Charles Schwab Management of technology

Company Background

The Charles Schwab Corporation is an American brokerage and banking company, based in San Francisco, California. It was founded in 1971 by Charles R. “Chuck” Schwab, as a traditional, brick and mortar brokerage firm and investment newsletter publisher. In 1973, the company name changed from First Commander Corporation to Charles Schwab & Co., Inc. The company started offering discount brokerage on May 1, 1975, and became one of the world’s largest discount brokers.

Company over the years:

• 1971 – In April, the firm is incorporated in California as First Commander Corporation by Charles “Chuck” Schwab with two other partners.
• 1973 – Charles Schwab bought all stocks and change company name to Charles Schwab & Co., Inc.
• 1975 – Launch discount brokerage and opens its first branch in Sacramento, California, USA.
• 1982 – First to offer 24 hours phone service.
• 1983 – Bank of America acquires Schwab for $57 million.
• 1987 – Management leads a buyback from Bank of America for $324 million.
• 1995 – Activates its first website at schwab.com
• 1996 – Add web trading to schwab.com
• 1998 – Reach the first place in stock market capitalization.
• 1999 – Launch after hours trading that trade order can places online or by phone.
• 2000 – Acquires U.S Trust and also acquires CyberCorp, Inc.
• 2001 – U.S Trust was fined $10 million for failed to comply the rule to disclosed financial report.
• 2004 – Schwab announces the resignation of David Pottruck and the reinstatement of Charles Schwab as CEO. Schwab sold its seats on the NYSE and then launched Charles Schwab Bank.
• 2006 – Sold U.S Trust to Bank of America.

How has Charles Schwab’s business changed since 2002? Is the company moving in the right direction? Originally company was set up as discount broker. The company started to operate in the mid-70s and trades were closed by phone. The process was inconvenient and unproductive.

Company was immediately looking for improvement and implemented system for automate trade clearance and settlement. In the mid-80s company introduced PC software for online trading using dial up connection and later automated voice-response telephone service. When internet emerged in 90s Schwab started to work on Interned brokerage platform. In 2000 Schwab acquired Cyber Trader a direct access broker with their unique software described as easy to use advanced technology platform with access to many markets.

That software became the engine for new Schwab’s trading platform StreetSmart Pro. At 2001 Schwab was operating over 13 million online accounts and ranked as number one discount broker. Most of the business was done online. Events in September 2001 had huge influence to economy and financial markets together with many company bankruptcies (Enron, WorldCom, Tyco) in early 2002 investors behavior was changed a lot. Investors started to look more for safe investment rather than high return and started to seek the help of professional advisors more.

Analyst saw Schwab branch staff under qualified (they were originally taken as order takers) and necessary to change with more experienced and more expensive financial advisors. As a result company launched an alternative for investment research, Schwab Equity Ratings, and two new advisory services for affluent investors, Schwab Private Clients and Schwab Advisor Network.

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.

The market downturn 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. 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-1990.

Change in source of revenue at Charles Schwab

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. 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.

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*Trade However ratio of trading commission revenue to net company revenue continued dropping. Schwab’s previous successor didn’t last long: David Pottruck, who had spent most of his 20 years at the brokerage as the founder’s right-hand man, was ousted as CEO in July 2004 after just 14 months in the job. He had shared the CEO title with Schwab from 1998 to May 2003, when the founder gave Pottruck sole control of the top post. But by the summer of 2004 the company faced heavy criticism that it had lost its connection to many of its core individual-investor customers.

Rising fees were angering many clients and the company was struggling with a number of acquisitions that had taken it away from its central business. Once back in control, Schwab — who later said the company had “lost touch with our heritage” — quickly refocused the business on providing financial advice to individual investors. He also rolled back Pottruck’s fee hikes. As business rebounded, earnings began to turn around in 2005. So did the company’s stock. The share price is up 151% since Pottruck’s ouster, 10 times the gain of the Standard & Poor’s 500 index in that period.

Discuss the acquisitions that Charles Schwab made? Do you think they fit the strategic direction that Schwab was looking to move in? As discussed above, Charles Schwab initial strategy was to target the large but low maintenance middle class market. Schwab was known as the champion of the little guy and opened the floodgates of investment to customers with modest means. Schwab was known universally for providing service at very low brokerage fees.

Initially set up as a discount brokerage firm to target the middle class investor, Schwab knew that to expand and become a Wall Street mainstay as an investment bank firm to reckon with it needed to expand its customer base. For this tapping the resources of the elusive wealthy clientele was essential. Wealthy clients, because of their huge assets, usually demanded a gamut of services such as tax and estate planning, trust advice, portfolio management and private banking.

As Schwab was primarily only a discount broker, it could not effectively compete with private banks on these fronts and could not do much when a wealthy customer wanted to depart citing lack of services to competitors such as Merrill Lynch & Co and Morgan Stanley who in contrast offered a full range of Investment Portfolios. US Trust

For David Pottruck, who was Schwab’s co-CEO along with Charles Schwab the discount broker needed a way to get the services required for its wealthy clientele. In comes the acquisition of US Trust during May of 2000 for about 2.7 billion dollars making it a wholly subsidiary of Charles Schwab and Corporation making it one of the largest financial transactions in history. About the acquisition, Charles Schwab has said “US Trust represents a piece of the puzzle that was missing in our offering to affluent customers. This has great appeal to Schwab’s top 5% customer base.”

Charles Schwab’s strategy was to constantly innovate and offer the best possible services to its customers. Whether it was offering discount brokerage services at half of most competitors’ prices, or introducing PC software for automated 24×7 online trading in the 80s or creating an online platform that was accessible across many markets, Schwab was constantly the game changer in the financial brokerage services industry.

One commentator has remarked about the acquisition of US Trust as: “Now Schwab has taken what the next big battleground is and has gotten to be the best there is”.* Naturally everyone including investors thought that for a company with a vision as far reaching as Schwab; it was the best move to acquire US Trust.

The initial market reactions sent the same vibes too, as the deal had sent investors into a tizzy as the share price of 46 5/8 to 125 ½ in midafternoon trading. Though there were a few analysts who thought that Schwab had paid through its nose for the deal such as offering what was thought to be a premium of 64% in market value of the company, allowing US Trust to retain their board of directors, work force and their New York headquarters, the general sentiment was that the acquisition was a good one and it was worth the money.

Before the landmark deal to acquire US Trust, Schwab had approximately 6.4 million customers and were adding at least 100,000 accounts every month. At this point it may be useful to examine the kind of company that US Trust was and what their strategy was and did this fit into Charles Schwab’s larger strategic goals or not.

US Trust was founded in 1853 in New York and was primarily a financial services company that catered to both individuals and institutions or large organizations alike. They extend services such as private banking, asset management and investment consulting. Their clientele was wealthy individuals with assets usually between 2 million dollars and 50 million dollars. Some of their most famous clients included the Astons, Rockefellers and Whitneys.

Right from its inception it has been a full-fledged services team catering to America’s millionaires. At the time of the acquisition US Trust had about 86 billion $ in assets and brought to the table a clientele so wealthy that Schwab thought opened up a multitude of opportunities. It almost seemed what David Pottruck had been adamantly and relentlessly campaigning for (high technological and financial services of Schwab meeting the high touch elite and privileged customers of US Trust) was about to come to fruition. But before long, the harsh realization had begun to set in. The merger was a disappointment on multiple levels.

Most importantly, as Schwab would later learn as the initial excitement had tied down; the deal represented an ideological shift away from Schwab’s original culture. Schwab was seen as the kind of firm that provided the everyday Joe’s or the average middle class an opportunity to invest their hard earned money. It also helped the middle class make their own decisions and investments by having an online system that provided the user with unlimited information. Their fundamental principle was an inclusive one and any kind of preferential treatment to wealthy clients or elitism of any sort was not tolerated.

On the other hand of the spectrum was US Trust who was viewed primarily as an investment bank for the extremely affluent. It was in the culture of US Trust to portray this kind of snobbery. Having a history of dealing with primarily the wealthy clientele who expected this kind of attention (contrary to Schwab’s philosophy of do it yourself investment) US Trust had managers work their entire careers often serving multiple generations of the same family. Often these two forces could not co-exist with each other.

The managers at US Trust did not respond well to the referrals that were coming in from Schwab as they were not accustomed to newly made millionaires who got rich of the stock trade walking into their offices and demanding a particular kind of service. This intra office resentment towards each other made things very difficult for Pottruck in particular who tried to force integration across both Schwab and US Trust. Though this only marginally increased revenue the merger was headed nowhere close to its lofty expectations.

Pottruck was struck severely by this failure. It was as though his baby which he had so impassionedly crusaded for was falling apart. The failure to synergize Schwab’s core vision of providing affordable investment opportunities to the middle class along with US Trust’s wide reach and influence over affluent clients affected Charles Schwab Inc. greatly. It was unable to tide through the dot com bubble, before which it primarily relied on online trading, but after the stock market crash Schwab’s online trading revenue fell 25% to 4.3 billion dollars, its net income dropped 72% to 199 million $.

Schwab as a company was caught somewhere in the middle, it was neither a discount brokerage firm nor a full-fledged investment firm. Succinctly put Charles Schwab strategy post 2000 of appealing to potential investors of all wealth denominations was falling apart. In November 2006, US Trust was sold to Bank of America for about 3.3 billion dollars in all cash transaction, which was one of the largest transactions in history once again.

Sound View Inc.

Soundview as most acquisitions post 2002 in Charles Schwab was made under the guidance and leadership of David Pottruck. Soundview was bought by Schwab on Nov 19 2003 in a deal that was valued at 321 million dollars. Soundview was known to have the most intensive market research methodologies and also leveraged its relationship with Gartner clients to an extent that allowed it to become the pre-eminent technology research boutique in Wall Street. Over time Soundview built a reputation of having some of the best research technologies and research analysts along with an access to institutional investors and hedge funds. Pottruck thought that Schwab’s online trading expertise coupled with Soundview’s equity research background.

Over a period of about 9 months, Soundview’s fierce reputation inside Schwab had subsided and it was becoming clear that it was more of a liability to Schwab than an asset. The focus on capital market and institutional investors was not turning out as fruitfully as expected, as the division in its second quarter posted only a 1 million dollar profit on sales worth 75 million dollars registering an extremely sluggish growth rate of 1.3%.

There was obviously a lack of synergy between what was Schwab’s core business, (i.e. providing low and medium income households a place to safely invest their money for appreciable returns in the long run.) and Schwab’s apparently new strategy championed by Pottruck of attracting a bevy of wealthy clients or deep pocket institutional investors. Schwab was getting stuck in the middle, neither being a discount brokerage firm like Ameritrade nor being a full service provider like Merryl Lynch.

Citing this lack of synergy, Schwab, with Charles R Schwab the man back at the helm again started focusing its energy and focus in the bread and butter of Schwab’s business all this while-the retail business of individual investors or small institutions. Schwab then sold Soundview after this 9 month tumultuous period to UBS for a period of 265 million dollars in cash, at a loss of almost 56 million in mid-2004.

The selling of Soundview whose acquisition was championed with so much vigor by CEO David Pottruck had forced the board members to take control of the growing difficulties Schwab was facing and he was unceremoniously fired only for Charles Schwab, the man to be back at the helm as Chairman and CEO once again.

Chicago Investment Analytics

Chicago Investment Analytics was acquired by Charles Schwab in November 2000. It was a prized acquisition that allowed Schwab to cover a range of over 3000 stocks across varied consumer portfolios and assessed their performance over a definite time frame. The total market value of all the stocks Schwab covered was over 75 million dollars in value at the time. This formed the basis of Schwab’s equity ratings model. The model covered all the above stocks and rated them on a scale of A, B, C, D, E & F.

The A rated stocks were strongly expected to outperform the market in the coming financial year whereas the F rated stocks were expected to underperform the market in the coming financial year. Schwab’s model fitted with the mold of investment analytics whereby an analyst would objectively weigh a stock’s value across different parameters and not be biased. This was especially true in Schwab’s case since it has no ties with investment banking firms. This provides consumer with a fair and unbiased representation of a given stocks’ performance over a given time and its direction in the future allowing in turn the consumer to make the most thorough decision of where to invest his/her money.

The main disadvantage of an over reliance on past information is that sometimes the future turns out to be different from the past. It was being observed that on some indicators Schwab’s ‘F’ rated stocks were doing well as compared to some of Schwab’s ‘A’ rated stocks, contrary to the Schwab’s analytics. This put investors in an uncomfortable tizzy and made them unsure of how the system functioned and was a dent in the usefulness of Schwab’s equity ratings model.

Nonetheless this system helped Schwab gain a considerable amount of foothold in customers that they had built over the years. This coupled with Schwab’s brand value and market presence allowed them to allocate individual attention to its customers despite not having a dedicated manpower and providing them with the right kind of investment advice.

Conclusion: Despite having made some erroneous acquisitions in the past in part due to the overzealous actions and aggressiveness of Mr. David Pottruck, the ex-CEO is on its way to realizing Charles Schwab’s original vision while starting the organization. This was providing for a way for regular middle class America to invest their money in stocks, mutual funds or hedge funds and someday realize their dream of becoming rich.

In the process, as revenue figures for Schwab in the recent past would indicate their business has gradually evolved from being a primarily a discount brokerage firm that relied on online trading for a bulk of their revenues to now become an asset management firm that manages the and investment consultancy firm that has a gamut of portfolios to cater to the average American willing to invest. As Chuck Schwab himself has said repeatedly, it is his goal to see that investors get better returns out of their investment and Charles Schwab Inc., with Chuck Schwab back at the helm is on its way of doing that.

Schwab has once again begun re-organizing its strategy. It has gone back to a strategy that paid rich dividends during the growth years. With Chuck Schwab at the helm they are moving away from an over dependence on online trading volumes to a more conciliatory approach that relies heavily on asset management of its wealthy clients.

The above graph indicates the tremendous volatility that the group faced during the dot com bubble and especially in 2006 when growth was at an all-time low. The share price is stable now in 2013 and is almost near the peak levels before 2000. “It is my belief that investors deserve better. They still do.”-Charles R Schwab. Chairman and CEO, Charles Schwab & Co, Inc.

Discuss the leadership styles of Schwab and Pottruck in the context of the company? Charles Schwab started his San Francisco-based firm in 1971 as a traditional brokerage company and in 1974 became a pioneer in the discount brokerage business. Mr. Schwab took an early lead, offering a combination of low prices with fast, efficient order executions, and soon became the nation’s largest discount broker In 1984, David Pottruck, a young and aggressive ex-Penn wrestler and football player, was frustrated with his traditional job at Shearson American Express in New York.

At that time, Charles Schwab asked him to come across the country and be the head of marketing for a new kind of financial services firm Schwab had in San Francisco. Pottruck said he was up for the challenge. Together, Pottruck and Schwab set a new tone and built up that new kind of financial services business that became a standard in the industry. Pottruck and Schwab became the Mr. Inside and Mr. Outside of the online stock trading revolution.

Schwab, whose name was on the firm, was the face the public saw in commercials and on the talk shows. Pottruck, a driven businessman, designed the strategies and put people in place to perform. He and Schwab were co-CEOs for five years. By merging their clashing styles, they built their company into one that more than a trillion dollars in customer assets.

Charles Schwab and his leadership styles

1. The leadership strengths include Schwab’s ability to vision, to achieve employee “buy-in” to the company mission, to practice renewal, and to empower individual employees.
2. Charles Schwab certainly started the firm to make money. But he believed that could be done by actually serving others, giving market access to people who wanted to manage their own accounts. He knew if he provided value to customers and paid attention to good business principles, profit would follow. He was determined to -provide customers with the most useful and ethical brokerage services in America. Charles’s vision reflects his personal values – fairness, empathy, responsiveness, service – and these have become the bedrock for how he expected everyone in his company to behave.
3. Among Charles’s managerial shortcomings two common complaints seem to be that  he created a high stress environment and He did not communicate concrete expectations very well.
4. Charles Schwab focused a lot on technology based services which became central components of his business and his main aim was to provide informed investors with low-cost access to security transactions.
5. David S. Pottruck, shared the CEO title with the company’s founder from 1998 to 2003. In May 2003, Mr. Schwab stepped down, and gave Pottruck sole control as CEO. Just a year later, on July 24, 2004, the company’s board fired Pottruck due to the drop in profit margins and a big decline in the company’s revenue, replacing him with its founder and namesake, Charles R. “Chuck” Schwab.
6. After coming back into control, Mr. Schwab conceded that the company had “lost touch with our heritage”, and quickly refocused the business on providing financial advice to individual investors. He also rolled back Pottruck’s fee hikes. The company rebounded, and earnings began to turn around in 2005, as did the stock. The share price was up as high as 151% since Pottruck’s removal, ten times since the return of Charles Schwab. The company’s net transfer assets, or assets that come from other firms, quadrupled from 2004 to 2008
7. Charles Schwab agrees to the fact that Technology is the driver and enabler of all the company does and it’s been Schwab’s hallmark to enable customers to interact directly with technology themselves.
8. Charles Schwab agrees to the fact that Technology is the driver and enabler of all the company does and it’s been Schwab’s hallmark to enable customers to interact directly with technology themselves.
9. He has the vision thing, but every manager who ever worked for him uses the same terms – Not detail-oriented. Avoids conflict. Tactically tone deaf. Detail-averse.
10. Schwab explains that his success was based on his ability to handle people well. He considered his greatest skill to be his ability to arouse enthusiasm among his subordinates. In his words: “The greatest asset I possess, and the way I develop the best in a person is by appreciation and encouragement.”
11. There is no question that Schwab’s leadership style and ability to motivate contributed to his enormous success as a business titan during the turn of the 20th century. He built his enterprise by building confidence within his workforce, not by tearing them down.

David Pottruck and his leadership style

1. David Pottruck arrived at Schwab with a lot of what Charles diplomatically labeled – East Coast baggage. He was brilliant, but Pottruck’s hard driving personality and a management style developed at Citibank and Shearson, irritated a lot of people at Schwab.
2. Pottruck was a hard driving executive who was respected but not always liked. He came to Schwab with a streak of impetuousness, an eagerness to call a spade a spade and a strong fondness for making wise-cracks.
3. Charles had set a high bar for Pottruck, and he outperformed in every way. He helped navigate Schwab to a dominant position on the Internet. His fingerprints were on every part of the company, from the monumentally successful AdvisorSource program to Schwab’s increasing presence in the retirement plan market. With Charles increasingly preoccupied with visionary duties and activities such as writing his book, Pottruck had been operating in every respect like a chief executive officer.
4. David Pottruck tried to create the firm in a “clicks and mortar” way that combined the best-of-the-breed technology and people i.e people were given access and choice from wherever they happened to be through a multi-channel method of service delivery. Even though the Internet was a popular option, representatives were available in branch offices and in the call centres to help the investors in developing the strategies and evaluating their choices.
5. He helped build Schwab from a $50 million revenue company to a $5 billion revenue company over 15 years and was in Charles Schwab from 1984 until 2004.
6. Pottruck helped guide Schwab through the 1987 crash, led its drive to start a mutual fund supermarket, and in perhaps the boldest move of all, shifted Schwab’s customers en masse to the Internet in the late 1990s while dramatically cutting commission prices. For that move he was widely hailed as a business visionary and handsomely compensated, with options worth tens of millions of dollars and bonuses of more than $8 million in 1999 and 2000 alone.
7. David Pottruck became co-CEO with Charles Schwab in January 1998 and they served together as co-CEO’s till May 2003. Then, Pottruck became the sole CEO and served for 14 months before being replaced by Schwab at the behest of the board of directors.
8. Pottruck was fired since the overall profit had dropped 10 percent, to $113 million, for the second quarter of 2004, driven largely by a 26 percent decline in revenue from customer stock trading. Also Pottruck’s acquisitions of US Trust and Soundview Technology were reasons for his removal from the CEO position. US Trust was acquired so that the company could serve the wealthy clients which eventually shifted the company’s principle goal of serving the middle class segment. The acquisition of Soundview Technology was not as fruitful as
   expected and it had become more of a liability than an asset.
9. During Pottruck’s tenure as Schwab’s President and co-CEO, the client assets at Schwab grew from $66 billion (1992) to $1.08 trillion (2004), and their market capitalization grew from under $1 billion to $15.9 billion.

Conclusion

Schwab was a little soft hearted while Pottruck was the aggressor; he was openly ambitious, slightly selfish and made no second thought while saying he wanted to be CEO. Schwab was not a touchy feely person, he did not believe in loyalty and things like that but in contrast Pottruck, even though he was a an extremely aggressive person by nature, he viewed loyalty very importantly. He would give anything for his employees. Charles always stuck to the company’s original policy of serving the middle class segment, seeing to it that the investors get the most out of their investments while Pottruck also shared the same goal but somehow diverted from it so that the wealthy and affluent clients could also be served.