Schwab, Charles

(1937-)
Charles Schwab Corporation

Overview

After Charles Schwab's struggling investment firm took part in the Securities and Exchange Commission's (SEC) 1975 experiment to eliminate fixed rates on securities trades, Charles Schwab and Company became the largest discount brokerage firm in the United States. His brokers were paid salaries rather than commissions, and clients paid fees instead of commissions when they bought and sold stocks and other securities. His company did not provide any research or other information, it simply executed trades. It began to offer mutual funds when they became popular with investors, and by 1996 Schwab and Company was the fifth-largest brokerage firm, with client assets of $195.6 billion. In 1997 Forbes estimated Charles Schwab's personal net worth to be $1.7 billion.

Personal Life

Charles Schwab was born in 1937 in Sacramento, California (his actual birthdate has not been published). He was raised in nearby Woodland, a farming community, in upper-middle-class surroundings. His father was a lawyer and district attorney. As a young man Schwab found several ways to make money, from selling walnuts and magazine subscriptions to raising chickens.

In 1949 the family moved south to Santa Barbara, California, where Schwab developed a passion for golf. He played on the high school golf team, which was captained by future professional Al Geiberger. As an adult, Schwab had a nine handicap and often played in tournaments, including the Pro-Am at Pebble Beach.

After graduating from high school, Schwab attended Stanford University, where he earned a bachelor's degree in economics in 1959 and then an M.B.A. in 1961. He went to work for an investment advisory firm in San Francisco, where he spent several years studying growth stocks and market cycles. His research was frequently published in the firm's newsletter. In the late 1960s he branched out and managed a mutual fund.

Schwab has been married twice and has three children from his first marriage and two children from his second marriage. He has been described as a trim 5 feet 9 inches with a full head of hair. His associates call him Chuck and invariably describe him as a nice guy.

Schwab was diagnosed with dyslexia, a reading disability, after his son Michael was diagnosed with the same condition in the mid-1980s. Developing other traits to compensate for his reading difficulties, Schwab told Business Week, "I've always felt that I have more of an ability to envision, to be able to anticipate where things are going, to conceive a solution to a business problem than people who are more sequential thinkers."

Schwab was not always a successful investor. His failures include Congoland USA, a drive-through wild-animal park; a three-day music festival that lost $100,000; and several start-up companies that quickly went bankrupt.

Career Details

Schwab opened his investment firm, Charles Schwab and Company, in 1971 with an office in San Francisco. He ran into legal problems with the state of Texas, which prohibited him from taking orders from Texas residents because he was not a registered broker in that state. His legal battles with Texas left him in debt for about $100,000, which he paid off with the help of his uncle, Bill Schwab, who also invested another $100,000 in the brokerage firm.

Schwab's company was only marginally successful until his high school friend, Hugo Quackenbush, suggested he look into discount brokering. At that time the Securities and Exchange Commission (SEC) was reexamining the old fixed-rate system for buying and selling stocks and bonds. Schwab signed up to participate in the SEC's experimental discount brokerage program, and when the SEC abolished the old system on May 1, 1975, his firm was among the first to offer discounted trading. He pursued this niche even more aggressively when it became clear that the large established brokerages were using the new unregulated trading system to provide lower rates to their large institutional clients and raising the rates for smaller individual investors.

Schwab's company had sales of $1.3 million in its first full year of discounted trading and opened branch offices in Sacramento and Los Angeles. The company expanded rapidly in the 1970s and 1980s, opening branch offices as fast as it could. That set Schwab apart from other discounters, and soon Schwab was one of the first brokerage firms to automate all of its order processing. Another factor that helped to distinguish Schwab from the other discount brokerage firms was its personal touch in advertising. Schwab himself appeared, although at first somewhat reluctantly, in the company's advertisements, thereby providing a personal link between the firm and its clients.

The company's rapid expansion cut into profits, and Schwab had trouble raising capital to finance his company's growth. In 1981 he agreed to sell his company to Bank of America in exchange for 2.2 million shares of BoA stock. At the time of the sale, Schwab owned 38 percent of the company, and 20 percent was held by United Financial Corporation, which had paid $4.5 million for its interest. The rest of the company stock was part of an employee stock option plan or belonged to key employees. The company had sales of $41 million, with 40 branch offices, 600 employees, and 220,000 customers.

Chronology: Charles Schwab

1937: Born.

1961: Received M.B.A. from Stanford University.

1971: Opened investment firm Charles Schwab and Company.

1975: Company became a discount brokerage firm; opened first branch office in Sacramento.

1976: Reached sales of $1.3 million in first year as a discount brokerage; opened second branch office in Los Angeles.

1978: Began automating order processing.

1981: Company acquired by Bank of America.

1987: Bought firm back from Bank of America and took the company public.

1990: Began offering Charles Schwab Company name-brand mutual funds.

1992: Introduced OneSource, which offered customers no-load mutual funds of other companies.

With the backing of Bank of America, Schwab's company grew in five years to 93 branches, 1.6 million customers, and sales of $308 million. However, his association with Bank of America was troubled from the start. The stock he had received quickly dropped in value even before the sale was closed, due to losses incurred by the bank. At the time of the sale the Bank of America stock was selling at $25 a share and was worth $55 million. Within days it was selling for $21 a share. As the stock price fell, Schwab held onto his shares. When he and his wife finally sold most of them in 1985, it was at prices ranging from $14 to $19 a share.

Friction developed between Bank of America's CEO Armacost and Schwab over how Schwab and Company was to expand as well as how the bank should be managed. As part of the sale, Schwab had been given a seat on the Bank of America's board of directors and headed his own fairly independent board at Schwab and Company. Finally, in 1987 Schwab repurchased his brokerage firm for $230 million. A few weeks later, he took the company public to raise capital to pay down its $200 million debt and finance further expansion. Schwab's goal was to increase the number of branches to about 120 by the end of the year and expand into London, West Germany, and Japan.

By 1990 Schwab had 100 branches worldwide and was the largest discount brokerage firm in the United States. The company had diversified and was offering its own branded mutual funds. In 1992 it introduced One-Source, which offered clients 380 no-load mutual funds from other companies. Schwab was riding the bull market of the 1990s, enjoying 43 percent compound annual growth from 1990 to 1996 in terms of client assets. It was the fifth-largest U.S. brokerage firm (behind Merrill Lynch, Smith Barney, Dean Witter, and PaineWebber) with $195.6 billion in client assets as of February 1996.

Social and Economic Impact

As soon as it offered discount trading for a fee rather than a commission, Schwab and Company was perceived as a threat by the established brokerage firms and other members of the financial establishment. After the SEC deregulated securities trading in 1975, the established firms used their newfound freedom to lower rates for their biggest clients while raising them for smaller investors. Schwab, on the other hand, has always focused on the individual investor. He combined the traits of an entrepreneur with those of a crusader. Business Week wrote, "By all accounts, Schwab's populist sentiments are genuine."

When Schwab began aggressively marketing mutual funds in the early 1990s, he was directly competing with large established funds such as Fidelity and Vanguard by offering his customers no-load mutual funds from other companies. Schwab and Company's Mutual Fund Marketplace grew at an astounding 61 percent annual rate, growing to $58.3 billion in assets by 1996. Institutional Investor estimated that Schwab had taken away some $34 billion out of the big funds' pockets. Schwab ranked as the third-largest distributor of mutual funds, after Fidelity and Vanguard, which both perceived Schwab as a competitive threat.

Just as Schwab pioneered discount brokering and automated trading, his company has aggressively sought to capture the electronic trading market over the Internet. In early 1997, Wired magazine estimated Schwab owned 47 percent of the electronic brokerage business.

Sources of Information

Contact at: Charles Schwab Corporation
101 Montgomery St.
San Francisco, CA 94104
Business Phone: (415)627-7000
URL: http://www.schwab.com

Bibliography

"CEOs of the Decade." California Business, May 1990.

Ferguson, Tim W. "Do It Yourself: Charles Schwab Has Ridden the Bull Market to a Splendid Present, But Its Future Is in Boomer Retirements." Forbes, 22 April 1996.

Hector, Gary. "Charles Schwab is Feeling Fettered." Fortune, 20 January 1986.

Ingham, John N., and Lynne B. Feldman. Contemporary American Business Leaders. Westport, CT: Greenwood Press, 1990.

Lappen, Alyssa A. "Chuck Schwab's Search for the Next Paradigm." Institutional Investor, April 1996.

Mitchell, Russell. "Seeing the World through a Different Lens." Business Week, 19 December 1994.

Moreau, Dan. "Charles Schwab Built His Empire with a Simple Idea: Discounted Fees for Small Investors." Changing Times, October 1990.

Schwab, Charles. Charles Schwab's Guide to Financial Independence. New York: Crown, 1998.

Who's Who in America 1998. New Providence, NJ: Marquis Who's Who, 1997.

"The Wired Index." Wired, June 1998.