Saturday, January 29, 2005

What lies ahead for Charles Schwab?

By special request, we're reposting a piece we did on Schwab last December.
Now that Charles Schwab ousted David Pottruck from the CEO position at the brokerage giant that bears his name, Schwab needs to concentrate on what it/he does best.
There's no one who has more interest in righting the ship of the company--that is obviously good for shareholders. Schwab is the largest discount broker and master of their own domain--Charles Schwab was the company "applying the pressure" when the government deregulated commission prices 20 plus years ago, as one commentator wrote. Charles Schwab is successful b/c of its identity. No high fees, but no costly personal advisors either. In the late 1990s, as individual investors plunged into their self-directed portfolios, Schwab and the other discount brokers exploded. Their revolutionary 1995 decision to drop commission fees from 80 to 30 bucks set the stage for a boom in the company's share price.

Then ETrade, Ameritrade, and their brethren crashed the fiesta and the shit really hit the fan. Online trading turned into a commoditized price-driven enterprise--Schwab positioned itself on the upper echeleons and paid the price. Dearly. When the stock market turned, the company tried to multi-task it all, engaging in poor transactions while failing to either reduce fees further or lend personal/advisor support to the guys who lost thier shirt post-99. What they did instead was buy U.S. Trust in 2000 for $2.7 billion and Soundview Technology, an equity research firm thereafter. All of a sudden you had a formerly low cost entity company morphing into a differentiated products holder. Ummm, no.

Schwab built its reputation via a focused strategy that fell out of bed when competition neared. No company can fight a war on both ends--high and low. Chuck can save the brokerage by returning to the basics. A revolutionary 180 in thier business model would spell, I beleive, further disaster. Keep it real, Chuck, and just give 'em what they want. High-ticket investors aren't feeling you, man. I read today that the company had the exact same top-line number in 2003 as it did in 2000--entailing all those costly expenditures resembled a sort of treadmill effect--going nowhere fast. Schwab is still the largest discount broker, holding $1 trillion in assets under management. The market is back on its feet, finally. A new pricing model may wreak further havoc so that's not the answer--re-establishing the company's core identity within a polarized Street mentality is. You can do it, Chuck.

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