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Ba401 Case 2 15 Charles Schwab Corporation
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Ba401 Case 2 15 Charles Schwab Corporation


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  • 1. Case II-15
  • 2. Company Background
    • 3 Primary Business Segments
    • 3. Investor Services
    • 4. Advisor Services
    • 5. Corporate and Retirement Services
    • 6. Headquartered in San Francisco, California, USA
    • 7. 306 Branch offices in United States, operations in 45 states.
    19 offices and our automated telephone system provide Chinese,
    Korean, Spanish and Vietnamese language services.
    • 12,200 Full-time employees
    • 8. 6.8 million client brokerage accounts, 1.1 million corporate
    retirement plan, 154,000 banking accounts and 1.3 trillion in
    client assets
    • One of the world’s largest discount brokerage firm
  • Timeline
    • Dot-com bubble
    • 9. Boom in trading volume
    • 10. Trade can placed by online or by phone
    • 11. Acquire U.S. Trust and CyberCorp
    • 12. Changes in Retail Group
    • 13. Reduce numbers of RIAs in the network
    • 14. Launch “Talk To Chuck” Campaign
    • 15. Chuck Schwab Reinstatement as CEO
    • 16. Refocus on what clients need
    • 17. Launch Charles Schwab Bank
    • 18. Trouble Times for enterprises
    • 19. Fined by U.S Federals
    • 20. Market Downturn
  • The Reinstatement of Chuck
    In 2004, There is milestones for Charles
    Schwab Corporation that Charles “Chuck”
    Schwab, the founder is replace the former
    CEO, David Pottruck in July 2004. After that
    he was immediately determined to fix the
    problems and refocus the company.
  • 21. Market Storm & Market Bust
    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
  • 22. Market Storm & Market Bust
    According to program “Market Storm”, which the company added 2,000 service reps to the 7,000 and a new call center, its 5th in Austin, Texas.
    The market downturn is come 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.
  • 23. Change in Volume Trading
    Boom in trading volume that arrived and quickly ended in 2000
    Trading volume
    average per day
    Commission trading revenue dropped about 50%
  • 24. Market Storm & Market Bust
    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 1990s
  • 25. Market Storm & Market Bust
    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
  • 26. Market Storm & Market Bust
    After 2002 Trading revenue was declined because Schwab raised fees and growth of competition
    Ameritrade + TD Waterhouse = TD Ameritrade
    E*Trade acquire 2 companies, Harrisdirect and Brown Co.
    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.
  • 27. Challenge With Acquisitions
    U.S. Trust (1999-2006)
    In January 2000, Schwab acquire U.S. Trust for $2.8 billion. Schwab and U.S. Trust had a combined 1999 net revenue of $4.5 billion and combined client assets totaling $950 billion, as of early 2000
    24 offices of U.S. Trust were luxurious and hushed, catering to the asset management to fewer than 10,000 extremely wealthy clients.
    That’s different to Schwab’s hundreds of storefront offices and 4 call centers served the quotidian investment needs of company’s millions of middle-class customers
  • 28. Challenges With Acquisitions
    • U.S. Trust (1999-2006)
    Charles Schwab hoped to use U.S. Trust’s technological expertise such as IT assets to developed their financial research and administrative trustee service
    In 2001, U.S. Trust put small dent to Schwab’s long established reputation for probity after $10 million fined by U.S. regulator
    After that, there had been some upheavals at the top of U.S. Trust as several senior managers and two CEOs came and went in quick succession.
    Charles Schwab sold U.S. Trust to Bank of America in November 2006
  • 29. CyberCorp and CyberTrader
    CyberCorp and its subsidiary CyberTrader, a fast-growing online brokerage with specialized electronic trading technology for highly active traders.
    Schwab aimed to provide CyberTrader technology to better serve active online traders with a technology platform that gave them market and analytical data and executed trades.
    Challenge With Acquisitions
  • 30. Chicago Investment Analytics (CIA)
    CIA developed proprietary stock analysis based on quantitative modeling techniques for institutional clients
    Schwab apply the system to its retail-focused equity rating system, Schwab Equity Ratings, which was launched in 2002 and subsequently used to build a number of proprietary mutual funds.
    Challenge With Acquisitions
  • 31. Briefly Flirting with Institutional Research and Trading
    SoundView Technology Group
    Schwab paid about $340 m. to purchase SoundView in 2004
    SoundView Technology Group, Inc. operates as a technology-focused, research driven investment banking firm that provides services to an institutional and issuer client base
    Schwab acquire SoundView to create a combined institutional research and trading capacity to compete with major Wall Street institutional capital markets players.
    Only 8 months after Schwab cited the lack of synergy between the Capital Markets and Schwab’s core business and sold its capital markets business (Including 3 seats on New York Stock Exchange (NYSE)) to financial firm UBS.
  • 32. Computerized Recommendations
    • In 2002, Schwab launched new investing rating service, called the Schwab Equity Ratings System.
    • 33. Its new own stock ratings was introduced by employing Chicago Investment Analytics, a company Schwab acquired in 2000, to use computers to evaluate stocks according to quantitative metrics.
    • 34. The Schwab rating system assigned each rated equity a grade of A,B,C,D, or F. A-Rated stocks, on average, were expected to strongly outperform to overall equity markets over the following 12 months, while F-Rated is adverse to A-Rated.
  • Computerized Recommendations
    • Schwab’s stock selection came out on top of financial newspaper Barron’s ranking of top stock picks in 2006, and since 2003 have consistently beat all or most of the rankings produced by the top dozen Wall Street brokerage over a three-year or five-year period as compiled by Zacks Investment Research.
    • 35. Schwab Equity Ratings and other Investment analysis was made available over the Internet to Schwab retail clients and Schwab’s institutional clients.
  • Gathering Assets, Gathering Fees and interest: De-Emphasizing Commissions
    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.
    Just a few year ago, Schwab charged some of the highest trading fees in the brokerage industry. As trading volume across the industry declined and as price-sensitive customers defected from Schwab, the company’s revenue, which were heavily dependent upon trading fees, declined.
  • 36. Source of Revenue
    Source of Revenue
  • 37. Gathering Assets, Gathering Fees and interest: De-Emphasizing Commissions
    In 2005, 79% of Schwab’s revenue was derived from asset-based products and services, and interest. Only 17% came from trading revenues. The shift away from dependence upon trading revenue allowed the company to drop its trading commissions
    Beginning of 2006, Schwab’s trading volume had again approached the highs of 2000, but at a much lower commissions per trade. And hit an average of 230,000 trades a day by 4Q of 2005.
  • 38. Gathering Assets, Gathering Fees and interest: De-Emphasizing Commissions
    • By Late 2006, Schwab was organized into two primary operating segments:
    Schwab Investor Services which provided investment guidance, products and services to a full spectrum of investors:
    Schwab Institutional which provides custodial, trading and support services to independent investment advisors.
    • There was a third group called Schwab Financial products that developed products and services sold by the two operating segments.
  • Schwab Financial Products
    • Schwab Financial Products played a unique role at the company. Created the high margin products that provided much of the profitability for each of client enterprises.
    • 39. These product and services helped reduce Schwab’s dependence upon retail trading commissions.
    • 40. By May of 2006, this group had over $650 billion under custody. In total, Schwab had around $1.3 trillion under custody by the middle of 2006.
  • Schwab Financial Products
    • Schwab Financial Products also encompassed lending through Schwab Bank, and asset management.
    • 41. Schwab Bank offered traditional banking products and service including below:
    • 42. FDIC-insured savings and checking accounts
    • 43. Mortgages
    • 44. certificate of deposit(CD) accounts
    • 45. credit cards
  • Schwab Financial Products
    • Schwab Asset Management Products is sub group of Schwab Financial Products.
    • 46. Asset Management Products and Services (AMPS) ran the no-transaction fee mutual funds marketplace called Mutual Fund OneSource.
    • 47. AMPS was also responsible for design ,market , development, and management the Managed Account Platform which offered products called “Separate Accounts”
  • Schwab Financial Products
    Serve as an alternative to mutual funds, especially for wealthier clients.
    Investors in separate accounts show individual shares in portfolios and reap the tax efficiencies
    These accounts were managed by institutional money managers that were selected, monitored by Schwab
    Schwab charged its managed account clients regularly quarterly fees
    This was growing business for Schwab which was approaching the top five competitors in the market
    The Managed Account Platform is from Schwab’s efforts to better segment its clients, attract and service wealthier customer segments
    • Separate Accounts
  • Scaling Experience
    • The cost to serve investors and the profits to be made from servicing investors were generally related to the amount of the customer’s investment under management
    • 48. Small investors with around $50,000 to invest were received “Mass Advice” making do with investment tools that were online.
    • 49. Most financial services firms were interested in accounts with over $200,000 or more to invest
    • 50. Independent financial advisors in general served investors with six-figure-plus portfolios to invest
  • Scaling Experience
    • Schwab’s sweet spot, customer segment that provided good profits was customers with investible assets between $50,000-$2 million
    • 51. Investors with more to invest could use the services of fee-based planners available through Schwab Institutional
    • 52. Accounts with more than $250,000 were assigned a relationship manager who helped with service, investing advice and asset allocation
  • Scaling Experience
    • One key challenge Schwab faced was serving clients with less than $250,000 in their accounts to feel they were serviced well and service by the firm as oppose to an individual representative
    • 53. In the investment industry, sales representatives often took some or all of their clients with them when they switched firm or open up their business.
    • 54. Branches network is important in Schwab’s business. Most of new asset come in through the branches
    • 55. The physical locations were important to customers even younger customers seemed reassured by the physical branches
  • Schwab Institutional
    Schwab Institutional provide services such as asset custody and back office operations to independent financial advisors
    Registered Investment Advisors (RIAs)
    The business had grown from $50 billion in assets under custody in 1995 to $439 in 2006, 25% increase from the year prior
    There are 5,100 RIAs work with Schwab in 2005, and grew to 5,500 by late of 2006
  • 56. Schwab Institutional
    Because of well performing of RIAs business, Charles Schwab felt he could sell U.S Trust without damaging strategy
    The Schwab Advisor Network (AdvisorSource) , a group of RIAs prescreened by Schwab received prequalified client referrals from Schwab reps who felt their client would be better served by an RIAs. In return, RIAs pay a fee for referring clients and used Schwab to execute trades and custody assets
  • 57. Schwab Institutional
    Schwab Institutional reach the 1st place in market share in terms of client assets in 2005
    Source :
  • 58. Schwab Institutional
    Schwab is largest custodian for RIAs by touch over ¾ of all RIAs
  • 59. Schwab Institutional
    In October 2006, Schwab announced that it would reduce the number of RIAs in Schwab Advisor Network program by more than 50%
    Schwab reps was enabled to establish deeper relationships with the remaining independent financial advisors in the network
  • 60. Schwab Institutional
    Some independent financial advisors in Schwab universe feared that Schwab would compete with them for financial advisory business
    “Many advisors saw Schwab as an ally and a competitor”
    Schwab’s Financial Advisor
  • 61. Schwab Private Client
    Launched in the wake of U.S Trust acquisition
    Aimed at higher net worth individuals, people with over $1 million to invest
    Schwab Private Client would assigned customers to Schwab investment consultant to create an investment plan
    This service did not manage client’s money, nor advise on tax or estate-planning
    The service was aimed to fill a gap between service provided by Schwab and by RIAs or financial advisors at U.S Trust whose clients usually had at least $5 million to invest.
  • 62. The Role For Retail
    Schwab Investor Services run Schwab’s network of retail investment offices, call centers and online services, all of which provided customers with independent and advised investment services, trading, and investment products
    This group is the core group to prop up company’s profitability when met the trouble
    “Personal Choice”, pricing strategy launched in 2004. The company started to charge fees to customers with less than $500,000 in assets(90%) for services that used to free. Many customers take their account elsewhere
  • 63. The Role For Retail
    Charles Schwab, company’s CEO pointed that 2 problems that his company have
    Service and product’s price is higher than competitors
    Basic structure of discount broker didn’t permit company to develop relationship with clients
    For solve both of those problems Charles Schwab appoint Walter W. Bettinger II, ex-chief operating officer of the retail business for a new leader of the retail organization
  • 64. Changes in the Retail Group
    48% of new accounts were open through a branch
    Schwab point out that many of branch in network become an unwieldy
    Schwab make a biggest change to reduce cost by closed some branch and added others
    210 full service branches
    400 full Service Branches
    90 satellite branches
  • 65. Changes in the Retail Group
    The cost savings gained from changes in branches network were ploughed back into service
    Reduce waiting times in the call centers
    Lower prices
    Cost cutting had been an important priority for the company since Charles Schwab return to the CEO chair in 2004
  • 66. One Schwab
    In Schwab’s prior organization model, it had 3 separate business group:
    Active Trader
    Advised Investing
    Customers were assigned in a group based on their trading behavior in previous quarter
    The structure didn’t accurately reflect real customer behavior and make 3 ways competition in the company. Each group aiming to grow and take business from each other
  • 67. One Schwab
    In 2006, Schwab segmented customers based on their needs, their value and potential value to the firm
    Serving customers with “One Schwab” point of view
    In the past, Schwab separate website for each business. Nowadays, the company has a single integrated web capability
    In the past, a customer with $100,000 brokerage account and $400,000 mortgage, was viewed discretely as 2 small customers. Today, that customer is viewed and serviced as a $500,000 client
  • 68. The Role For Technology
    Technology is a key tool for Schwab and its competitors
    For example, one of Schwab’s competitor, Fidelity said it spent around $2 billion each year for technology
    Technology played a central role in the strategic shift that the firm made over the past few years
    For example, Schwab’s business model had changed from a transaction model to a relationship model. Transaction had become a commodity in brokerage industry
    The most salient ethos that ran through the company was the desire to eschews the potential conflicts between that what was best for the client and what was best for the company
  • 69. The Role For Technology
    The company had to leverage and scale technology that it bought or developed
    For example, use technology to scale the number of customers it could effectively and efficiency serve
    When Charles Schwab himself returned to the CEO position, the company reestablished its focus on productivity. This focus on efficiency extended to Schwab’s technology operations
  • 70. Competitor
  • 71. Fidelity:DangerousCompetitor
    Fidelity headquartered in Boston is the largest mutual fund company in U.S., providing investment management, retirement and brokerage service
    Fidelity was such a leader in administering 401(k) retirement business
    Both Schwab and Fidelity looked for growth in similar areas such as online brokerages, RIAs
    However, Merrill Lynch, TD Ameritrade ,Pershing, E*Trade, and Vanguard are also important competition in Financial service to Schwab too.
  • 72. Fidelity:DangerousCompetitor
    Fidelity relying heavily upon its online presence
    Fidelity has only 110 branches compared to 300 branches for Schwab
    Fidelity has $1.6 trillion in asset under administration by the end of 2006. Fidelity surpassed compared to former asset leader Merrill Lynch’s $1.4 trillion in asset and Schwab’s $1.3 trillion
    It was believe that Fidelity have been more profitability than Schwab because half of Fidelity’s brokerage asset were invested in Fidelity funds, as opposed to one-eight at Schwab
  • 73. Fidelity:DangerousCompetitor
    Fidelity seemed to poured a lot of profit into technology
    In 2004, the company spent $700 million in technology
    In RIAs business Fidelity has had less success than Schwab. With $470 billion in RIAs assets, Schwab was 3 times larger than Fidelity’s equivalent business
    Fidelity seemed to developed their RIAs business to compete with Schwab. Nowadays, Fidelity was offering technology-based products and services that resembled those provided by Schwab
  • 74. Fidelity:DangerousCompetitor
    Both of Schwab and Fidelity looked to increase their investment in technology to serve RIAs
    Worrying for Schwab Institutional was the fact that the Fidelity was such a leader in administering 401(k) retirement accounts
    By the end of 2005, Fidelity managed $708 billion in retirement assets compared to only $159 billion for Schwab
    As baby boomers aged and their retirement accounts grew, Schwab’s retirement account customers might turn to Fidelity investment advisor to guidance
  • 75. Reference
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  • Thank You