such as money management fees, rather than possible profits from various manipulations of client money. The desire for this prompted the decision to purchase U.S. Trust (at the time of the transaction, David Pottruck himself was a client of U.S.Trust), as well as to begin conducting trust and estate planning examinations. The new services take Schwab into another market: wealth management.

Now it is clear what suddenly bothered Charles Schwab. As Schwab clients get older and wealthier, they want someone to plan how to manage their wealth and provide personalized banking services. Schwab couldn’t do this and, as a result, lost many of its wealthiest clients and significant profits with them. It should be noted that the deal between the companies was concluded at the right time: in the next four years, the number of Americans whose personal capital ranges from $1 to $5 million is expected to increase by 40%.

Back in the early 1990s, Schwab did not advise its clients at all. For answers to any question about stocks, Schwab employees referred clients to advertisements in Standard & Poor, which could be cut out and sent to the firm as an order, or to stock quotes in the Morning Star. Then in 1993, Schwab took the first step with the release of the “Mutual Fund Select List,” a summary of 75 funds recommended by Schwab. The summary was compiled based on the fund’s risk, expense and strategy data.

If clients needed further assistance, Schwab referred them to its 425 community of investment advisors. These advisors were independent financial planners who passed Schwab’s impartiality test and agreed to pay Schwab a set “fee” for clients. It is clear that Schwab, in general, shared money that it could have received itself.

Change came last year when Schwab introduced portfolio consulting across all of its businesses. For $400, investors can get expert analysis of their portfolio from a broker who offers advice on buying or selling stocks and funds. Most recently, a new “signature” service was introduced for accounts of at least $1 million. Users of this service receive everything from research reports to access to dedicated brokers.

In an effort to provide clients with a full range of brokerage services, Schwab wants to differentiate itself from rivals such as Marrill Lynch and Morgan Stanley in the scale of its operations. In addition, Pottruck said that if “all firms provide similar services for 2% of assets under management, then Schwab should do it for 1%.”

Having achieved success in the United States, Charles Schwab is working to adequately represent his interests in Europe and Asia. True, one difficulty awaits Schwab in Europe. As interest in the individual investment market increases, Schwab is finding numerous competitors in European banks that have moved aggressively into online services.

A real treat for technology:

It was already mentioned above that Schwab always sought to automate the work process as much as possible. Thanks to his efforts, the company began to use Internet technologies quite early, as well as use wireless devices, etc. for trading.

His many years of “boring” have borne fruit. Schwab receives up to 600,000 calls every day from customers demanding answers to questions about trading, forgot passwords, etc. But only about 100,000 of these are processed by humans at a cost of $11 each, while automated calls and connections over the Web cost a few cents . Schwab spends 42% of its net income on compensation and bonuses, while Merrill Lynch spends about 55%, according to analyst Guy Motzkowski of Salomon Smoth Barney.

By automating bidding and day-to-day tasks, Schwab wants to put technology to work for advisory services. Since an adviser spends about 60% of his time working with a client collecting and collating information about his accounts, Schwab believes it is necessary to make work easier in this area. He plans to install tools on the Web that, after entering certain data, will allow clients to carry out all the routine work of collecting information themselves and turn to an adviser for a conclusion.

Schwab’s website directs visitors to the company’s “ground” offices for personalized advice, while web studios teach clients how to work online. According to one of the company’s employees, wherever Schwab opens a new office, web traffic from that area increases sharply. The secret is the seamless connection the company has created between its Park Avenue offices and its virtual channels.

A spoon of tar:

Already during the preparation of the issue, news about Charles Schwab & Co became known: the company asked some of its employees to take unpaid days off on Fridays in the next two months. Thus, some of the company’s 26 thousand employees will not come to work on February 2, 16 and March 2. These actions are an attempt to reduce the company’s costs, and at the same time prevent a full-scale staff reduction.

The need to significantly reduce costs is dictated by high competition in this business area. To some extent, this action is a response to the announcement of Ameritrade, Charles Schwab’s strongest competitor, to cut 9% of its workforce. In addition, earlier this month Charles Schwab reported a 27 percent drop in profit compared to its forecast estimate.