Magazine

The Transformation of Charles Schwab


"Schwab vs. Wall Street" nails the radical outward changes that have taken Charles Schwab Corp. far from its roots as a discount broker (Cover Story, June 3). But the quaking on Wall Street is mirrored by the turmoil inside the company as Schwab systematically abandons three of the four principles on which it was based.

Principle No. 1: No advice. Chuck Schwab used to fire brokers who recommended stocks. A generation of Schwab traders grew up believing that advice was a dirty word. Schwab Equity Ratings, its new stock-picking service, takes the air out of that principle.

Principle No. 2: No selling. Its brokers still don't make cold telephone calls, but Schwab is gearing up for an aggressive e-mail alert program that is "warm calling" in disguise.

Principle No. 3: Serve the average investor. Schwab's transformation into a broker for the wealthy is almost complete. It is nickel-and-diming its sub-$50,000 accounts, hoping they will go away. While other brokerages are lowering fees, Schwab is raising them.

Only the fourth principle (salaried brokers) continues to be respected. Yet Schwab's embrace of tying employee bonuses to the assets each broker aggregates can also expose the company to unintended conflicts [of interest].

John Kador

Geneva, Ill.

Editor's note: The writer is the author of a forthcoming book about Charles Schwab Corp.

Schwab is playing a risky game. As an independent investment adviser, I have "parked" a lot of my client assets with Schwab. However, my clients report that Schwab has inserted envelope stuffers with their statements touting their advisory services. Does Schwab think I am going to direct any more new accounts to them?

Harry Kirsch

San Francisco

I was a customer of Charles Schwab for nearly 19 years ("Schwab vs. Wall Street" Cover Story, June 3). In my opinion, Schwab's customer focus has been declining. I reached the breaking point last June, when out of the blue I was hit with a $19,000 margin call that was purely the result of an unannounced decision by Schwab to switch one of my stock holdings from fully marginable to completely nonmarginable. In the past two to three years, Schwab has quietly moved a large number of stocks to the nonmarginable category.

I was interested to see that Schwab is limiting its new stock-evaluation program to approximately the 3,000 largest stocks. If they had gone just a bit further down the capitalization scale, Schwab's system might have identified stocks with very good price-appreciation potential that customers would be prohibited from buying on margin.

William C. Ristow

Ambler, Pa.

In your article on Charles Schwab and its need for quality advisers, you mention that three of four in their Santa Clara (Calif.) office lack the certified financial planner (CFP) qualification. I am a stockbroker and investment adviser with more than 19 years of experience. The licenses and examinations I have passed to sell securities, insurance, and other products are exams with either state or national requirements (e.g., Series 7, 63; life and variable annuities; real estate broker; California attorney).

The CFP designation is from an organization without any governmental authority or standards. You perpetuate the marketing ploy that the CFP indicates that someone is better or more qualified than a non-CFP. Many excellent financial planners do not feel like sending money to the CFP organization for even more hours of continuing education than are already required.

Robert Berend

Kensington, Calif. I must take some issue with Laura D'Andrea Tyson's "The farm bill is a $200 billion disaster" (Economic Viewpoint, June 3) regarding the Farm Security & Rural Investment Act of 2002. Tyson's comparisons on the cost of the new law fail to recognize actual spending on farm programs during the past four years. The level of support of the new law is very nearly the same as under the Clinton Administration. More important, farmers and their supporting industry can now plan long-term rather than not knowing each year what emergency appropriation might be coming from the Congress.

Tyson's comments on the effects of the farm bill and international trade negotiations also seem a bit overstated. Our resolve to obtain further trade liberalization in agriculture and food products has not changed one bit. We will continue to provide vigorous leadership throughout the Doha negotiations.

A key fact pertaining to World Trade Organization compliance continues to be ignored by critics: The U.S. domestic support ceiling is $19.1 billion a year, vs. $31 billion for Japan and $62 billion for the European Union. Our spending under the new law is well within the allowable ceiling. Moreover, the law mandates the Agriculture Secretary to ensure that the $19.1 billion limit is not exceeded. This is a critically important aspect of ensuring that we meet our international trade commitments.

J.B. Penn

Undersecretary for Farm

& Foreign Agricultural Services

Agriculture Dept.

Washington I'd like to correct one item in your otherwise well-written article on AARP ("Captain AARP's war on drug costs," Social Issues, May 27): AARP did not endorse the measure that ended up taking a big tax bite out of Social Security payments. In fact, AARP vigorously worked to change the Social Security tax increase incorporated in the 1993 deficit-reduction bill. While the deficit-reduction bill eventually passed and was signed into law, AARP's efforts to highlight the disproportionate impact of the proposed increases on those 65 and older helped reduce the number of people affected and the size of the tax bite.

Unfortunately, at some point years ago, AARP's position on the tax increase was misstated, especially in direct mail fund-raising hype from groups targeting older retirees. Thank you for giving us the opportunity to lay it to rest.

David Certner

AARP Director of Federal Affairs

Washington While we certainly have seen little to nothing we like in the Bush corporate trade agenda, tagging the Administration on the U.S.-Canada softwood lumber debate isn't quite accurate ("Bush: What price fast track?" News: Analysis & Commentary, June 3).

For starters, the U.S. levied tariffs against Canadian timber pursuant to a long-standing and mandatory trade law developed by Congress. These tariffs do two positive things: They offset the massive subsidies given by Canadian provinces to timber companies operating in Canada (some, such as Weyerhaeuser Co., log in multiple countries). And the tariffs at least slow down the literal liquidation of Canadian wild forests, most of which are accessible to loggers only because of the unfair Canadian subsidies.

The Bush Administration should be doing much more to protect cross-boundary wildlife species and ecosystems by negotiating an end to the Soviet-style monopolies enjoyed by timber companies in provinces such as British Columbia.

William Snape III

Chief Counsel

Defenders of Wildlife

Washington Re "It's time to cash in some chips, Big Blue" (News: Analysis & Commentary, June 3): IBM rode out the storm of the changing economy and changing technology not only by shifting how it does business but by keeping up its underlying strength in basic science, technology, and manufacturing. Do you think Big Blue would develop advanced semiconductor processes if it didn't manufacture semiconductors? Probably not. Real wealth is generated by manufacturing, not by fancy paper-shuffling or becoming a services company.

Joe Blaschka Jr.

Woodinville, Wash.


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