Back to Basics: Charles Schwab discusses the Secret of his Success

By the close of 2004, however, the company’s revenue, profits and stock price had fallen and the board turned to its former figurehead to stop the rot. He didn’t disappoint: share prices have since soared and the company recently achieved net incomes of more than $1 billion. So what’s the secret of his success?

Think of Charles Schwab the man, and you immediately think of business success; it’s hard not to, given that the company he lends his name to is one of the most successful financial firms of the last 30 years. Using a discount brokerage model that did more than any other to bring finance management to the masses, Schwab brought investing from Wall Street to Main Street with a no-nonsense approach that enabled a generation of Americans to make more informed decisions about how to invest their money. By the turn of the millennium, Charles Schwab Corp. had established itself as the largest discount brokerage in the world, the dominant force in online investing and was winning plaudits for its straight-talking style. Schwab even felt confident enough to take a back seat, handpick his successor and step into semi-retirement with dreams of reducing his golf handicap even further (he currently plays off an impressive eight). After a five-year period as co-CEO, 2003 saw David Pottruck take sole charge with Schwab remaining as Chairman.

But before long the wheels had begun to fall off the newly helmed firm. Between 2000 and 2004, Charles Schwab Corp. laid off over 30 percent of its workforce, suspended contributions to its 401(k) retirement plans and saw its share price plummet by 80 percent. Discount brokerage competitors such as E*Trade were chipping away at its customer base. And most damning of all, the company had, as Schwab told investors in the firm’s annual report, become “disconnected” with its customers – a cardinal sin for a firm built on its appeal to the common man. A change was needed, and when the board lost confidence in Pottruck’s decision-making the firm’s charismatic founder was the logical choice to step into the managerial void and take Schwab back to basics. Charles was back in charge.

In the hot seat

The first item on the new CEO’s desk was to re-establish that all-important connection with its clients. “We had allowed ourselves over a period of time to get disconnected with our clients,” he admits. “We got somewhat arrogant, all caught up in the dotcom arena with its wonderful explosion of new accounts, transactions, valuations.” It was an important first step in rebuilding the trust essential to any investment firm, and key to the company’s upturn. The next item was to cut costs, a painful experience for a company more used to growth than lay-offs. “I had to reduce costs dramatically,” he says. “We ended up using an outside firm that helped us organize our thinking and review every cost center that we had here to take out $600 million in costs. That was painful.” Finally, Schwab took the decision to strip away the bureaucracies and non-core business activities that had built up over the years in order to return the company to its focus on serving the individual investor. “We ended up selling our capital markets, all of our international activities, anything that deviated really from our focus on our core business,” he says. “In some respect, the company had grown and matured and thought it could do everything. And it wasn’t the case. We had a core capacity, a core culture, and we needed to get back to the basics.”

The result of this three-pronged strategy is that the firm is once more the darling of both Wall Street and Main Street, with last year proving to be an unmitigated success. “In every way I look at it, 2006 was a spectacular year,” agrees Schwab. “Our clients brought $87 billion in net new assets to Schwab Investor Services and Schwab Institutional – an incredible 33 percent increase over 2005. Total client assets increased 18 percent and reached $1.24 trillion by year-end. We also accomplished what we set out to do financially – and then some. First and foremost for me, we’re back on a growth path, with 2006 net revenues growing 19 percent to $4.3 billion. We also continued to manage costs carefully, enabling us to earn net incomes of more than $1 billion.”

Focus on the fundamentals

Whichever way you look at it, it’s been an incredible turnaround, but the 69-year-old Schwab is pragmatic when it comes to putting his finger on precisely what has made the difference. “It’s a continuation of our 30-year history of focusing on clients,” he says simply. “We succeed when we provide them with great value and great service, and when we help them achieve better financial outcomes. Last year proved the wisdom of that strategy.”

It’s a focus that has seen the firm return to a core belief in helping individuals make sense of their investments – what Schwab likes to call financial fitness. “Today’s Schwab is better organized to help individuals achieve the confidence and comfort that come with financial fitness – whether they are seasoned investors, just starting to invest on their own, or turning to an independent investment advisor for help,” he says. This approach is reflected by the company’s main areas of focus – Schwab Investor Services, for example, is focused on the needs of the individual investor, targeting people who have $50,000 to $2 million in investable assets; Schwab Institutional is the industry leader in supporting independent investment advisors who serve individuals with larger and more complicated portfolios, including those who need custody, tax and wealth management advice; while Schwab Financial Products provides products and services such as mutual funds, money market funds, fixed income securities or banking products to the other business areas.

“We’ve organized our business around client needs,” he continues. “But that’s just the beginning. We want to do a better job of reaching out to our existing clients to strengthen our relationships and increase their satisfaction and loyalty. It’s not just about bringing in more assets, though we are pleased when that’s the case. We want individual investors to feel so good about their investing outcomes – and their entire experience with Schwab – that they recommend us to their friends and family.”

On the right path

Schwab’s made major strides in the short time since retaking control. He’s right-sized the company and restored its growth. He also plans to use the proceeds from the sale of US Trust – the wealth management subsidiary sold to Bank of America for $3.3 billion in late-2006 – to reinvest in the more focused company in order to deliver double-digit revenue growth in 2007. This, coupled with strong financial discipline, will help the corporation to continue improving net income and earnings per share.

But it’s not just the financials that have improved under his watchful guidance. The company’s reconnection with its clients has been a major feature of its turnaround. “When we put clients first, we not only help them build their financial future, but we also build their trust in Schwab,” he says. This belief is backed up by the figures: in 2006, the company averaged more than $7 billion in net new assets every month in Schwab Investor Services and Schwab Institutional. Plans for the next year include the not insignificant goal of attracting more than $10 billion per month in net new assets across the entire firm. As well as broadening its reach to include more of America. Of the 112 million US households, about three million currently do business with Schwab; in 2007, Schwab plans to grow that number, both in terms of new accounts and new households.

Perhaps more than anything else, it’s this pursuit of the everyman market that epitomizes Charles Schwab and his eponymous company. “Our entire team – more than 12,000 strong – remains focused on my lifelong mission: to help more people start investing earlier in life and stick with it,” he asserts. “That’s the path to financial fitness. Like physical fitness, it’s a lifelong quest. Fitness starts with a realistic plan. It grows with the personal discipline to take action over time. It improves through constant monitoring and occasional adjustment. Every step in the right direction brings better outcomes, plus the renewed strength and confidence that come with those results.”

Demystifying money management

So is he satisfied with what he has achieved? If he is, he doesn’t show any signs of resting on his laurels. “The best is yet to come,” he maintains. “Even after the records we set in 2006, I still believe that’s true. When we put our clients’ needs first and help them succeed, then our growth will follow. During the past year, we worked hard to improve our relationships with existing clients, but we also brought in new ones. We added 655,000 new brokerage accounts, up 15 percent from 2005.”

Many new clients were responding to the firm’s highly successful Talk to Chuck advertising campaign, which features everyday investors in an attempt to demystify the money management process. Since the campaign was launched nationally in 2005, monthly new-to-firm assets have increased 29 percent, and surveys indicate more investors now consider Schwab when shopping for financial services. But this is far more than an advertising campaign; it’s a philosophical approach. “We are here to listen and to help more people do better at investing, regardless of their age, the extent of their wealth or their sophistication as investors,” says Schwab.

These are the principles on which the company was founded, and Schwab hopes that it is this, aligned with his firm’s ability to respond to changing customer demands and market forces, that will enable it to continue its success long into the future. “The good news is we are a highly flexible organization,” he asserts. “We have a national footprint, we have low costs, we’re efficient, so we can compete at this point with almost anybody and do a great job for our clients. I think we’re in a wonderful position, frankly.”

$1.3 trillion
Value of client accounts

6.8 million
Number of client brokerage accounts

“We had allowed ourselves over a period of time to get disconnected with our clients”
“When we put clients first, we not only help them build their financial future, but we also build their trust in Schwab”