Charles Schwab is the largest publicly traded
brokerage in the U.S.
It's a enormous business, $7.5 trillion of client
assets.
Charles Schwab, often referred to as the discount
brokerage king.
It was one of the first brokerages to offer discount
trades for retail investors, and now it's
expanded services across the finance sector.
It would be fair to characterize Charles Schwab
as a financial services supermarket.
It even slashed trading fees to zero.
Why the heck would you give something away for free if
you could charge real money for it instead?
But this behemoth is facing a risky financial
environment.
Charles Schwab. Three days of double digit declines.
For the first time in its 36 year trading history.
The collapse of SVB has investors nervous about
firms that have big losses on bonds.
Schwab's huge growth also had its own consequences,
and this is a huge problem.
Here's how Charles Schwab battled the ever-evolving
financial services market from low fees to fintech.
In 2022, Charles Schwab said they saw an all time
record financial performance despite the
bruising year for equity and bond markets.
Adjusting to the new post-pandemic normal.
With $20.8 billion in revenue, Charles Schwab had
a profit of $7.2 billion, and 4 million new brokerage
accounts were created.
Over 50% of its net revenue is related to interest
rates. And whether this is via net interest income or
its bank deposit account agreement with
Toronto-Dominion Bank, about 20% of its revenue is
from trading and commissions and the
remainder is asset management fees.
Privately owned Fidelity is big competition.
It's the larger firm with over 45 million brokerage
accounts, including 37 million retail and 8 million
wealth management accounts.
Whereas Charles Schwab has 34 million total brokerage
accounts, some of which are retail wealth management and
independent advisor accounts.
Charles Schwab is a powerhouse in the investment
services industry, but it does compete with many other
firms.
In each case, Charles Schwab competes with different
facets of its business, including legacy full
service brokers and investment bankers like
privately owned Edward Jones, Stifle, JPMorgan,
Morgan Stanley and UBS.
Not to mention the newer entrants Robinhood, Ally
Financial and SoFi compete with Schwab in the financial
tech, aka fintech, market.
Charles Schwab & Co.
was founded 50 years ago in 1973, when Charles Schwab
himself bought out his partners at what was
formerly Commander Industries.
At the time, Wall Street was accessible only to
investors with enough money to pay high commission fees
using full service brokers.
Many of these institutional people like to hold the
information close to them they want only for
themselves. And Schwab is about the trying to open
architecture to get more information out to more
individuals.
Wall Street thought deregulating fees would
crumble. The New York Stock Exchange and bankrupt at
least 150 investment banks.
May Day abolished fixed commissions.
Charles Schwab, the company and Charles Schwab the
person were pioneers in democratizing investing.
Charles Schwab undercut the competition.
It had this huge first mover advantage.
A lot of people went to Schwab to open trading
accounts because they can pay a lot less for the same
services.
For example, investors could now buy and sell stocks for
less than $10 per trade.
You led that revolution.
Well, we in the discount brokers, it took us.
About 15 or 20 years to do that.
Didn't happen overnight.
Charles Schwab also started advertising before May Day.
Self promotion was not something gentlemen brokers
did.
From the get go. They were advertising using chalk.
They put a picture of him in the newspaper and he
seemed like a credible, nice person that was
trustworthy and it worked.
Let's talk to Chuck, as the ad used to say.
He joins us down on the NYSE floor.
That was my favorite.
Thank you, Bob. When was that? 2005?
Yeah. It was.
That helped put your face out there as the face of the
firm itself. Did that give you a competitive advantage?
Well, you said so.
I think it did.
And so when you look at Schwab today, they still
have that brand, they still have that customer service,
but they also have some of the best pricing in the
industry.
Charles Schwab eventually went beyond brokering.
Charles Schwab was an early adopter of technology from
digitizing its back office in the late 70s to online
trading in the 90s.
Before Charles Schwab really started to expand, Bank of
America acquired Schwab for $55 million in 1983.
But by 1987, Charles Schwab bought it back for $280
million and went public with $429 million of market
cap.
Charles Schwab & Co.
had a record year in '97.
Fantastic year.
Competition stayed fierce.
This boom has been led by computer and high technology
stocks.
The 1990s tech boom inspired the company and its
competitors to expand offerings.
The Schwab right now is well over 50% of our customers
use a personal computer to interact with Schwab, get
information, monitor their accounts, make decisions,
make transactions.
It's a huge world of information.
Charles Schwab introduced mutual funds, retirement
accounts and online trading on schwab.com.
Inherently, this is a scale business.
The larger you are, the more efficient you are from
an expense perspective.
It enables you to cut prices.
But when the dot-com bubble burst, Schwab felt that
impact.
75% of all Internet firms will either merge or fail to
keep.
Up with competition.
The company pivoted to strategic acquisitions and
eventually grew its services and even launched
its very own bank, Schwab Bank, in 2003.
Charles Schwab being a bank is very unique.
Say an investor opening an account with Schwab, They
can have deposits at its bank.
They can trade stocks within its brokerage.
By 2010, mobile trading was introduced.
And Schwab met demand for exchange-traded funds, aka
ETF's.
Schwab has muscled into the ETF space in the last five
years. You're now number five from nowhere.
It's really very-
I don't know if we muscled in. We just offered great
value.
If you look in more recent years, it continued to
innovate and disrupt or at least has been a fast
follower with industry developments.
When startup trading apps like Robinhood entered the
market with zero commissions in 2014, that
was a huge deal.
Five years later, Schwab followed suit.
Charles Schwab out with a bombshell announcement
today. It is slashing trading commissions for
stocks, ETF's and options to zero.
In a world where Schwab is at zero, everyone had to
follow.
The following day, TD Ameritrade cuts to zero.
Hours later, E-Trade cuts to zero.
The problem was that it did a lot more damage to their
business models than it did to Schwab's.
Ameritrade was in a moment losing something like 20% of
their revenues.
Is Schwab a potential buyer of anyone out there?
Well, certainly at the right valuations, we would do it.
Fast forward less than two months later and Schwab
announces that it's merging with TD Ameritrade in an all
stock combination.
Believe most people would have thought that maybe
Charles Schwab would have gone after E-Trade instead
just because it would have been smaller and more
manageable. But it was quite a feat for them to
actually be able to merge with TD Ameritrade.
The problem is that with brokerages slashing fees to
zero, a revenue stream is lost.
But for Charles Schwab, one of its main revenue streams
is now its banking operation, which other
brokerages don't really have.
It's actually one of the biggest banks in the
country. They make a lot of revenues from what they call
sweep accounts.
It's essentially uninvested money that gets pushed to
bank accounts from brokerage overnight.
So they get this leftover money from investors, from
trading from their portfolio.
And Schwab takes this cash and reinvest it in
government bonds and other securities in order to turn
a profit.
This is where Schwab's pandemic growth faces
consequences of aggressive Federal Reserve interest
rate hikes.
This really rapid rise in interest rates really dented
the value of the longer term bonds that Schwab had.
That's why we saw Schwab stock is down so much.
Charles Schwab told CNBC it was unable to participate in
this story.
The collapse of SVB has investors nervous about
firms that have big losses on bonds and potentially
flighty deposits. Schwab, defending its financial
position, insisting it's well positioned to navigate
the current environment.
Our bank is very conservatively managed.
From a liquidity standpoint, we have access
to very substantial liquidity.
I understand that, that there are banks that got
into trouble, but those applications, we don't
believe, apply at Schwab at all.
The financial services industry is always changing
and companies are fiercely competing to stay ahead.
Once Charles Schwab decided to develop its own ETF line
and its intelligent portfolios, robo advisors,
offering it quickly caught up to and even leapfrogged
some of the early leaders in those spaces.
Artificial intelligence, like robo-advising used by
Schwab in its intelligent portfolios, may be the next
stage of tech evolution in the industry.
Robo advisors are a great value proposition for
certain investors, primarily cost conscious.
Robo Advisor remains a very small business for Schwab.
The development of growth in that space is a little bit
bumpy, I would say, for Schwab, because just last
year they settled a pretty big settlement alleging
Schwab that it wasted the investors' money by asking
them to put too much cash in their account.
As competition heats up, Charles Schwab is hoping to
lean into its reputation to continue to serve clients in
the future.
The concept of discount brokerage still exists.
That concept is becoming increasingly antiquated.
If you really want to be a player in this industry, you
really have to branch out into other services, whether
that's asset management, product manufacturing or
having a banking subsidiary. You have to
offer a lot more than just cheap trades.