Schwab Soared As Low Fees Spurred Investment Boom

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Charles Schwab Corp. gave individual investors a chance to reap big stock market gains and has been rewarded handsomely in return.

The stock broker age begun in 1971 by now-chairman Charles "Chuck" Schwab has focused on leveling the playing field for the average person.

Investing used to be considered the preserve of the wealthy, with traditional brokerages charging high fees, guarding information jealously and often putting commissions before their clients' interests.

Charles Schwab launched a discount brokerage unit in 1975, a year of brokerage industry deregulation. The firm's new strategy transformed the sale of stocks and mutual funds into a mass-market retail business with low trading fees and a philosophy of putting customers first.

"Chuck was always a tremendous advocate of investing for the benefit of the average American," Walter Bettinger, the CEO ofCharles Schwab ( SCHW ), told IBD.

Bettinger said Schwab's goal was to create an ownership society in which well-informed investors could move more of their capital out of low-yielding savings accounts and put it to work in the stock market. The risks were higher but so, too, were the rewards.

Growing Roots In A Recession

Schwab told IBD in 1998 that he was motivated by a fear of poverty drilled into him by his father, Robert Schwab, who often told stories about the Great Depression. Those fears intensified in the recession of 1958, when at age 19 Schwab went looking for a job in Chicago only to find long unemployment lines.

"I saw how financial insecurity can control your life," Schwab said in the interview with IBD. "It shook me up, and it's driven me."

Schwab -- and individual investors -- got a big break in 1975, when the Securities and Exchange Commission deregulated the brokerage industry, abolishing fixed commissions that had kept trading costs up.

Schwab slashed fees to far below those of big Wall Street brokerages. Trading a block of shares went from hundreds of dollars at a traditional firm to just $70 at Schwab.

Building the business wasn't easy. Schwab faced stiff opposition from the old-line brokerage industry, which fought the upstart's efforts to bring low-fee trading and transparency to average investors. Schwab accused the big Wall Street firms of trying to block access to financing needed to fuel the firm's growth.

"We were breaking down the barriers. This really upset the traditional firms," Schwab told IBD recently. "We were very disliked. On one occasion I was called unethical."

Unfazed, Schwab went on, opening 100 branches around the U.S. in the first decade of operation to educate individual investors and providing 24/7 customer service by phone. And in 1996, with online trading, Schwab became one of the first brokerages to let investors research, buy and sell stocks on their own computers.

"The Schwab model made it easier for investors to take control of their accounts," said Charles Rotblut, a vice president at the American Association of Individual Investors and editor of the AAII Journal.

Baby Boomer Appeal

In the 1990s, Schwab branched into no-fee IRAs, bundled 401(k) plans and no-load mutual funds, in part to attract baby boomers, who were then entering their peak earning, saving and investing years. The company grew, and its stock climbed.

"The later part of the 1990s and early after Y2K was a time of individual investor awakening" as the Internet made investing easier and more transparent, said Bettinger, who joined Schwab in 1995 after Schwab purchased the retirement plan services firm he founded.

In the late 1990s, Schwab beefed up its website and became the leader in electronic stock trading. By 1998, it had nearly 2 million online accounts, up from 360,000 when its Internet service began in 1996.

Schwab profit and revenue soared amid the dot-com boom and trading volume expanded. From 1995 through 2000, earnings per share leapt 445% to 60 cents a share and revenue swelled from $1.06 billion to $5.8 billion. Schwab shares continued to head higher, becoming a big market winner of the 1990s.

From its low in August 1990 to the all-time high in April 1999, Schwab stock rocketed about 22,000%. That gain puts Schwab among the great stocks of the past 30 years.

Schwab has continued to innovate in recent years by offering managed portfolios and products and services for independent advisers.

"Schwab has done a good job branching out beyond their client who walks in the front door," said Stephen Nielander, a lecturer in finance at San Diego State University.

Nielander, also a partner at independent investment advisory firm HPM Partners, said Schwab works well with third-party advisers who can assist clients with "bigger needs beyond personal trading."

These independent advisers keep their clients' assets at Schwab and trade through the firm. In 2013, $946 billion of Schwab's $2.25 trillion in client assets were under the guidance of an independent investment adviser doing business through Schwab. Clients holding another $155 billion of assets were enrolled in fee-based advice programs, according to Schwab.

Finding ways to expand its client base has kept Schwab among the biggest brokerages. It has more than 300 U.S. branches and one each in London and Puerto Rico.

In 2013, Schwab brought in $140.8 billion in net new client assets, up 25% vs. 2012. Its $2.25 trillion in client assets trailed only Bank of America Merrill Lynch's $2.37 trillion.

For the year, Schwab's profit rose 13% to 78 cents a share on an 11% increase in revenue to $5.4 billion. Meanwhile, the stock rose 81% last year, far outpacing the S&P 500.

Bettinger said few consumers paid much attention to the market 40 years ago. That's changed thanks in large part to Schwab's efforts.

"We've helped clean up Wall Street," Schwab said. "We've taken a lot of mystery out of the business."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

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