U.S.News & World Report Senior Writer Kim Clark recently sat down with Charles Schwab, longtime chairman and recently returned CEO of the world's biggest discount brokerage, to talk about his attempt to turn around the troubled firm he founded 30 years ago. Here are some highlights from their discussion.
USN&WR: Some critics have said your company was caught in the middle: squeezed on the low end by discount carriers, and cherry-picked on the high end by the higher-end brokers.
Charles Schwab: I think some of that criticism was true. I think it was true in the past. We were blessed by a great expansion in the last century. There was a rush to invest by many individuals. We became a little bit fat and happy. We weren't as competitive in pricing. We are extraordinarily more competitive than we have ever been before. . . . But here's where the middle criticism came from. We made a movement into the institutional brokerage . . . and we bought that Soundview thing, which was a classic strategic error. That is all gone now. We focus completely on the individual investor.
Our brand name stands for serving the individual investor and the advisers that serve them. There are approximately 28 to 30 million people in the category of having $50,000 in investable assets to $1 million. That's about $7 trillion in assets. We have about 6 percent of that. I think we can go to 10 percent. That is the middle market, and, yeah, I am in the middle of the market. I am right in middle with all the baby boomers. We have services to fulfill all the financial needs of the baby boomer generation. The heart of America.
USN&WR: So there's nothing wrong with being in the middle. Target seems to be doing OK.
CS: I was on the board of the Gap for 18 years. And it is the same kind of thing. They have a fantastic name and presence in their category. Yet they also have Old Navy, and yet they have Banana Republic. We have CyberTrader and U.S. Trust.
USN&WR: Competition from the low end is a little ironic since you basically started the discount brokerage industry.
CS: We became the dominant discount broker, but we weren't the first one. I based the business on providing incredibly efficient transactional services in stocks and bonds. Our pricing was below the major brokerages. We weren't always the lowest. But my aspiration was to be the best value and best service. We had the best computers. I have seen so many try to be the lowest. When it comes to financial services, you don't always want to be the cheapest, because then you don't have best-trained employees, the best computers. What you want is the greatest value.
We have lowered our commissions. We lowered some in June, some in August. We will become more competitive.
USN&WR: But won't that reduce your revenues?
CS: It turns out, for our company, about 20 percent of revenues come from so-called commissions. Eighty percent comes from other things. We are going towards fee-based kind of relationships. Forty-five percent of Schwab's business comes from advice-based business such as the Schwab Advisor Network. Seventy percent of our relationships involve some sort of advice. So transactions are important, but they are the beginning of the relationship.
