"Schwab, the Full-Choice Brokerage"?

Co-CEOs Charles Schwab and David Pottruck talk about how they're intent on moving beyond the discount bracket

As traditional Wall Street brokerages find themselves on the defensive amid allegations of conflicts between their analysis and sales businesses, Charles Schwab & Co. (SCH ) is coming out swinging. The San Francisco-based discount brokerage has just launched its most aggressive initiative yet to push into the lucrative financial-advice business.

The offering is backed by a bold advertising campaign emphasizing that Schwab doesn't face the kinds of conflicts dogging most of Wall Street (see BW Cover Story, 6/3/02, "Schwab vs. the Street"). BusinessWeek Correspondent Louise Lee recently spoke with Schwab co-CEOs Charles "Chuck" Schwab and David Pottruck about why the company is so intent on transforming itself from king of discount brokerages to a full-fledged financial-services shop. Edited excerpts from their conversation follow:

Q: Why is offering financial advice important to Charles Schwab?


For years, people have told us they would love to have a one-on-one relationship with a Schwab investment consultant. We found over the last 5, 10 years, many people really do need help with investing, and we really had to get in the business of showing people exactly how to do that. You can't just give them a book. So we started figuring out how could we offer a one-on-one personal relationship between clients and advisers.

Q: What did you come up with?


Schwab Private Client. It's a fee-based relationship that is based upon having a one-on-one consultant to work with clients on asset allocation, diversification ideas, individual stocks, and so forth.

Q: Does this service fundamentally change Charles Schwab?


It's a huge change for us. But we're not giving up our traditional discount brokerage. With the Schwab Private Client service, we now are going after the middle of the market, which represents about 50% of the investment market.

Q: What does the overall market look like?


Twenty percent of the market is represented by the people who do it themselves, the hard core do-it-yourself kind, the traditional Schwab customer. On the other extreme, we have the people who like to delegate investment-management decisions to someone like a U.S. Trust, Northern Trust (NTRS ), or a financial adviser. And the middle, which happens to be about $6 trillion or $7 trillion of assets, is represented by the PaineWebbers of the world, the Smith Barneys (KSB ), the Morgan Stanleys, Merrill-Lynch (MER ). That's the target we have set for ourselves.

Q: How is Schwab's service different?


We're doing their thing but with a different model. We're trying to destroy the old model of Wall Street, which is so conflicted in so many different ways. We've created, we think, a conflict-free model, which we happen to believe resonates with lots and lots of investors.

Q: How is the Schwab method of compensation conflict-free?


All the people at Schwab who are in our branch network are all rewarded based upon salaries and incentives. Incentives make up anywhere from 20% to 50% of their compensation, and those incentives are not based on commissions. Those incentives are not based on revenues. Those incentives are based on client assets.

When you walk into a branch, when you deal with the person we call an investment consultant or investment specialist, the person who is talking to you is compensation neutral. Our advisers are paid on how much in client assets they bring to the company, regardless of what product or what service it goes in. To us, this is the way clients want to be served.

Q: Why is it so important for Schwab to offer a variety of investment services and advice?


Many clients want the economy of managing their money themselves. But sometimes, they want a little bit of help that builds confidence, and maybe for some of their money they want professional money management. So we want to be able to offer those services as people change over time.

Q: So Schwab is in pursuit of a whole new image in the marketplace?


One of the things we want to do is stop being thought of as Schwab, the discount brokerage, and being increasingly thought of as Schwab, the full-choice brokerage.

Q: How much of a marketing hurdle does Schwab face?


Our research suggests that we have a wonderful image and sense of trust with our clients. Our clients and prospects believe Schwab is trustworthy. They know we don't have conflicts. They know that we do a good job with service. But that trust doesn't extend to our investment wisdom. We want to see our trust for investment wisdom grow.

Q: Why do you think you have the upper hand over traditional Wall Street?


It's very hard to move them into an unconflicted, nonsales-pressure, noncommission-driven model of doing business. When clients come to us they tell us, "We don't like that [traditional] model." They say they don't want someone who's just trying to move money around, paid on commission. And even if they have fee-based accounts, there's some stuff that's covered in the fee.

But if you buy insurance, you buy annuities, if you buy IPOs, these are not covered under the fee. They get commissions for those generally. So you never really know what the motive of the person who's supposedly advising you is.

Edited by Douglas Harbrecht