Charles Schwab Case

Topics: Mutual fund, Broker, Stock broker Pages: 5 (1794 words) Published: May 29, 2005
Charles Schwab, a Stanford MBA, founded Charles Schwab & Company in 1971 in California. The company quickly established itself as an innovator. A defining moment came with the 1975 "May Day," when Schwab took advantage of the new opportunities deregulation offered. Schwab would not provide advice on which securities to buy and when to sell as the full-service brokerage firms did. Instead, it gave self-directed investors low-cost access to securities transactions. From the late 80s to the early 90s, before the commercial use of the Internet, Schwab used technology to increase efficiency and quality and expand its services. Schwab's innovations harnessed technology to the solution of business problem. As Schwab's President and co-CEO David Pottruck put it, "we are a technology company in the brokerage business."

Schwab introduced TeleBroker, a fully automated telephone system that allowed customers to retrieve real-time stock quotes and place orders. Schwab also leveraged its back-office operations with SchwabLink, a service to provide fee-based financial advisors with back-office custodial services and the capability for RIAs to plug into Schwab's computers to trade. The RIA market became an important source of revenue for Schwab. By 2000, Schwab had 5,900 affiliated RIAs, who controlled about 30% of Schwab's assets, up from zero in 1987. Merrill Lynch viewed these RIA's as a "virtual sales force" for Schwab: "We don't compete with the discounters. We do compete with Schwab. They have essentially built a Merrill Lynch by proxy." Schwab introduced the Mutual Fund OneSource program in 1992, enabling customers to purchase no-load mutual funds without paying commissions. The vast majority of OneSource assets were in non-Schwab funds, except the SchwabFunds money market, the only money market fund offered to OneSource customers. Funds were ranked and presented to Schwab customers based on objective characteristics (e.g., sector, investment style, or management fees) and performance. Customers could use their Schwab account to buy or sell more than 1,100 mutual funds from about 200 third-party fund families without paying any fees, and the transactions were integrated into their Schwab account statements and reports. Schwab serviced these accounts, aggregating all OneSource trades into a single daily transaction that was communicated electronically to the participating funds. Schwab charged fund providers a 25-35 basis point fee for listing the fund in OneSource and providing shareholder services.

Schwab impacted the industry in various ways. However, we need to first define the various types of firms that existed. The industry consists of three distinct types of firms: traditional full service brokers, limited-service discount brokers and Internet brokers. The market share for these three types of firms was as following: Full service brokers – 74%, Discount Brokers – 20%, and Internet brokers 4%. Traditionally, full-service brokers have aided investors in making investment decisions through expert advice and guidance. They guide investors through the purchase and/or sale of stocks, bonds, mutual funds, options, and other financial securities. Their services are delivered through a network of local offices and are they highly compensated through their firms' individual commission structure. Leading full-service brokerage firms include Merrill Lynch, Paine Webber, Dean Witter, Smith Barney, and Prudential Securities. Limited service brokers surfaced in the mid-1980's to challenge the traditional full service brokers. They became increasingly popular in the late 1980's and early 1990's with knowledgeable investors who take an active role in managing their portfolios, trade frequently and want to minimize trading costs. The discount broker's, such as Schwab, main advantage is that they offer investors discounted commissions. They are able to charge these reduced fees since they don't employ brokers or investment researchers....
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