Should Charles R. Schwab Aim Higher?

Some say the conservative brokerage firm Charles R. Schwab should be more aggressive as rivals such as E*Trade Financial struggle

In a long-planned succession, Bettinger (left) replaced Schwab as CEO in October Eric Millette

By Roben Farzad and Christopher Palmeri

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When Charles R. Schwab, the chairman and founder of the giant stock brokerage that bears his name, starts feeling overconfident, he grips the black bowling ball perched on his desk. It's a memento of the long-forgotten bubble of 1961, when shares of bowling pin companies, shoemakers, chalk manufacturers, and lane operators were thought to be can't-miss plays on the limitless potential of suburbia—and turned out to be duds. Schwab keeps the ball as a reminder not to buy into hype or take excessive risks.

That conservatism has helped the San Francisco firm avoid many disasters over the years, none bigger than the recent credit bubble. While much of Wall Street was rushing into risky subprime mortgages, Schwab (SCHW) was setting up a modest consumer bank to keep the company steady in the event of a market meltdown. Bingo: During the panic of 2008, many of the customers fleeing Merrill Lynch (BAC), Wachovia (WFC), and others took their money to Schwab. Its brokerage business grew by $113 billion on the year, while its bank deposits surged by 72%, to $24 billion. Schwab posted record operating profits for 2008—a mind-bending feat given the stock market meltdown.

In the span of a few quarters Schwab has morphed from a stock brokerage into a fully diversified financial institution: Not only does it process trades and offer financial advice, but it now provides all manner of banking products and services, from certificates of deposit to credit cards. In terms of brokerage assets and retail clients, Schwab now ranks solidly among the "big four" diversified retail financial firms, alongside Bank of America (BAC) Merrill Lynch, Morgan Stanley (MS) Smith Barney, and Wells Fargo (WFC) Wachovia. The distance between the big four and the next tier, which includes TD Ameritrade (AMTD), E*Trade Financial (ETFC), and SunTrust Banks (STI), is vast.

Yet some analysts and investors expect more of Schwab. The industry turmoil, they say, is presenting unusual opportunities to take out weaker rivals and tap new revenue sources. Other firms are already on the prowl. Wells Fargo is beefing up the risky securities business it inherited as part of its controversial acquisition of Wachovia last year. New York money manager BlackRock (BLK) bought Barclays Global Investors in June to become the biggest asset management firm in the world.

The question is whether Schwab should follow those firms into the risk pool. In order to seize what might be a once-in-a-lifetime chance to gain market share, it would have to abandon the conservative principles that helped it sidestep the financial crisis in the first place.

What's more, even if Schwab were to go on the offensive, it wouldn't be easy. Some analysts and former employees are raising doubts about the firm's ability to ride herd over all that new money, and about its ability to learn, on the fly, how to become a bank.

So what's a discount stockbroker turned Wall Street kingpin to do? You might call the dilemma a paradox of success.

BACK TO HIS ROOTS

For now Chuck Schwab is taking the cautious route, in part because the firm has misplayed industry shakeups before.

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