How Charles Schwab Quietly Became The Biggest, Public U.S. Brokerage

Charles Schwab is the largest publicly traded brokerage in the U.S. It's a enormous business, $7.5 trillion of client assets. Charles Schwab, often referred to as the discount brokerage king. It was one of the first brokerages to offer discount trades for retail investors, and now it's expanded services across the finance sector. It would be fair to characterize Charles Schwab as a financial services supermarket. It even slashed

trading fees to zero. Why the heck would you give something away for free if you could charge real money for it instead? But this behemoth is facing a risky financial environment. Charles Schwab. Three days of double digit declines. For the first time in its 36 year trading history. The collapse of SVB has investors nervous about firms that have big losses on bonds. Schwab's huge growth also

had its own consequences, and this is a huge problem. Here's how Charles Schwab battled the ever-evolving financial services market from low fees to fintech. In 2022, Charles Schwab said they saw an all time record financial performance despite the bruising year for equity and bond markets. Adjusting to the new post-pandemic normal. With $20.8 billion in revenue, Charles Schwab had a profit of $7.2 billion, and 4 million

new brokerage accounts were created. Over 50% of its net revenue is related to interest rates. And whether this is via net interest income or its bank deposit account agreement with Toronto-Dominion Bank, about 20% of its revenue is from trading and commissions and the remainder is asset management fees. Privately owned Fidelity is big competition. It's the larger firm with over 45 million brokerage accounts, including 37 million

retail and 8 million wealth management accounts. Whereas Charles Schwab has 34 million total brokerage accounts, some of which are retail wealth management and independent advisor accounts. Charles Schwab is a powerhouse in the investment services industry, but it does compete with many other firms. In each case, Charles Schwab competes with different facets of its business, including legacy full service brokers and investment bankers like privately owned Edward

Jones, Stifle, JPMorgan, Morgan Stanley and UBS. Not to mention the newer entrants Robinhood, Ally Financial and SoFi compete with Schwab in the financial tech, aka fintech, market. Charles Schwab & Co. was founded 50 years ago in 1973, when Charles Schwab himself bought out his partners at what was formerly Commander Industries. At the time, Wall Street was accessible only to investors with enough money to pay high

commission fees using full service brokers. Many of these institutional people like to hold the information close to them they want only for themselves. And Schwab is about the trying to open architecture to get more information out to more individuals. Wall Street thought deregulating fees would crumble. The New York Stock Exchange and bankrupt at least 150 investment banks. May Day abolished fixed commissions. Charles Schwab, the company

and Charles Schwab the person were pioneers in democratizing investing. Charles Schwab undercut the competition. It had this huge first mover advantage. A lot of people went to Schwab to open trading accounts because they can pay a lot less for the same services. For example, investors could now buy and sell stocks for less than $10 per trade. You led that revolution. Well, we in the discount brokers,

it took us. About 15 or 20 years to do that. Didn't happen overnight. Charles Schwab also started advertising before May Day. Self promotion was not something gentlemen brokers did. From the get go. They were advertising using chalk. They put a picture of him in the newspaper and he seemed like a credible, nice person that was trustworthy and it worked. Let's talk to Chuck, as the ad

used to say. He joins us down on the NYSE floor. That was my favorite. Thank you, Bob. When was that? 2005? Yeah. It was. That helped put your face out there as the face of the firm itself. Did that give you a competitive advantage? Well, you said so. I think it did. And so when you look at Schwab today, they still have that brand, they still

have that customer service, but they also have some of the best pricing in the industry. Charles Schwab eventually went beyond brokering. Charles Schwab was an early adopter of technology from digitizing its back office in the late 70s to online trading in the 90s. Before Charles Schwab really started to expand, Bank of America acquired Schwab for $55 million in 1983. But by 1987, Charles Schwab bought it

back for $280 million and went public with $429 million of market cap. Charles Schwab & Co. had a record year in '97. Fantastic year. Competition stayed fierce. This boom has been led by computer and high technology stocks. The 1990s tech boom inspired the company and its competitors to expand offerings. The Schwab right now is well over 50% of our customers use a personal computer to interact

with Schwab, get information, monitor their accounts, make decisions, make transactions. It's a huge world of information. Charles Schwab introduced mutual funds, retirement accounts and online trading on schwab.com. Inherently, this is a scale business. The larger you are, the more efficient you are from an expense perspective. It enables you to cut prices. But when the dot-com bubble burst, Schwab felt that impact. 75% of all Internet firms

will either merge or fail to keep. Up with competition. The company pivoted to strategic acquisitions and eventually grew its services and even launched its very own bank, Schwab Bank, in 2003. Charles Schwab being a bank is very unique. Say an investor opening an account with Schwab, They can have deposits at its bank. They can trade stocks within its brokerage. By 2010, mobile trading was introduced. And

Schwab met demand for exchange-traded funds, aka ETF's. Schwab has muscled into the ETF space in the last five years. You're now number five from nowhere. It's really very- I don't know if we muscled in. We just offered great value. If you look in more recent years, it continued to innovate and disrupt or at least has been a fast follower with industry developments. When startup trading apps

like Robinhood entered the market with zero commissions in 2014, that was a huge deal. Five years later, Schwab followed suit. Charles Schwab out with a bombshell announcement today. It is slashing trading commissions for stocks, ETF's and options to zero. In a world where Schwab is at zero, everyone had to follow. The following day, TD Ameritrade cuts to zero. Hours later, E-Trade cuts to zero. The problem

was that it did a lot more damage to their business models than it did to Schwab's. Ameritrade was in a moment losing something like 20% of their revenues. Is Schwab a potential buyer of anyone out there? Well, certainly at the right valuations, we would do it. Fast forward less than two months later and Schwab announces that it's merging with TD Ameritrade in an all stock combination.

Believe most people would have thought that maybe Charles Schwab would have gone after E-Trade instead just because it would have been smaller and more manageable. But it was quite a feat for them to actually be able to merge with TD Ameritrade. The problem is that with brokerages slashing fees to zero, a revenue stream is lost. But for Charles Schwab, one of its main revenue streams is

now its banking operation, which other brokerages don't really have. It's actually one of the biggest banks in the country. They make a lot of revenues from what they call sweep accounts. It's essentially uninvested money that gets pushed to bank accounts from brokerage overnight. So they get this leftover money from investors, from trading from their portfolio. And Schwab takes this cash and reinvest it in government bonds

and other securities in order to turn a profit. This is where Schwab's pandemic growth faces consequences of aggressive Federal Reserve interest rate hikes. This really rapid rise in interest rates really dented the value of the longer term bonds that Schwab had. That's why we saw Schwab stock is down so much. Charles Schwab told CNBC it was unable to participate in this story. The collapse of SVB

has investors nervous about firms that have big losses on bonds and potentially flighty deposits. Schwab, defending its financial position, insisting it's well positioned to navigate the current environment. Our bank is very conservatively managed. From a liquidity standpoint, we have access to very substantial liquidity. I understand that, that there are banks that got into trouble, but those applications, we don't believe, apply at Schwab at all. The

financial services industry is always changing and companies are fiercely competing to stay ahead. Once Charles Schwab decided to develop its own ETF line and its intelligent portfolios, robo advisors, offering it quickly caught up to and even leapfrogged some of the early leaders in those spaces. Artificial intelligence, like robo-advising used by Schwab in its intelligent portfolios, may be the next stage of tech evolution in the industry.

Robo advisors are a great value proposition for certain investors, primarily cost conscious. Robo Advisor remains a very small business for Schwab. The development of growth in that space is a little bit bumpy, I would say, for Schwab, because just last year they settled a pretty big settlement alleging Schwab that it wasted the investors' money by asking them to put too much cash in their account. As

competition heats up, Charles Schwab is hoping to lean into its reputation to continue to serve clients in the future. The concept of discount brokerage still exists. That concept is becoming increasingly antiquated. If you really want to be a player in this industry, you really have to branch out into other services, whether that's asset management, product manufacturing or having a banking subsidiary. You have to offer a

lot more than just cheap trades.