Founder Acknowledges Schwab’s Shortcomings
The founder of pioneering discount stockbroker Charles Schwab Corp. conceded Tuesday that the struggling company had lost touch with individual investors in recent years, but stressed that it was returning to its roots to focus on small clients.
Over lunch with reporters, Charles Schwab acknowledged that his firm had made missteps in recent years -- including keeping stock-trading commissions too high and confusing the public with muddled marketing campaigns.
“Schwab has lost a little bit of its connection with its client base,” Schwab said.
He also expressed frustration with the company’s lackluster financial performance, but stressed that Schwab was on sound financial footing and would begin growing again.
“When you look at it realistically over the last four years, we’ve really shown no particular growth at all,” Schwab said. “It’s solid but it isn’t growing, and it isn’t growing at the rate I’d like to see.”
Schwab revenue has been flat at just over $1 billion a quarter for the last year, with earnings of 8 cents a share for the second quarter of 2004, down from 9 cents in the year-earlier period.
Its shares have fallen 23.9% this year and lost 11 cents Tuesday, to $8.96, on the New York Stock Exchange.
Schwab rarely meets with the news media, and his presence at the Four Seasons hotel Tuesday was one in a series of steps intended to reposition the company in the eyes of its customers.
Today, his company will roll out an advertising campaign featuring two TV commercials starring Schwab himself. Rather than touting specific services as in the past, the ads are part of a broad branding effort in which Schwab stresses a commitment to small investors. The company also is mailing a letter to its customers with the same message.
The San Francisco-based company is trying to yank itself out of a deep malaise dating to the end of the 1990s bull market.
The company’s board ousted David Pottruck as CEO in July and asked Schwab to re-take the reins of the company he founded in 1971. Last month, Schwab sold its poorly performing capital-markets business, and on Monday it slashed stock-trading commissions for the second time in five months.
Schwab enjoyed spectacular growth during the late 1990s by pushing beyond its discount-brokerage roots. Predicting that baby boomers would need financial hand-holding as they aged, Schwab targeted well-heeled customers that traditionally had relied on full-service brokerages such as Merrill Lynch & Co.
The crowning step in that transformation came in 2000 when Schwab bought U.S. Trust Corp., an old-line money-management firm catering to the ultra wealthy.
But the shortcomings of its strategy were laid bare when the stock market peaked in early 2000. As a raft of cut-rate competitors stole Schwab’s customers on the low end, the masses of individuals seeking high-priced financial advice didn’t materialize as quickly as hoped. Ever since, the company that played a seminal role in the small-investor revolution of the last three decades has been forced into the unlikely position of casting about for a reliable niche.
Analysts have been pressing the company to forge a clear identity and stick to it. “They’ve been trying to be all things to all people,” said Richard Repetto, an analyst at Sandler O’Neill & Partners in New York. “The recent price cuts signal that they’re trying to get aligned with the core retail customer.”
Schwab defended the U.S. Trust purchase and said there were no plans to sell it. Critics have questioned the synergy between the online stock-trading business and the rarefied world of U.S. Trust. The money management firm, some say, has been a distraction for Schwab and has been plagued by poor profitability, computer problems and other woes.
Schwab countered that U.S. Trust was on track to notch its best-ever annual revenue, saying profit margins were “climbing nicely.” He added that 18% of U.S. Trust’s new business came from referrals by Schwab.
“U.S. Trust is very important to us, and we’re very important to U.S. Trust,” he said.
