Charles Schwab Budget Broker

Charles Schwab
Founder of Charles Schwab & Co.
Founded: 1971

"I have a passion for the investor. I've always been one myself, and the standard I apply to all our services is: If it's good for me as an investor, you'll see it."-Charles Schwab

There's an old marketing adage that goes, "When everyone is headed in one direction, chances are your best opportunities lie in the opposite direction." This is one maxim Charles Schwab takes to heart. By turning his back on stodgy Wall Street conventions, he blazed his own trail and sparked an investing revolution. At a time when most brokers were battling for large institutional clients, Schwab focused his attention on the individual investor. As one of the first brokers to offer low-cost, no-frills trading services, Schwab pioneered the discount brokerage industry and transformed a struggling firm into one of the nation's largest traders.

The son of an upper-middle-class lawyer and a district attorney, Schwab was bitten by the entrepreneurial bug at an early age. While growing up in Woodland, California, a small farm community west of Sacramento, the industrious Schwab found lots of way to make money, from selling magazine subscriptions to raising chickens in his backyard. After graduating from high school, Schwab attended Stanford University, where he earned a bachelor's degree in economics in 1959. While working on his graduate degree at Stanford, Schwab took a job with a local investment advisory service, and upon receiving his MBA, was promoted to vice president of the company. But Schwab had bigger things in mind.

Wanting to be his own boss, Schwab and two of his friends launched a newsletter for investors in 1962. The company grew quickly and branched out to include a $20 million mutual fund. After the market crashed in 1969, the state of Texas ordered Schwab to stop taking mail orders from Texans because he wasn't registered to do business in the state. He fought the order in court and the legal fees left him $100,000 in debt. Undaunted, Schwab brokered a land deal for his uncle, who gratefully paid off the rest of his debt and offered him an additional $100,000 to start his own business.

Using the money from his uncle, Schwab opened the first office of Charles Schwab & Co. in San Francisco in 1971. Initially, the company was just one of many struggling young firms in the securities business, with only a dozen employees and 2,000 or so clients. As late as 1974, Schwab was still on the rebound, searching for a niche for his company. Then in 1975, the Securities and Exchange Commission (SEC) discarded the old fixed-rate system for buying and selling securities in favor of negotiated rates. Under the new system, brokers could charge whatever they wanted.

Schwab noticed that most established brokerages were using the new unregulated system to provide lower rates to their large institutional clients while raising the rates for individual investors. Schwab saw his chance and vigorously targeted the small-investor market, offering no-frills service and deep commission discounts that were as much as 50 percent below that of his competition. To afford such discounts and still make money, Schwab did away with the traditional service of offering research, put his staff on salary, and automated order processing via computer (one of the first brokerages to do so).

Industry experts were skeptical. They argued that investors had to be sold stocks by brokers-that people tended not to buy on their own initiative. But Schwab stuck to his guns, and his company quickly emerged as the leading discount brokerage firm. Schwab continued to break new ground by opening branch offices and offering 24-hour order taking, no-fee individual retirement accounts, cash management accounts (investment accounts that offer subscribers traditional bank services such as personal checks, credit and debit cards as well as financial tracking and management), no-load mutual funds and insurance, all industry firsts.

By 1981, Schwab had branch offices in 40 cities, 600 employees, 220,000 clients and annual revenue of $42 million. But the company's rapid expansion began to cut into profit, and Schwab had trouble raising capital to finance further growth. To remedy this, Schwab agreed to sell his company to Bank of America (B of A) for $57 million worth of B of A stock, making him the bank's largest individual shareholder.

However, the deal began to sour almost immediately. While Schwab's group enjoyed healthy profits, B of A suffered heavy losses. As the bank's stock plummeted, Schwab urged his fellow board members to cut overhead and reorganize, but his pleas fell on deaf ears.

After six frustrating years at B of A, Schwab had finally had enough. In an unprecedented move, he repurchased his firm from B of A for $230 million in 1987. A few weeks later, he took the company public to raise capital to pay down its $200 million debt and finance further expansion. With Schwab back in control, the company soon returned to profitability and regained its status as the nation's leading discount brokerage.

Throughout the 1990s, Schwab continued to expand. Anticipating the Internet boom, he began looking into e-commerce in 1995, and by the end of the year, he had opened one of the first online discount brokerages, e.Schwab. By 1998, e.Schwab had become the No. 1 online trader and accounted for more than half the firm's trades.

By following his instincts rather than listening to "the experts," Charles Schwab created a new form of stock brokerage and paved the way for online trading. He took brokering out of the hands of high-powered, high-priced firms; demystified the process of stock trading; and made it easier for individual investors to enjoy the benefits of a wide-open stock market.

The Personal Touch

A major factor in Charles Schwab & Co.'s success has been a unique marketing strategy that features Charles Schwab's photo in most of the company's advertising. Schwab was a reluctant model, but as business grew, the photo provided a personal link between the company and it customers. As one former Schwab executive explains in a 1986 Fortune magazine interview: "We'd interview customers and they'd talk about 'Chuck' or 'Charlie.' [The photo] gave them a human being to relate to."

Stiff Competition

While Charles Schwab may be a hero to individual investors, many of his colleagues were outright hostile toward him when he first ventured into the discount brokerage market. In the early days, Schwab had to fight to get seats on several stock exchanges. He spent hours combating rumors spread by rival firms that his company was going out of business. Banks, influenced by the rumors, refused to lend him money. And he found getting office space particularly difficult as the big brokers apparently told landlords they would move out of buildings if they rented to Schwab. Yet he overcame it all, and in a poetic twist of fate, Schwab's company has outlived many of the competitors that tried to do him in.