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During the past 20 years, the author has watch China move from being a developing country into an industrial superpower
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Get Four
|  | DECEMBER 30, 2004
By Mike Brewster Chuck Schwab: Everyman's Broker His notion of individual investors making their own trades -- and at affordable rates -- changed the way Americans invest As with most families, there wasn't much talk around the dinner table about playing the stock market when Carrie Schwab-Pomerantz and her two siblings were growing up in California in the 1960s and early 1970s. That was before their father, Charles R. (Chuck) Schwab, launched the discount brokerage that would create a new industry and give millions of typical Americans their first taste of investing. In those days, Schwab was still playing by the rules of the old-boy network that had ruled the brokerage industry for generations. In 1963, at the age of 27, Schwab and two partners had launched Investment Indicator, an newsletter that offered advice. Giving investment advice -- wanted or unwanted -- was something all brokerages did back then. But when Schwab began to notice how competitors' advice often steered clients into needlessly risky situations, he began to think he could offer investors something better. ADVENTUROUS TRADES. Before 1975, brokerage commission rates were set in stone, leaving consumers with no competition that could benefit them. Not only did stockbrokers receive set commissions for each trade their clients transacted but they also realized a higher percentage fee for riskier trades. This gave brokers incentive to lure clients into a series of frequent, adventurous trades. Save for large institutional investors, people who wanted to trade based on their own knowledge and experience -- and thus pay less of a commission and avoid the often-slimy brokerage sales pitches -- were out of luck. Then came May 1, 1975, and everything changed. That's when the brokerage industry, under a mandate from the Securities & Exchange Commission, deregulated commissions. Many brokerages -- so fat and complacent that they had no idea a generation of investors longed for someone to treat them fairly and with respect -- reflexively raised commissions. Schwab, however, saw the opportunity for a new kind of business -- the discount brokerage. At age 37, he started a company that undercut typical brokerage commissions by 75%. Perhaps most important, he put the power of trading directly into the hands of individual investors. Schwab had people on staff to place orders, yes, but he gave the intelligent investor who didn't want to hear -- or pay for -- advice a new route to trading. Today, Charles Schwab & Co. (SCH ) boasts over $880 billion in client assets, with over 8 million accounts. STRUGGLES WITH STUDIES. The knowledge Schwab had of his customers that led him to launch a discount brokerage was hard-won. As Carrie Schwab-Pomerantz says, he tried and failed many times before hitting on his paydirt idea. "My father was for a long time a struggling businessman," says Schwab-Pomerantz, today Schwab's vice-president for consumer education. "And then he had this idea that there should be more transparency in the brokerage industry, that there should be some options for investors with their own ideas. His competitors tried to treat him like a laughingstock. But underneath that laughter there was a real fear of his ideas." Schwab, though, has never feared being a laughingstock, due to the severe dyslexia that partly defined his childhood. He was born in Sacramento, Calif., on July 29, 1937, the son of a district attorney. Shy and always struggling to read, Schwab spent hours alone on a local golf course, sometimes playing 36 or 54 holes in a day. He labored mightily at school, making his way through on the strength of his winning personality, as well as good math and science skills. When he was accepted into Stanford University, thanks mostly to his golf skills, Schwab was in for a big surprise. He failed English twice, and once admitted that he was passed through the third time. He also failed a French class. Finally, he discovered economics and barely passed. BIG OOPS. But he worked hard and graduated -- and then earned an MBA, also from Stanford. After that, though, came Schwab's biggest failure as a businessman. At age 23, he formed a brokerage with two other men, Desmond Mitchell and John Morse. The aggressive young brokers wanted to take the industry by storm, and starting advertising in their Investment Indicator for people around country to invest in their funds. But Mitchell, Morse & Schwab neglected to register some of the funds it launched with all the states where it was doing business. The SEC intervened, and the firm had to stop selling certain funds in various states, bringing an end to the partnership and putting Schwab $100,000 in debt. The end of his first marriage soon followed. At age 35, Schwab looked like a failure. Then came May Day. The new brokerage, hitting a nerve with individual investors, grew dramatically. Schwab's firm began offering seminars for investors and then made the wise move of automating transaction and back-office record keeping, which led to more growth. "He always knew to have very strong leaders in terms of technology," says Schwab-Pomerantz. "For years, our brokers were making records of trades on computers, while the wire houses were still writing on paper tickets." BACK IN COMMAND. Soon, Schwab was opening branches all over the U.S. By 1983, when he sold the firm to Bank of America (BAC ), the brokerge had 500,000 customer accounts. Despite the ill-fated BofA sale (Schwab persuaded the bank's board to shed the company just four years later in a leveraged buyout), Schwab & Co. has continued a series of amazing successes that has kept it ahead of other discount brokerages. It was the first to offer a variety of no-load mutual funds with its Mutual Fund OneSource program, one of the first to facilitate electronic trading for customers, and the first to offer professional-quality research over the Web. Today, after a series of management changes following the 2000-02 market downturn, in which clients' trading activity plummeted and Schwab gave up the CEO role to give new management a chance, Chuck Schwab is back in the driver's seat. In July, the company's board appointed him to replace David Pottruck, who was forced to step down after failing to improve the company's performance. "The way the economy and the industry suffered a few years back -- no one could have predicted that," says Schwab-Pomerantz. "But he loves being back." And legions of investors are thankful he got started in the first place.  During its 75th anniversary year, BusinessWeek is presenting a series of weekly profiles of the greatest innovators of the past 75 years, from science to government. BW Online is joining in by adding more online-only profiles of The Great Innovators. In late September, 2004, BusinessWeek published a special commemorative issue, The Innovation Economy Brewster is a New York-based writer Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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