Ba401 Case 2 15 Charles Schwab Corporation

Case II-15CHARLES SCHWAB

Company Background

• 3 Primary Business Segments• Investor Services• Advisor Services• Corporate and Retirement Services

• Headquartered in San Francisco, California, USA• 306 Branch offices in United States, operations in 45 states. 19 offices and our automated telephone system provide Chinese, Korean, Spanish and Vietnamese language services.• 12,200 Full-time employees• 6.8 million client brokerage accounts, 1.1 million corporate retirement plan, 154,000 banking accounts and 1.3 trillion in client assets• One of the world’s largest discount brokerage firm

Timeline

3000

4000

5000

6000 Charles Schwab Revenue ($ million)• Dot-com bubble

• Boom in trading volume• Trade can placed by online

or by phone• Acquire U.S. Trust and

CyberCorp

• Chuck Schwab Reinstatement as CEO

• Refocus on what clients need• Launch Charles Schwab Bank

• Trouble Times for enterprises• Fined by U.S Federals• Market Downturn

• Changes in Retail Group• Reduce numbers of

RIAs in the network • Launch “Talk To Chuck”

Campaign

The Reinstatement of Chuck

In 2004, There is milestones for Charles Schwab Corporation that Charles “Chuck” Schwab, the founder is replace the former CEO, David Pottruck in July 2004. After that he was immediately determined to fix the problems and refocus the company.

Market Storm & Market Bust

• The late of 1990s Schwab get the tremendous growth in Trade Volume and grew to eclipse leader in this market, Merrill Lynch in 1998

• Business in Schwab exploded. Commission trades were up 90% in Q1 2000 from the year prior

• The company seemed to lose the focus on customers, one of strategy that made the company success. During increase in trade volume that caused service levels at Schwab to plummet. Customer can’t or delay to reach telephone reps and in some cases trade failing to execute due to computer glitches


• According to program “Market Storm”, which the company added 2,000 service reps to the 7,000 and a new call center, its 5th in Austin, Texas.

• The market downturn is come in 2000 and hit the company hard. By the August 2001, the firm’s commission trading revenue had 50% drop from 242,000 trades a day in 2000 to 134,000 trades a days in 2002 and continue falling to 101,500 in 2003.

1995 1996 1997 1998 1999 2000 2001 2002 20030

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Change in Volume Trading

Boom in trading volume that arrived and quickly ended in

2000 Commission trading revenue

dropped about 50%

Trading volumeaverage per day


• Another problem that Schwab was face is company’s workforce. Schwab was famous for long-tenured employees and often rated as one of the best companies to work for, undertook several round of layoffs. Finally, shed half of its workforce.

• By 2006, Schwab had workforce around 14,000, half the size it had grown to by early 2000 and close to its size in the mid 1990s

• Change in source of revenue at Charles SchwabIn 2000, 50% of Schwab’s revenue came from trading activity, and 27% came from asset-based fees, for example by keeping custody of mutual fund balances.In 2002, Schwab started to squeeze its less wealthy clients by raising fees and transaction charges on smaller-sized accounts. That caused some customers to defect to discount brokerages such as Ameritrade, E*Trade and TD Waterhouse


• After 2002 Trading revenue was declined because Schwab raised fees and growth of competition

Ameritrade + TD Waterhouse = TD AmeritradeE*Trade acquire 2 companies, Harrisdirect and Brown Co.

• About 2004 Charles Schwab did an about-face to compete with stronger competition by cutting trading fees on average

Schwab’s trading fees in line with those charged by discount brokers like Ameritrade and E*TradeHowever ratio of trading commission revenue to net company revenue continued dropping.


• U.S. Trust (1999-2006)In January 2000, Schwab acquire U.S. Trust for $2.8 billion. Schwab and U.S. Trust had a combined 1999 net revenue of $4.5 billion and combined client assets totaling $950 billion, as of early 200024 offices of U.S. Trust were luxurious and hushed, catering to the asset management to fewer than 10,000 extremely wealthy clients.That’s different to Schwab’s hundreds of storefront offices and 4 call centers served the quotidian investment needs of company’s millions of middle-class customers

Challenge With Acquisitions

Challenges With Acquisitions

• U.S. Trust (1999-2006)Charles Schwab hoped to use U.S. Trust’s technological expertise such as IT assets to developed their financial research and administrative trustee serviceIn 2001, U.S. Trust put small dent to Schwab’s long established reputation for probity after $10 million fined by U.S. regulatorAfter that, there had been some upheavals at the top of U.S. Trust as several senior managers and two CEOs came and went in quick succession.Charles Schwab sold U.S. Trust to Bank of America in November 2006

• CyberCorp and CyberTraderCyberCorp and its subsidiary CyberTrader, a fast-growing online brokerage with specialized electronic trading technology for highly active traders.Schwab aimed to provide CyberTrader technology to better serve active online traders with a technology platform that gave them market and analytical data and executed trades.


• Chicago Investment Analytics (CIA)CIA developed proprietary stock analysis based on quantitative modeling techniques for institutional clientsSchwab apply the system to its retail-focused equity rating system, Schwab Equity Ratings, which was launched in 2002 and subsequently used to build a number of proprietary mutual funds.


• SoundView Technology Group

Schwab paid about $340 m. to purchase SoundView in 2004SoundView Technology Group, Inc. operates as a technology-focused, research driven investment banking firm that provides services to an institutional and issuer client baseSchwab acquire SoundView to create a combined institutional research and trading capacity to compete with major Wall Street institutional capital markets players.Only 8 months after Schwab cited the lack of synergy between the Capital Markets and Schwab’s core business and sold its capital markets business (Including 3 seats on New York Stock Exchange (NYSE)) to financial firm UBS.

Briefly Flirting with Institutional Research and Trading

Computerized Recommendations

• In 2002, Schwab launched new investing rating service, called the Schwab Equity Ratings System.

• Its new own stock ratings was introduced by employing Chicago Investment Analytics, a company Schwab acquired in 2000, to use computers to evaluate stocks according to quantitative metrics.

• The Schwab rating system assigned each rated equity a grade of A,B,C,D, or F. A-Rated stocks, on average, were expected to strongly outperform to overall equity markets over the following 12 months, while F-Rated is adverse to A-Rated.

Computerized Recommendations

• Schwab’s stock selection came out on top of financial newspaper Barron’s ranking of top stock picks in 2006, and since 2003 have consistently beat all or most of the rankings produced by the top dozen Wall Street brokerage over a three-year or five-year period as compiled by Zacks Investment Research.

• Schwab Equity Ratings and other Investment analysis was made available over the Internet to Schwab retail clients and Schwab’s institutional clients.

Gathering Assets, Gathering Fees and interest: De-Emphasizing Commissions

In 2000, 50% of Schwab’s revenue came from trading activity, and 27% came from asset-based fees, for example by keeping custody of mutual fund balances.Just a few year ago, Schwab charged some of the highest trading fees in the brokerage industry. As trading volume across the industry declined and as price-sensitive customers defected from Schwab, the company’s revenue, which were heavily dependent upon trading fees, declined.

1997 1998 1999 2000 2001 2002 2003 2004 2005 20060%

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70% Trading Revenue

Asset Management and administra-tion fees

Net Interest Revenue

Source of RevenueSource of Revenue


In 2005, 79% of Schwab’s revenue was derived from asset-based products and services, and interest. Only 17% came from trading revenues. The shift away from dependence upon trading revenue allowed the company to drop its trading commissions

Beginning of 2006, Schwab’s trading volume had again approached the highs of 2000, but at a much lower commissions per trade. And hit an average of 230,000 trades a day by 4Q of 2005.


By Late 2006, Schwab was organized into two primary operating segments:

Schwab Investor Services which provided investment guidance, products and services to a full spectrum of investors:Schwab Institutional which provides custodial, trading and support services to independent investment advisors.

There was a third group called Schwab Financial products that developed products and services sold by the two operating segments.

Schwab Financial Products

• Schwab Financial Products played a unique role at the company. Created the high margin products that provided much of the profitability for each of client enterprises.

• These product and services helped reduce Schwab’s dependence upon retail trading commissions.

• By May of 2006, this group had over $650 billion under custody. In total, Schwab had around $1.3 trillion under custody by the middle of 2006.


• Schwab Financial Products also encompassed lending through Schwab Bank, and asset management.

• Schwab Bank offered traditional banking products and service including below:FDIC-insured savings and checking accountsMortgages certificate of deposit(CD) accounts credit cards


• Schwab Asset Management Products is sub group of Schwab Financial Products.

• Asset Management Products and Services (AMPS) ran the no-transaction fee mutual funds marketplace called Mutual Fund OneSource.

• AMPS was also responsible for design ,market , development, and management the Managed Account Platform which offered products called “Separate Accounts”


– Serve as an alternative to mutual funds, especially for wealthier clients.

– Investors in separate accounts show individual shares in portfolios and reap the tax efficiencies

– These accounts were managed by institutional money managers that were selected, monitored by Schwab

– Schwab charged its managed account clients regularly quarterly fees

• This was growing business for Schwab which was approaching the top five competitors in the market

• The Managed Account Platform is from Schwab’s efforts to better segment its clients, attract and service wealthier customer segments

• Separate Accounts

Scaling Experience

• The cost to serve investors and the profits to be made from servicing investors were generally related to the amount of the customer’s investment under managementSmall investors with around $50,000 to invest were

received “Mass Advice” making do with investment tools that were online.

• Most financial services firms were interested in accounts with over $200,000 or more to invest

• Independent financial advisors in general served investors with six-figure-plus portfolios to invest

Scaling Experience

• Schwab’s sweet spot, customer segment that provided good profits was customers with investible assets between $50,000-$2 millionInvestors with more to invest could use the

services of fee-based planners available through Schwab Institutional

• Accounts with more than $250,000 were assigned a relationship manager who helped with service, investing advice and asset allocation

Scaling Experience• One key challenge Schwab faced was serving clients

with less than $250,000 in their accounts to feel they were serviced well and service by the firm as oppose to an individual representative• In the investment industry, sales representatives often

took some or all of their clients with them when they switched firm or open up their business.

• Branches network is important in Schwab’s business. Most of new asset come in through the branches• The physical locations were important to customers

even younger customers seemed reassured by the physical branches

Schwab Institutional

• Schwab Institutional provide services such as asset custody and back office operations to independent financial advisors– Registered Investment Advisors (RIAs)

• The business had grown from $50 billion in assets under custody in 1995 to $439 in 2006, 25% increase from the year prior

• There are 5,100 RIAs work with Schwab in 2005, and grew to 5,500 by late of 2006


• Because of well performing of RIAs business, Charles Schwab felt he could sell U.S Trust without damaging strategy

• The Schwab Advisor Network (AdvisorSource) , a group of RIAs prescreened by Schwab received prequalified client referrals from Schwab reps who felt their client would be better served by an RIAs. In return, RIAs pay a fee for referring clients and used Schwab to execute trades and custody assets

• Schwab Institutional reach the 1st place in market share in terms of client assets in 2005

Source : http://thetrustadvisor.com/tag/charles-schwab


Charles Schwab

23%

Fidelity8%Other Firm

69%

Market Shares


• Schwab is largest custodian for RIAs by touch over ¾ of all RIAs


• In October 2006, Schwab announced that it would reduce the number of RIAs in Schwab Advisor Network program by more than 50%

• Schwab reps was enabled to establish deeper relationships with the remaining independent financial advisors in the network


• Some independent financial advisors in Schwab universe feared that Schwab would compete with them for financial advisory business

• “Many advisors saw Schwab as an ally and a competitor”

Charles Schwab

Client

Client

Client

Schwab’s Financial Advisor RIAs

Schwab Private Client

• Launched in the wake of U.S Trust acquisition• Aimed at higher net worth individuals, people with

over $1 million to invest• Schwab Private Client would assigned customers to

Schwab investment consultant to create an investment plan– This service did not manage client’s money, nor advise

on tax or estate-planning• The service was aimed to fill a gap between service

provided by Schwab and by RIAs or financial advisors at U.S Trust whose clients usually had at least $5 million to invest.

The Role For Retail

• Schwab Investor Services run Schwab’s network of retail investment offices, call centers and online services, all of which provided customers with independent and advised investment services, trading, and investment products

• This group is the core group to prop up company’s profitability when met the trouble

• “Personal Choice”, pricing strategy launched in 2004. The company started to charge fees to customers with less than $500,000 in assets(90%) for services that used to free. Many customers take their account elsewhere

The Role For Retail

• Charles Schwab, company’s CEO pointed that 2 problems that his company have– Service and product’s price is higher than competitors– Basic structure of discount broker didn’t permit company to

develop relationship with clients

• For solve both of those problems Charles Schwab appoint Walter W. Bettinger II, ex-chief operating officer of the retail business for a new leader of the retail organization

• 48% of new accounts were open through a branch• Schwab point out that many of branch in network become an

unwieldySchwab make a biggest change to reduce cost by closed some branch and added others

Changes in the Retail Group

400 full Service

Branches

210 full service branches

90 satellite branches

Changes in the Retail Group

• The cost savings gained from changes in branches network were ploughed back into service

Reduce waiting times in the call centersLower prices

• Cost cutting had been an important priority for the company since Charles Schwab return to the CEO chair in 2004

One Schwab

• In Schwab’s prior organization model, it had 3 separate business group:– Independent– Active Trader– Advised Investing

• Customers were assigned in a group based on their trading behavior in previous quarter

• The structure didn’t accurately reflect real customer behavior and make 3 ways competition in the company. Each group aiming to grow and take business from each other

One Schwab

• In 2006, Schwab segmented customers based on their needs, their value and potential value to the firm

• Serving customers with “One Schwab” point of view– In the past, Schwab separate website for each business.

Nowadays, the company has a single integrated web capability

– In the past, a customer with $100,000 brokerage account and $400,000 mortgage, was viewed discretely as 2 small customers. Today, that customer is viewed and serviced as a $500,000 client

The Role For Technology

• Technology is a key tool for Schwab and its competitors– For example, one of Schwab’s competitor, Fidelity said it spent

around $2 billion each year for technology

• Technology played a central role in the strategic shift that the firm made over the past few years– For example, Schwab’s business model had changed from a

transaction model to a relationship model. Transaction had become a commodity in brokerage industry

• The most salient ethos that ran through the company was the desire to eschews the potential conflicts between that what was best for the client and what was best for the company

The Role For Technology

• The company had to leverage and scale technology that it bought or developed– For example, use technology to scale the number of customers

it could effectively and efficiency serve

• When Charles Schwab himself returned to the CEO position, the company reestablished its focus on productivity. This focus on efficiency extended to Schwab’s technology operations

Competitor

• Fidelity headquartered in Boston is the largest mutual fund company in U.S., providing investment management, retirement and brokerage service

• Fidelity was such a leader in administering 401(k) retirement business

• Both Schwab and Fidelity looked for growth in similar areas such as online brokerages, RIAs

• However, Merrill Lynch, TD Ameritrade ,Pershing, E*Trade, and Vanguard are also important competition in Financial service to Schwab too.

Fidelity:Dangerous Competitor

• Fidelity relying heavily upon its online presence– Fidelity has only 110 branches compared to 300 branches for

Schwab

• Fidelity has $1.6 trillion in asset under administration by the end of 2006. Fidelity surpassed compared to former asset leader Merrill Lynch’s $1.4 trillion in asset and Schwab’s $1.3 trillion

• It was believe that Fidelity have been more profitability than Schwab because half of Fidelity’s brokerage asset were invested in Fidelity funds, as opposed to one-eight at Schwab


• Fidelity seemed to poured a lot of profit into technology– In 2004, the company spent $700 million in technology

• In RIAs business Fidelity has had less success than Schwab. With $470 billion in RIAs assets, Schwab was 3 times larger than Fidelity’s equivalent business

• Fidelity seemed to developed their RIAs business to compete with Schwab. Nowadays, Fidelity was offering technology-based products and services that resembled those provided by Schwab


• Both of Schwab and Fidelity looked to increase their investment in technology to serve RIAs

• Worrying for Schwab Institutional was the fact that the Fidelity was such a leader in administering 401(k) retirement accounts– By the end of 2005, Fidelity managed $708 billion in

retirement assets compared to only $159 billion for Schwab

• As baby boomers aged and their retirement accounts grew, Schwab’s retirement account customers might turn to Fidelity investment advisor to guidance


http://en.wikipedia.org/wiki/Charles_Schwab http://www.ryt9.com/s/prg/195960/ https://www.schwab.com/ http://finance.yahoo.com/q/pr?s=schw http://www.journal.au.edu/abac_journal/2004/may04/

abacvol24no2_artical03.pdf http://www.aboutschwab.com/about/history/index.html http://www.1000ventures.com/business_guide/

cs_fast_company_schwab.html http://thetrustadvisor.com/tag/charles-schwab http://biz.yahoo.com/ic/54/54911.html http://investing.businessweek.com/research/stocks/private/snapshot.asp?

privcapId=36667 http://www.wikinvest.com/stock/Charles_Schwab_%28SCHW%29 http://aboutschwab.com/press/releases/press-release.cgi?release_id=944557

Reference

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Ba401 Case 2 15 Charles Schwab Corporation